** **

**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, 2002** |
|------------|--------------------------------------------------------------------------------------------------------------------------------------|

 

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

 

**CommissionFile Number 0-27666**

 

**NORTHERN CALIFORNIA BANCORP, INC.**

(Name of Small BusinessIssuer in its Charter)

 

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

 

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

 

As of April 30, 2002, the Corporation had 1,342,848shares of common stock outstanding.

 

 

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**PART I-FINANCIAL INFORMATION**

 

### Item1.              FINANCIALSTATEMENTS

 

NORTHERN CALIFORNIABANCORP, INC.

AND SUBSIDIARY

CONSOLIDATED BALANCESHEET

 
|                                                 |   | **MARCH 31  2002** |   | **DECEMBER  31  2001** |   |
|------------------------------------------------------|--------|--------------------|--------|------------------------|--------|
| ASSETS:                                              |   |               |   |                   |   |
|                                                 |   |               |   |                   |   |
| Cash and Cash  Equivalents                           |   | 11,535,600         |   | 11,392,900             |   |
| Due From Bank —  Time Deposits                  |   | 100,000            |   | 100,000                |   |
| Trading Assets                                       |   | 161,700            |   | 173,000                |   |
| Investment  Securities, available for sale (Note 1)  |   | 5,652,900          |   | 9,478,400              |   |
| Other  Investments                                   |   | 954,900            |   | 950,600                |   |
| Loans Held for  Sale                                 |   | 1,289,900          |   | 605,600                |   |
| Gross Loans  (Note 2)                                |   | 54,365,800         |   | 52,601,400             |   |
| Allowance for  Possible Loan Losses (Note 3)         |   | (600,400           | )      | (566,300               | )      |
| Deferred  Origination Fees                           |   | (86,400            | )      | (78,800                | )      |
| Net Loans                                            |   | 53,679,000         |   | 51,956,300             |   |
| Bank Premises  and Equipment, Net                    |   | 1,799,300          |   | 1,804,700              |   |
| Cash s Surrender  Value of Life Insurance            |   | 2,028,100          |   | 2,000,700              |   |
| Interest  Receivable and Other Assets                |   | 1,258,900          |   | 1,272,700              |   |
| Total Assets                                         |   | 78,460,300         |   | 79,734,900             |   |
|                                                 |   |               |   |                   |   |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY:          |   |               |   |                   |   |
|                                                 |   |               |   |                   |   |
| Total Deposits  (Note 4)                             |   | 67,234,500         |   | 68,332,400             |   |
| Short-term  Borrowing                                |   | 200,000            |   | 200,000                |   |
| Long-term  Borrowing                                 |   | 1,000,000          |   | 1,000,000              |   |
| Federal Home  Loan Bank Borrowed Funds               |   | 4,000,000          |   | 4,000,000              |   |
| Interest Payable  and Other Liabilities              |   | 853,200            |   | 1,115,600              |   |
| Total  Liabilities                                   |   | 73,287,700         |   | 74,648,000             |   |
|                                                 |   |               |   |                   |   |
| Shareholders’  Equity:                          |   |               |   |                   |   |
|                                                 |   |               |   |                   |   |
| Common Stock -  No Par Value                         |   |               |   |                   |   |
| Authorized:  2,500,000 in 2002 and 2001              |   |               |   |                   |   |
| Outstanding:1,342,848  in 2002 and 1,336,378 in 2001 |   | 4,068,100          |   | 4,040,600              |   |
| Retained  Earnings                                   |   | 1,132,200          |   | 1,038,000              |   |
| Accumulated  Other Comprehensive Income (Loss)       |   | (27,700            | )      | 8,300                  |   |
| Total  Shareholders’ Equity                     |   | 5,164,300          |   | 5,086,900              |   |
| Total  Liabilities & Shareholders’ Equity   |   | 78,460,300         |   | 79,734,900             |   |

 

2

----

 

NORTHERN CALIFORNIABANCORP, INC.

AND SUBSIDIARY

CONSOLIDATED STATEMENTSOF OPERATIONS

 
|                                                          |   | **THREE-MONTH  PERIOD ENDING** |   |
|---------------------------------------------------------------|--------|--------------------------------|--------|
|                                                          |   | **MARCH 31**                   |   |
|                                                          |   | **2002**                       |   | **2001** |   |
| INTEREST INCOME:                                              |   |                           |   |   |   |
| Interest and  Fees on Loans                                   |   | 1,060,400                      |   | 1,158,300 |   |
| Interest on Time  Deposits with Financial Institutions        |   | 900                            |   | 3,300 |   |
| Interest on  Investment Securities                            |   | 113,500                        |   | 168,500 |   |
| Interest on  Federal Funds                                    |   | 26,600                         |   | 121,400 |   |
| Total Interest  Income                                        |   | 1,201,400                      |   | 1,451,500 |   |
|                                                          |   |                           |   |   |   |
| INTEREST  EXPENSE:                                            |   |                           |   |   |   |
| Interest on  Interest-Bearing Transaction Accounts            |   | 26,700                         |   | 23,100 |   |
| Interest on  Savings Accounts                                 |   | 13,800                         |   | 25,300 |   |
| Interest on Time  Deposits                                    |   | 405,000                        |   | 502,000 |   |
| Interest on  Other Borrowed Funds                             |   | 81,500                         |   | 101,400 |   |
| Total Interest  Expense                                       |   | 527,000                        |   | 651,800 |   |
|                                                          |   |                           |   |   |   |
| Net Interest  Income                                          |   | 674,400                        |   | 799,700 |   |
| PROVISION FOR  LOAN LOSSES                                    |   | 37,000                         |   | 10,000 |   |
| Net Interest  Income After Provision for Possible Loan Losses |   | 637,400                        |   | 789,700 |   |
|                                                          |   |                           |   |   |   |
| NON-INTEREST INCOME:                                          |   |                           |   |   |   |
| Service Charges  on Deposit Accounts                          |   | 121,600                        |   | 121,400 |   |
| SBA Loan Sales  & Servicing Income                        |   | 72,800                         |   | 76,400 |   |
| Other Operating  Income                                       |   | 587,000                        |   | 677,000 |   |
| Total  Noninterest Income                                     |   | 781,400                        |   | 874,800 |   |
|                                                          |   |                           |   |   |   |
| NONINTEREST  EXPENSE:                                         |   |                           |   |   |   |
| Salaries and  Employee Benefits                               |   | 531,200                        |   | 564,500 |   |
| Occupancy and  Equipment Expense                              |   | 83,700                         |   | 77,200 |   |
| Professional  Fees                                            |   | 18,700                         |   | 39,200 |   |
| Data Processing                                               |   | 79,100                         |   | 63,500 |   |
| FDIC & State  Assessments                                 |   | 7,100                          |   | 10,100 |   |
| Other Operating  Expenses                                     |   | 599,200                        |   | 539,000 |   |
| Income Tax  Expense                                           |   | 5,600                          |   | 152,900 |   |
| Total  Non-interest Expense                                   |   | 1,324,600                      |   | 1,446,400 |   |
| NET INCOME  (LOSS)                                            |   | 94,200                         |   | 218,100 |   |
|                                                          |   |                           |   |   |   |
| Earnings per  common share                                    |   |                           |   |   |   |
| Primary                                                       |   | 0.071                          |   | 0.163 |   |
| Diluted                                                       |   | 0.060                          |   | 0.139 |   |

