**Table of Contents**

** **

 

** **

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

**Washington,D.C.  20549**

** **

**FORM 10-Q**

 

**x****   Quarterlyreport under Section 13 or 15(d) of the Securities Exchange Act of1934 for the quarterly period ended June 30, 2008**

** **

**o****   Transitionreport under Section 13 or 15(d) of the Securities Exchange Act of1934 (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 whether theissuer: (1) filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act during the past 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days. 
|   | Yes | x |   | No  o |
|--------|-----|---|--------|-----------------|

 

Indicateby check mark whether the registrant is an accelerated filer, a non-acceleratedfiler, or a smaller reporting company (as defined in Rule 12b-2 of theAct).

 
| Large  accelerated filer  o |   | Accelerated  filer  o         |
|----------------------------------|--------|------------------------------------|
|                             |   |                               |
| Non-accelerated  filer  o   |   | Smaller  reporting company  x |

 

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

 

As of August 4,2008, the Corporation had 1,815,908 shares of common stock outstanding.

 

 

 

----

Table ofContents

 

TABLE OF CONTENTS

 
| **Facing Page**       |                                                                                        | 1      |
|-----------------------|---------------------------------------------------------------------------------------------|--------|
| **Table of Contents** |                                                                                        | 2      |
| ** **            |                                                                                        |   |
| **PART I**       | Financial Information                                                                       | 3-6    |
| Item 1                | Financial Statements                                                                        |   |
|                  | Consolidated Balance Sheets                                                                 | 3      |
|                  | Consolidated Statements of  Operations                                                      | 4      |
|                  | Consolidated****Statements****of  Changes in Shareholders’ Equity                      | 5      |
|                  | Consolidated Statements of  Cash Flows                                                      | 6      |
|                  | Summary of Accounting  Policies                                                             | 7-11   |
| Item 2                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 11-30  |
| Item 4T               | Controls and  Procedures                                                                    | 30     |
|                  |                                                                                        |   |
| **PART II**      | Other Information                                                                           |   |
| Item 1                | Legal Proceedings                                                                           | 31     |
| Item 2                | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 31     |
| Item 3                | Defaults  Upon Senior Securities                                                            | 31     |
| Item 4                | Submission  of Matters to a Vote of Security Holders                                        | 31     |
| Item 5                | Other Information                                                                           | 31     |
| Item 6                | Exhibits  and Reports on Form 8-K                                                      | 32     |
| Signatures            |                                                                                        | 32     |
| Certifications        |                                                                                        |   |
|                       |                                                                                             |        |  |

 

2

----

Table of Contents

 

**PART I-FINANCIALINFORMATION**

###  

### Item 1.              FINANCIAL STATEMENTS

 

NORTHERNCALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATEDBALANCE SHEETS

 
| ** **                                                                                              | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|------------------|------------|----------------------|------------|
| **(in thousands except share data)**                                                | ** ** | **2008**         | ** ** | **2007**             | ** ** |
| ** **                                                                                              | ** ** | **(Unaudited)**  | ** ** | **(Audited)**        | ** ** |
| ASSETS:                                                                                                 |       |             |       |                 |       |
| Cash and Due  From Banks                                                                                |       | $                | 6,769      |                 | $          | 8,063 |   |
| Federal Funds  Sold                                                                                     |       | 10,345           |       | 12,090               |       |
| Total Cash and  Cash Equivalents                                                                        |       | 17,114           |       | 20,153               |       |
| Trading Assets                                                                                          |       | 744              |       | 1,224                |       |
| Investment  Securities, available for sale (Note 5)                                                     |       | 69,037           |       | 36,801               |