 

3

----

 

NORTHERN CALIFORNIABANCORP, INC.

AND SUBSIDIARY

CONSOLIDATED STATEMENTSOF CASH FLOWS

THREE MONTHS ENDED MARCH31, 2002 AND 2001

 
|                                                    |   | **2002**   |   | **2001**    |   |
|---------------------------------------------------------|--------|------------|--------|-------------|--------|
| NET INCOME                                              |   | 94,200     |   | 218,100     |   |
| Adjustments to  net income:                             |   |       |   |        |   |
| Depreciation and  amortization expense                  |   | 31,900     |   | 28,800      |   |
| Amortization/Accretion  on investments                  |   | (1,000     | )      | 1,900       |   |
| Provision for  possible loan losses                     |   | 37,000     |   | 10,000      |   |
| Amortization of  deferred income                        |   | 0          |   | (500        | )      |
| Increase  (decrease) in accrued expenses                |   | (203,000   | )      | 134,900     |   |
| (Increase)  decrease in other assets                    |   | 38,100     |   | (984,000    | )      |
| Increase  (decrease) in interest payable                |   | (59,200    | )      | 61,900      |   |
| (Increase)  decrease in interest receivable             |   | 12,300     |   | 204,900     |   |
| Total  adjustments to net income                        |   | (143,900   | )      | (542,100    | )      |
|                                                    |   |       |   |        |   |
| Net cash  provided (used) by operations                 |   | (49,700    | )      | (324,000    | )      |
|                                                    |   |       |   |        |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                    |   |       |   |        |   |
| Proceeds from  maturity of investments                  |   | 0          |   | 1,000,000   |   |
| Proceeds from  sale of investments                      |   | 5,987,600  |   | 20,405,400  |   |
| Principal payments  on investments                      |   | 2,400      |   | 2,100       |   |
| Purchase of  securities                                 |   | (2,154,100 | )      | (15,852,200 | )      |
| Net increase in  loans                                  |   | (1,762,400 | )      | (4,738,600  | )      |
| (Increase)  decrease in loans held for sale             |   | (684,000   | )      | 1,572,700   |   |
| Proceeds from  sale of equipment                        |   | 700        |   | 300         |   |
| Capital  expenditures                                   |   | (27,200    | )      | (31,300     | )      |
| Exercise of  Stock Options                              |   | 27,500     |   | 0           |   |
| Stock Repurchase                                        |   | 0          |   | (11,500     | )      |
|                                                    |   |       |   |        |   |
| Net cash  provided (used) in investing activities       |   | 1,390,500  |   | 2,346,900   |   |
|                                                    |   |       |   |        |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES                   |   |       |   |        |   |
| Net increase  (decrease) in deposit accounts            |   | (1,098,100 | )      | (12,245,800 | )      |
| Net increase  (decrease) in borrowed funds              |   | 0          |   | 75,000      |   |
|                                                    |   |       |   |        |   |
| Net cash  provided (used) by financing activities       |   | (1,098,100 | )      | (12,170,800 | )      |
|                                                    |   |       |   |        |   |
| Net increase  (decrease) in cash & cash equivalents |   | 242,700    |   | (10,147,900 | )      |
| Cash & cash  equivalents - beginning of year        |   | 11,392,900 |   | 17,356,200  |   |
|                                                    |   |       |   |        |   |
| Cash & cash  equivalents - end of period            |   | 11,635,600 |   | 7,208,300   |   |

 

See Note 5 for supplemental disclosures

 

4

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NOTES TO FINANCIALSTATEMENTS

 
|                                          |   | **MARCH 31  2002** |   | **DECEMBER  31  2001** |   |
|-----------------------------------------------|--------|--------------------|--------|------------------------|--------|
| (NOTE 1)  INVESTMENT SECURITIES:              |   |               |   |                   |   |
|                                          |   |               |   |                   |   |
| Available for  sale:                          |   |               |   |                   |   |
| U.S. Government  Agencies                     |   | 2,945,200          |   | 6,008,000              |   |
| Corporate Debt  Securities                    |   | 2,707,700          |   | 3,470,400              |   |
|                                          |   | 5,652,900          |   | 9,478,400              |   |
|                                          |   |               |   |                   |   |
| (NOTE 2) GROSS  LOANS:                        |   |               |   |                   |   |
|                                          |   |               |   |                   |   |
| Commercial and  Industrial                    |   | 14,703,700         |   | 13,863,200             |   |
| Construction                                  |   | 2,047,300          |   | 1,896,000              |   |
| Real Estate -  Mortgage                       |   | 36,770,300         |   | 36,009,500             |   |
| Installment                                   |   | 716,800            |   | 702,600                |   |
| Government  Guaranteed Loans Purchased        |   | 127,700            |   | 130,100                |   |
| Gross Loans                                   |   | 54,365,800         |   | 52,601,400             |   |
|                                          |   |               |   |                   |   |
| (NOTE 3)  ALLOWANCE FOR POSSIBLE LOAN LOSSES: |   |               |   |                   |   |
|                                          |   |               |   |                   |   |
| Balance at  Beginning of Period               |   | 566,300            |   | 468,500                |   |
| Recoveries                                    |   | 10,600             |   | 1,700                  |   |
| Provision for  Possible Loan Losses           |   | 37,000             |   | 185,000                |   |
| Loans Charged  Off                            |   | (13,500            | )      | (88,900                | )      |
| Balance at End  of Period                     |   | 600,400            |   | 566,300                |   |
|                                          |   |               |   |                   |   |
| (NOTE 4)  DEPOSITS:                           |   |               |   |                   |   |
|                                          |   |               |   |                   |   |
| Demand                                        |   | 14,191,100         |   | 14,525,800             |   |
| Interest-Bearing  Transaction                 |   | 11,373,500         |   | 12,014,500             |   |
| Savings                                       |   | 3,633,400          |   | 3,849,000              |   |
| Time Under  $100,000                          |   | 20,765,500         |   | 21,434,500             |   |
| Time Equal to or  Greater than $100,000       |   | 17,271,000         |   | 16,508,600             |   |
|                                          |   | 67,234,500         |   | 68,332,400             |   |

 

(NOTE 5) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 
| Payments during  the period ending: |   | **3/31/02** |   | **3/31/01** |   |
|-------------------------------------|--------|-------------|--------|-------------|--------|
| Interest                            |   | 591,000     |   | 651,800     |   |
| Income Taxes                        |   | 5,600       |   | 152,900     |   |

 

5

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**ITEM2:     MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION**

 

**OVERVIEW**

 

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

 

For the three months ended March 31, 2002 net incomewas $94,200, compared to $218,100 for the same period in 2001.  For the three months ended March 31, 2002interest income after provision for loan losses decreased $152,300,non-interest income decreased $93,400, while non-interest expense decreased$121,800.

 

6

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The following table sets forth certain selectedfinancial ratios of the Corporation at and for the three months ended, March31, 2002 and 2001.

 
|                                                 |   | **The three  months  Ended March 31, 2002**      |   | **The three  months  Ended March 31, 2001** |   |
|------------------------------------------------------|--------|--------------------------------------------------|--------|---------------------------------------------|--------|
|                                                 |   | **(Dollars in thousands except per share data)** |   |
| Summary of  Operating Results:                       |   |                                             |   |                                        |   |
|                                                 |   |                                             |   |                                        |   |
| Total interest  income                               |   | 1,201                                            |   | 1,451                                       |   |
| Total interest  expense                              |   | 527                                              |   | 651                                         |   |
| Net interest  income                                 |   | 674                                              |   | 800                                         |   |
|                                                 |   |                                             |   |                                        |   |
| Provision for  possible loan losses                  |   | 37                                               |   | 10                                          |   |
| Net interest  income after provision for loan loss   |   | 637                                              |   | 790                                         |   |
|                                                 |   |                                             |   |                                        |   |
| Total other  income                                  |   | 781                                              |   | 875                                         |   |
| Total other expense                                  |   | 1,319                                            |   | 1,294                                       |   |
|                                                 |   |                                             |   |                                        |   |
| Income (loss)  before taxes                          |   | 100                                              |   | 371                                         |   |
| Provision for  income tax                            |   | 6                                                |   | 153                                         |   |
|                                                 |   |                                             |   |                                        |   |
| Net income  (loss)                                   |   | 94                                               |   | 218                                         |   |
|                                                 |   |                                             |   |                                        |   |
|                                                 |   |                                             |   |                                        |   |
| Per Common Share  Data:                              |   |                                             |   |                                        |   |
|                                                 |   |                                             |   |                                        |   |
| Net income -  Primary (1)                            |   | 0.071                                            |   | 0.163                                       |   |
| Net income -  Diluted (2)                            |   | 0.060                                            |   | 0.139                                       |   |
| Book value, end  of period (3)                       |   | 3.85                                             |   | 3.79                                        |   |
| Avg shares  outstanding (4)                          |   | 1,330,973                                        |   | 1,337,087                                   |   |
|                                                 |   |                                             |   |                                        |   |
| Balance Sheet  Data:                                 |   |                                             |   |                                        |   |
|                                                 |   |                                             |   |                                        |   |
| Total loans, net  of unearned income (5)             |   | 54,969                                           |   | 46,877                                      |   |
| Total assets                                         |   | 78,452                                           |   | 71,531                                      |   |
| Total deposits                                       |   | 67,235                                           |   | 59,973                                      |   |
| Stockholders’  equity (6)                       |   | 5,164                                            |   | 5,061                                       |   |
|                                                 |   |                                             |   |                                        |   |
| Selected Financial Ratios (4):                       |   |                                             |   |                                        |   |
|                                                 |   |                                             |   |                                        |   |
| Return on  average assets (5)                        |   | 0.48                                             | %      | 1.19                                        | %      |
| Return on  average stockholders’ equity (5)     |   | 7.36                                             | %      | 17.78                                       | %      |
| Net interest  spread                                 |   | 3.37                                             | %      | 4.23                                        | %      |
|                                                 |   |                                             |   |                                        |   |
| Net interest  margin                                 |   | 3.97                                             | %      | 4.94                                        | %      |
|                                                 |   |                                             |   |                                        |   |
| Avg  shareholders’ equity to average assets     |   | 6.49                                             | %      | 6.67                                        | %      |
|                                                 |   |                                             |   |                                        |   |
| Risked-Based capital  ratios                         |   |                                             |   |                                        |   |
| Tier 1                                               |   | 9.30                                             | %      | 10.75                                       | %      |
| Total                                                |   | 10.28                                            | %      | 11.67                                       | %      |
| Total loans to  total deposits at end of period      |   | 81.76                                            | %      | 78.16                                       | %      |
|                                                 |   |                                             |   |                                        |   |
| Allowance to  total loans at end of period           |   | 1.08                                             | %      | 1.00                                        | %      |
|                                                 |   |                                             |   |                                        |   |
| Nonperforming  loans to total loans at end of period |   | 0.21                                             | %      | 0.09                                        | %      |
|                                                 |   |                                             |   |                                        |   |
| Net charge-offs  to average loans                    |   | 0.01                                             | %      | 0.01                                        | %      |

 

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(1)          Primary earnings per share amounts were computed onthe basis of the weighted average number of shares of common stock outstandingduring the year.  The weighted averagenumber of common shares used for this computation was 1,330,973 and 1,337,0287for March 31, 2002 and 2001, respectively.

 

(2)          Diluted earnings (loss) per share amounts werecomputed on the basis of the weighted average number of shares of common stockand common stock equivalents outstanding during the year.  Common stock equivalents includedirector/employee stock options. The weighted average number of shares used forthis computation was 1,564,684 and 1,565,766 for March 31, 2002 and 2001,respectively.

 

(3)          Includes loans being held for sale.

 

(4)          Averages are of daily balances.

 

(5)          March 31, 2002 calculated on an annualized basis.

 

7

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**NETINTEREST INCOME**

 

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

 

Net interest income for the three months ended March31, 2002 was $674,400 compared to $799,700 for the same period in 2001.  The decrease of $125,300 resulted from totalinterest income decreasing $250,100, while total interest expense decreased$124,800.  Average interest earningassets increased $4,059,000 (6.19%), while the average rate earned decreased205 basis points.   Average interestbearing liabilities increased $3,648,000 (6.65%), while the average rate paidincreased 119 basis points.

 

The following table shows the components of the Bank’snet interest income, setting forth, for each the three months ended March 31,2002 and 2001, (i) average assets, liabilities and investments, (ii) interestincome earned on interest-earning assets and interest expense paid oninterest-bearing liabilities, (iii) average yields earned on interest-earningassets and average rates paid on interest-bearing liabilities, (iv) the netinterest spread (i.e., the average yield earned on interest-earning assets lessthe average rate paid on interest-bearing liabilities) and (v)the net interestyield on average interest-earning assets (i. e., net interest income divided byaverage interest-earning assets).  Yieldsare computed on a tax-equivalent basis, resulting in adjustments to interestearned on non-taxable securities of $18,100 for the three months ended March31, 2001.  Non-accrual loans andoverdrafts are included in average loan balances.  Average loans are presented net of unearned income.

 

8

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**INTERESTSPREAD ANALYSIS:**

 
|                                  |   | **Three Months  Ended March 31,** |   | **Twelve Months  Ended December 31,****2001** |   |
|---------------------------------------|--------|-----------------------------------|--------|-----------------------------------------------|--------|
|                                  |   | **2002**                          |   | **2001**                                      |   |   |
|                                  |   | **Avg  Bal**                      |   | **IntEarn  Paid**                             |   | **Avg%  Rate** |   | **Avg  Bal** |   | **IntEarn  Paid** |   | **Avg%  Rate** |   | **Avg  Bal** |   | **IntEarn  Paid** |   | **Avg%  Rate** |   |
|                                  |   | **(Dollars in thousands)**        |   |
| Interest Earning  Assets:             |   |                              |   |                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                  |   |                              |   |                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Int-bearing  deposits at other banks  |   | 100                               |   | 1                                             |   | 3.45 |   | 200 |   | 3 |   | 6.53 |   | 178 |   | 12 |   | 6.99 |   |
| Invest  securities - Taxable          |   | 7,224                             |   | 104                                           |   | 5.77 |   | 8,854 |   | 146 |   | 6.60 |   | 7,444 |   | 469 |   | 6.30 |   |
| Invest  securities - Non-Taxable      |   | 0                                 |   | 0                                             |   | 0 |   | 1,528 |   | 27 |   | 7.16 |   | 377 |   | 25 |   | 6.65 |   |
| Federal funds  sold                   |   | 6,788                             |   | 27                                            |   | 1.57 |   | 9,245 |   | 121 |   | 5.25 |   | 10,310 |   | 363 |   | 3.52 |   |
| Total  investments                    |   | 14,112                            |   | 132                                           |   | 3.73 |   | 19,828 |   | 298 |   | 6.01 |   | 18,308 |   | 870 |   | 4.75 |   |
|                                  |   |                              |   |                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                                 |   |                              |   |                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Construction                          |   | 1,591                             |   | 67                                            |   | 16.92 |   | 2276 |   | 70 |   | 12.34 |   | 2,209 |   | 227 |   | 10.29 |   |
| Real estate                           |   | 37,115                            |   | 714                                           |   | 7.70 |   | 28,145 |   | 666 |   | 9.47 |   | 31,258 |   | 2,805 |   | 8.97 |   |
| Installment                           |   | 717                               |   | 19                                            |   | 10.85 |   | 579 |   | 17 |   | 11.53 |   | 767 |   | 90 |   | 11.67 |   |
| Commercial                            |   | 15,414                            |   | 262                                           |   | 6.80 |   | 14,035 |   | 405 |   | 11.55 |   | 14,335 |   | 1,454 |   | 10.15 |   |
| Total loans                           |   | 54,837                            |   | 1,063                                         |   | 7.75 |   | 45,036 |   | 1,158 |   | 10.29 |   | 48,570 |   | 4,576 |   | 9.42 |   |
|                                  |   |                              |   |                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Interest  earning assets        |   | 68,949                            |   | 1,194                                         |   | 6.93 |   | 64,863 |   | 1,456 |   | 8.98 |   | 66,878 |   | 5,446 |   | 8.14 |   |
|                                  |   |                              |   |                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Bearing  Liabilities:        |   |                              |   |                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                  |   |                              |   |                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Int-bearing  demand                   |   | 9,972                             |   | 23                                            |   | 0.91 |   | 9,270 |   | 23 |   | 1.00 |   | 9,422 |   | 93 |   | 0.99 |   |
| Money market  savings                 |   | 1,588                             |   | 4                                             |   | 1.03 |   | 1,302 |   | 6 |   | 1.85 |   | 1,328 |   | 22 |   | 1.66 |   |
| Savings deposits                      |   | 3,753                             |   | 14                                            |   | 1.47 |   | 4,246 |   | 19 |   | 1.82 |   | 3,885 |   | 71 |   | 1.82 |   |
| Time deposits  >$100M              |   | 16,776                            |   | 165                                           |   | 3.92 |   | 15,744 |   | 227 |   | 5.78 |   | 15,216 |   | 833 |   | 5.47 |   |
| Time deposits  <$100M              |   | 21,183                            |   | 240                                           |   | 4.54 |   | 18,357 |   | 275 |   | 5.98 |   | 20,263 |   | 1,126 |   | 5.56 |   |
| Other Borrowing                       |   | 4,000                             |   | 65                                            |   | 6.46 |   | 5,903 |   | 100 |   | 6.80 |   | 4,460 |   | 293 |   | 6.56 |   |
| Total interest  bearing liabilities   |   | 57,271                            |   | 510                                           |   | 3.56 |   | 54,822 |   | 651 |   | 4.75 |   | 54,574 |   | 2,437 |   | 5.40 |   |
|                                  |   |                              |   |                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest  income                  |   |                              |   | 684                                           |   |   |   |   |   | 806 |   |   |   |   |   | 3,009 |   |   |   |
|                                  |   |                              |   |                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest  spread                  |   |                              |   |                                          |   | 3.37 |   |   |   |   |   | 4.23 |   |   |   |   |   | 3.68 |   |
|                                  |   |                              |   |                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net yield on  interest earning assets |   |                              |   |                                          |   | 3.97 |   |   |   |   |   | 4.97 |   |   |   |   |   | 4.50 |   |

 

9

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|                                 |   | **Three Months  Ended March 31,  2002 vs 2001** |   | **Twelve Months  Ended December 31,  2001 vs 2000** |   |
|--------------------------------------|--------|-------------------------------------------------|--------|-----------------------------------------------------|--------|
|                                 |   | **Increase (Decrease)  Due to changes**         |   | **Increase (Decrease)**

**Due to Changes**         |   |
|                                 |   | **Avg  Volume**                                 |   | **Avg  Rate**                                       |   | **Total** |   | **Avg  Volume** |   | **Avg  Rate** |   | **Total** |   |
|                                 |   | **(Dollars in thousands)**                      |   |
| Interest Earning  Assets:            |   |                                            |   |                                                |   |   |   |   |   |   |   |   |   |
|                                 |   |                                            |   |                                                |   |   |   |   |   |   |   |   |   |
| Int-bearing  deposits at other banks |   | (2                                              | )      | (1                                                  | )      | (2 | ) | 1 |   | 1 |   | 2 |   |
| Invest  securities - Taxable         |   | (27                                             | )      | (15                                                 | )      | (42 | ) | 135 |   | (61 | ) | 74 |   |
| Invest  securities - Non-Taxable     |   | (27                                             | )      | 0                                                   |   | (27 | ) | (716 | ) | (5 | ) | (721 | ) |
| Federal funds sold                   |   | (32                                             | )      | (63                                                 | )      | (95 | ) | 352 |   | (291 | ) | 61 |   |
| Total  investments                   |   | (88                                             | )      | (78                                                 | )      | (166 | ) | (229 | ) | (357 | ) | (585 | ) |
|                                 |   |                                            |   |                                                |   |   |   |   |   |   |   |   |   |
| Loans                                |   |                                            |   |                                                |   |   |   |   |   |   |   |   |   |
| Construction                         |   | (21                                             | )      | 18                                                  |   | (3 | ) | (98 | ) | (4 | ) | (102 | ) |
| Real estate                          |   | 212                                             |   | (164                                                | )      | 48 |   | 588 |   | (234 | ) | 354 |   |
| Installment                          |   | 4                                               |   | (1.6                                                | )      | 2 |   | 34 |   | (12 | ) | 22 |   |
| Commercial                           |   | 40                                              |   | (183                                                | )      | (143 | ) | 194 |   | (191 | ) | 4 |   |
| Total loans                          |   | 235                                             |   | (331                                                | )      | (96 | ) | 718 |   | (441 | ) | 277 |   |
|                                 |   |                                            |   |                                                |   |   |   |   |   |   |   |   |   |
| Total Interest  Earning Assets       |   | 147                                             |   | (409                                                | )      | (262 | ) | 490 |   | (797 | ) | (308 | ) |
|                                 |   |                                            |   |                                                |   |   |   |   |   |   |   |   |   |
| Interest Bearing  Deposits:          |   |                                            |   |                                                |   |   |   |   |   |   |   |   |   |
|                                 |   |                                            |   |                                                |   |   |   |   |   |   |   |   |   |
| Int-bearing  demand                  |   | 2                                               |   | (2                                                  | )      | (0 | ) | 5 |   | (1 | ) | 4 |   |
| Money market  savings                |   | 1                                               |   | (3                                                  | )      | (2 | ) | (2 | ) | (2 | ) | (4 | ) |
| Savings deposits                     |   | (2                                              | )      | (3                                                  | )      | (5 | ) | 14 |   | (6 | ) | 7 |   |
| Time deposits  >$100M             |   | 15                                              |   | (78                                                 | )      | (63 | ) | 129 |   | (60 | ) | 69 |   |
| Time deposits  <$100M             |   | 42                                              |   | (76                                                 | )      | (35 | ) | 70 |   | (50 | ) | 21 |   |
| Other Borrowing                      |   | (32                                             | )      | (3                                                  | )      | (36 | ) | 4 |   | 9 |   | 13 |   |
|                                 |   |                                            |   |                                                |   |   |   |   |   |   |   |   |   |
| Total interest  bearing deposits     |   | 25                                              |   | (166                                                | )      | (140 | ) | 220 |   | (111 | ) | 109 |   |
|                                 |   |                                            |   |                                                |   |   |   |   |   |   |   |   |   |
| Net change in  net interest          |   | 122                                             |   | (243                                                | )      | (122 | ) | 269 |   | (686 | ) | (417 | ) |

 

10

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**Provisionand Allowance for Loan Losses**

 

The provision for loan losses is an expense chargedagainst operating income and added to the allowance for loan losses.  The allowance for loan losses representsamounts set aside for the specific purpose of absorbing losses that may occurin the Bank’s loan portfolio.

 

The allowance for loan losses reflects management’songoing evaluation of the risks inherent in the loan portfolio both generallyand with respect to specific loans, the state of the economy, and the level ofnet loan losses experienced in the past. Management and the Board of Directors review the results of the StateBanking Department and FDIC examinations, independent accountants’observations, and the Bank’s internal review as additional indicators todetermine if the amount in the allowance for loan losses is adequate to protectagainst estimated future losses.  It isthe Bank ‘s current practice, which could change in accordance with the factorsmentioned above, to maintain an allowance, which is at least equal to the sumof the following percentage of loan balances by loan category.

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

 

Although no assurance can be given that actual losseswill not exceed the amount provided for in the allowance, Management believesthat the allowance is adequate to provide for all estimated credit losses inlight of all known relevant factors. At March 31, 2002 and 2001 the Bank’sallowance stood at 1.08 percent and 1.00 percent of gross

 

11

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loans, respectively.  Aprovision of $37,000 was made to the allowance during the three months endedMarch 31, 2002, compared with a provision of $10,000 due the same period in2001.  Loans charged off during thethree months ended March 31, 2002, totaled $13,500, compared to $8,000 in thesame period of 2001.  Recoveries for thesame periods were $10,600 and $1,300, respectively.

 

The Bank’s non-performing (delinquent 90 days or moreand non-accrual) loans as a percentage of total loans were 0.21 percent atMarch 31, 2002 compared with 0.09 percent for the same period in 2001.

 

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

 

**Non-InterestIncome**

 

Total non-interest income for the three months endedMarch 31, 2002 was $781,400 compared with $874,800 for the same period in2001.  The decrease of  $93,400 was the result of service charges ondeposit accounts decreasing $200, income from SBA loan sales and servicingdecreasing $3,600 and income from other service charges, commissions and feesdecreasing $90,000.  Income from salesof securities which is a part of other service charges, commissions and feesdecreased $112,800.

 

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

 

There can be no assurance that the gains on sale willcontinue at, or above, the levels realized in the past three years.  In addition, increasing competition amonglenders for qualified SBA borrowers makes it difficult for the Bank tocontinually expand its program in this area, and may limit the level of premiumthat can be earned with regard thereto. Furthermore, the SBA recently began requiring lenders to share a portionof premiums in excess of 10% earned on the sale of the guaranteed portions, andto pay 50 basis points on the outstanding guaranteed balance.  Management cannot predict the significanceof the impact these changes will have on SBA income.

 

12

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**Non-InterestExpense**

 

Salary and benefits expense for the three months endedMarch 31, 2002 decreased $33,300 compared with the same period in 2001.  The decrease was due to bonus accrualsdeclining $58,500, partially offset by merit increases.

 

Total occupancy and equipment expense for the threemonths ended March 31, 2002 was $83,700 compared to $77,200 for the same periodin 2001.

 

Professional fees for the three months ended March 31,2002 decreased $20,500 compared to the same period in 2001.  The decrease was due to accounting feesdecreasing $6,600 and legal fees decreasing $13,900.

 

Data processing expense for the three months endedMarch 31, 2002 was $79,100 compared to $63,500 for the same period in 2001.

 

Other expenses for the three months ended March 31,2002 totaled $611,900 compared with $702,100 for the same period in 2001.  Significant changes occurred in thefollowing categories with increases in due and memberships $2,600, ATM expense$1,500, insurance expense $8,200, merchant expense $56,900, loan expense $3,000,messenger and freight $8,400, telephone $2,300, miscellaneous expense $5,600and decreases in collection expense $7,100, bank fees $1,500, businessdevelopment expense $6,600, donations $4,300, entertainment and meals $2,300postage $3,700 and FDIC and State assessments $3,000 and income tax expense$147,300.

 

**LOANS**

 

Loans represented 78.80% of average earning assets,and 69.50% of average total assets for the three months ended March 31, 2002compared with 68.79% and 61.20%, respectively during 2001. For the three monthsended March 31, 2002, average loans increased 21.64% from $45,081,000 for thesame period in 2001 to $54,837,000. Average commercial loans increased $1,371,000 (9.76%) real estate loansincreased $8,969,000 (31.87%), installment loans increased $101,000 (16.37%);while average construction loans decreased $685,000 (30.11%).

 

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

 

13

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The Bank is a recognized leader for Small BusinessAdministration lending in Monterey County, and holds SBA’s coveted PreferredLender Status.  Generally, SBA loans areguaranteed, by the SBA, for 75 to 80 percent of their principal amount, whichcan be retained in portfolio or sold to investors.  Such loans are made at floating interest rates, but generally forlonger terms (up to 25 years) than are available on a conventional basis tosmall businesses.  The unguaranteed portion of the loans, althoughgenerally 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 loan portfolio consists both ofreal estate construction loans and real estate mortgage loans.  The Bank has initiated a program to generatemore commercial and industrial real estate loans, which generally yield higherreturns than normal commercial loans. The Bank has also developed a broker program for generating residentialreal estate loans.  The Bank does notmake real estate development loans.  Real estate construction loans are madefor a much shorter term, and often at higher interest rates, than conventionalsingle-family residential real estate loans. The cost of administering such loans is often higher than for other realestate loans, as principal is drawn on periodically as construction progresses.

 

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

 

Consumer loans are made for the purpose of financingthe purchase of various types of consumer goods, home improvement loans, auto loansand other personal loans.  Consumerinstallment loans generally provide for monthly payments of principal andinterest, at a fixed rate.  Most of theBank’s consumer installment loans are generally secured by the personalproperty being purchased.  The Bankgenerally makes consumer loans to those customers with a prior bankingrelationship with the Bank.

 

**Non-performingand Non-accrual Loans**

 

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

 

14

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

 
|                                                           |   | **Three Months Ended  March 31,** |   |
|----------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                           |   | **2002**                          |   | **2001** |   |
|                                                           |   | **(Dollars  in thousands)**       |   |
| Accruing, past  due 90 days or more:                           |   |                              |   |   |   |
|                                                           |   |                              |   |   |   |
| Real Estate                                                    |   | 0                                 |   | 0 |   |
| Commercial                                                     |   | 0                                 |   | 0 |   |
| Installment                                                    |   | 0                                 |   | 0 |   |
| Other                                                          |   | 0                                 |   | 0 |   |
| Total accruing                                                 |   | 0                                 |   | 0 |   |
|                                                           |   |                              |   |   |   |
| Non-accrual  Loans:                                            |   |                              |   |   |   |
|                                                           |   |                              |   |   |   |
| Commercial                                                     |   | 118                               |   | 43 |   |
| Installment                                                    |   | 0                                 |   | 0 |   |
| Other                                                          |   | 0                                 |   | 0 |   |
| Total  non-accrual                                             |   | 118                               |   | 43 |   |
|                                                           |   |                              |   |   |   |
| Total non-performing                                           |   | 118                               |   | 43 |   |
|                                                           |   |                              |   |   |   |
| Total loans end  of period                                     |   | 55,569                            |   | 45,036 |   |
|                                                           |   |                              |   |   |   |
| Ratio of  non-performing loans to total loans at end of period |   | 0.21                              | %      | 0.09 | % |

 

15

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

 

**Summary of Loan Loss Experience**

 
|                                                                           |   | **Three Months Ended  March 31,****2002** |   | **Three Months Ended  March 31,****2001** |   |
|--------------------------------------------------------------------------------|--------|-------------------------------------------|--------|-------------------------------------------|--------|
|                                                                           |   | **(Dollars  in thousands)**               |   |
| Average loans  outstanding                                                     |   | 54,837                                    |   | 45,081                                    |   |
|                                                                           |   |                                      |   |                                      |   |
| Allowance,  beginning of period                                                |   | 566                                       |   | 468                                       |   |
|                                                                           |   |                                      |   |                                      |   |
| Loans charged  off during period:                                              |   |                                      |   |                                      |   |
| Commercial                                                                     |   | 13                                        |   | 8                                         |   |
| Installment                                                                    |   | 0                                         |   | 0                                         |   |
| Real Estate                                                                    |   | 0                                         |   | 0                                         |   |
| Other                                                                          |   | 0                                         |   | 0                                         |   |
| Total charge  offs                                                             |   | 13                                        |   | 8                                         |   |
|                                                                           |   |                                      |   |                                      |   |
| Recoveries  during period:                                                     |   |                                      |   |                                      |   |
| Commercial                                                                     |   | 10                                        |   | 1                                         |   |
| Installment                                                                    |   | 0                                         |   | 0                                         |   |
| Other                                                                          |   | 0                                         |   | 0                                         |   |
| Total recoveries                                                               |   | 10                                        |   | 1                                         |   |
|                                                                           |   |                                      |   |                                      |   |
| Net Loans  charged off during the period                                       |   | 3                                         |   | 7                                         |   |
|                                                                           |   |                                      |   |                                      |   |
| Additions to  allowance for possible loan losses                               |   | 37                                        |   | 10                                        |   |
|                                                                           |   |                                      |   |                                      |   |
| Allowance, end  of period                                                      |   | 600                                       |   | 472                                       |   |
|                                                                           |   |                                      |   |                                      |   |
| Ratio of net  loans charged off to average Loans outstanding during the period |   | 0.01                                      | %      | 0.01                                      | %      |
|                                                                           |   |                                      |   |                                      |   |
| Ratio of  allowance to total loans at end of period                            |   | 1.08                                      | %      | 1.00                                      | %      |

 

16

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**FundingSources**

 

Average deposits for the three months ended March 31,2002 were $67,531,000 an increase of 7.99% compared with the same period in2001.  Average certificates of depositrepresented 56.21% of average deposits for the three months ended March 31,2002.  Average interest bearingchecking, money market and savings accounts as a group was 22.67% of averagedeposits.  Average demand depositsrepresented 21.12% of average deposits.

** **

**The Corporation borrowed $1,000,000 on an unsecuredbasis from United Security Bank, Fresno, California on June 28, 2001.  The rate of interest is the United SecurityBank Reference Rate (the “Index”) plus .750 percentage points over theIndex.  The note requires monthlyinterest payments beginning August 5, 2001 and quarterly principal paymentsbeginning October 5, 2002 through April 5, 2011 and a final payment ofprincipal on July 5, 2001. The proceeds from the loan were used to payoff an$800,000 term loan and to pay down the $200,000 line of credit with PacificCoast Bankers’ Bank.  The Corporationrenewed the $200,000 revolving line of credit for one year, with interest duemonthly.  The credit line is secured by93,069 shares of Monterey County Bank stock. The rate of interest on the credit line is the prime rate as publishedin the Wall Street Journal (the “Index”) plus .750 percentage points over theIndex.  At March 31, 2002, the interestrate was 5.50% for both loans, and the outstanding principal balances on theterm note and line of credit were $1,000,000 and $200,000, respectively.**

** **

**The Bank has lines of credit from the Federal HomeLoan Bank of San Francisco and Pacific Coast Bankers’ Bank with maximumborrowing limits on March 31, 2002 of $6,818,800 and $2,500,000,respectively.  The Federal Home LoanBank line of credit is secured by certain of the Bank’s real estate securedloans at March 31, 2002 the total principal balances of pledged loans was$11,355,000.  At March 31, 2002 the Bankhad four $1,000,000 advances from the Federal Home Loan Bank, which bearinterest at 4.83%, 6.81%, 6.86% and 7.71%, respectively.  The advances mature in October 2003, June2004, August 2005 and June 2030, respectively. The Pacific Coast Bankers’ Bank line of credit is unsecured.  The Bank did not utilize any overnightborrowings in 2002, 2001 or 2000.**

 

**CapitalResources**

 

The Company maintains capital to comply with legalrequirements, to provide a margin of safety for its depositors andstockholders, and to provide for future growth and the ability to paydividends.  At March 31, 2002,stockholders’ equity was $5,164,300 versus $5,086,900 at December 31,2001.  The Company paid a ten (10%)percent stock dividend in 2001, 2000 and 1999. The Bank paid cash dividends totaling $100,000, $100,000 and$50,000  to the Corporation in 2001,2000 and 1999.

 

17

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The FDIC and Federal Reserve Board have adoptedcapital adequacy guidelines for use in their examination and regulation ofbanks and bank holding companies.  Ifthe capital of a bank or bank holding company falls below the minimum levelsestablished by these guidelines, it may be denied approval to acquire orestablish additional banks or non-bank businesses, or the FDIC or FederalReserve Board may take other administrative actions.  The guidelines employ two measures of capital:  (1) risk-based capital and (2) leverage capital.

 

Under current rules, all banks are required tomaintain Tier 1 capital of at least 4 percent and total capital of 8.0% ofrisk-adjusted assets. The Bank had a Tier 1 risk-based capital ratio of 9.30%and a total risk-based capital ratio of 10.28% at March 31, 2002, well abovethe minimum regulatory requirements.

 

The leverage capital ratio guidelines require aminimum leverage capital ratio of 3% of Tier 1 capital to total assets lessgoodwill.  The Bank had a leveragecapital ratio of 7.24% at March 31, 2002.

 

## **Liquidity**

 

Liquidity represents a bank’s ability to providesufficient cash flows or cash resources in a manner that enables it to meetobligations in a timely fashion and adequately provides for anticipated futurecash needs.  For the Bank, liquidityconsiderations involve the capacity to meet expected and potential requirementsof depositors seeking access to balances and to provide for the credit demandsof borrowing customers.  In the ordinarycourse of the Bank’s business, funds are generated from the repayment of loans,maturities within the investment securities portfolio and the acquisition ofdeposit balances and short-term borrowings. In addition, the Bank has lines of credit from the Federal Home LoanBank of San Francisco of approximately $6,818,800****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, the Bank seeks to maintain alevel of liquid assets, including marketable investment securities, equal to aleast 10 percent of total assets (“primary liquidity”), while maintainingsources of secondary liquidity (borrowing lines from other institutions) equalto at least an additional 10 percent of assets.  In addition, it seeks to generally limit loans to not more than90 percent of deposits.  Within these ratios, the Bank generally hasexcess funds available to sell as federal funds on a daily basis, and is ableto fund its own liquidity needs without the need of short-term borrowing.  The Bank’s primary liquidity at March 31,2002 was 21.12 percent, while its average loan to deposit ratio for the threemonths ended March 31, 2002 was 81.20 percent.

 

## **InterestRate Risk**

 

Management of interest rate sensitivity(asset/liability management) involves matching and repricing rates ofinterest-earning assets with interest-bearing liabilities in a 

 

18

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manner designed to optimize net interest income within the constraintsimposed by regulatory authorities, liquidity determinations and capitalconsiderations.  The Bank institutedformal asset/liability policies at the end of 1989.

 

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

 

The Bank monitors its interest rate risk on aquarterly basis through the use of a model which calculates the effect onearnings of changes in the fed funds rate. The model converts a fed funds rate change into rate changes for eachmajor class of asset and liability, then simulates the bank’s net interestmargin based on the bank’s actual repricing over a one year period, assumingthat maturities are reinvested in instruments identical to those maturingduring the period.  At March 31, 2002the affect of a 2% increase in the federal funds sold rate, expressed, as apercentage of equity, was a positive 6.95%, while a 2% decrease in the fedfunds rate was a negative 7.51% of equity.

 

The Corporation’s sources of revenues and liquidity arethe dividends, tax equalization payments or management fees from the Bank,gains on securities held in a trading account and the line of credit from thePacific Coast Bankers’ Bank.  Theability of the Bank to pay such items to the Corporation is subject tolimitations under state and Federal law.

 

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**InvestmentSecurities**

 

The following table sets forth the book and marketvalue of the Bank’s investment securities at March 31, 2002:

 
|                          |   | **INVESTMENT PORTFOLIO MIX**

**March 31, 2002** |   |
|-------------------------------|--------|--------------------------------------------------|--------|
|                          |   | **Book  Value**                                  |   | **Market  Value** |   |
| Securities Available for Sale |   |                                             |   |   |   |
| U.S. Government Agencies      |   | 3,000,000                                        |   | 2,945,200 |   |
| Corporate Debt  Securities    |   | 2,749,900                                        |   | 2,707,700 |   |
| Total                         |   | 5,749,900                                        |   | 5,652,900 |   |

 

The following table summarizes the maturity of theBank’s investment securities at March 31, 2002:

 
|                               |   | **INVESTMENT PORTFOLIO MATURITIES** |   |
|------------------------------------|--------|-------------------------------------|--------|
|                               |   | **(Dollars in thousands)**          |   |
|                               |   | **Available  for Sale**             |   |
|                               |   | **Amortized  Cost**                 |   | **Fair  Value** |   |
| Due between one  and five years    |   | 3,021,800                           |   | 2,974,500 |   |
| Due between five  and ten years    |   | —                              |   | — |   |
| Due between ten  and fifteen years |   | 2,728,100                           |   | 2,678,400 |   |
| Due in over  fifteen years         |   | —                              |   | — |   |
|                               |   | 5,749,900                           |   | 5,652,900 |   |

 

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**PART II-OTHER INFORMATION**

 

**Item1.  Legal Proceedings.**

 

None

 

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

 

None

 

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

 

None

 

In accordance with the requirements of the Exchange Act, the registrantcaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|   |        |   | NORTHERN CALIFORNIA BANCORP, INC. |
|--------|-------------|--------|-----------------------------------|
|   |        |   |                              |
| Date:  | May 9, 2002 |   | By:                               | /s/  Charles  T. Chrietzberg, Jr. |   |   |
|   |        |   |                              |   | Charles T. Chrietzberg, Jr. |
|   |        |   |                              |   | Chief Executive Officer and President |
|   |        |   |                              |
| Date:  | May 9, 2002 |   | By:                               | /s/  Bruce N.  Warner |   |
|   |        |   |                              |   | Bruce N. Warner |
|   |        |   |                              |   | Chief Financial Officer and Principal Accounting  Officer |
|        |             |        |                                   |  |  |  |  |  |

 

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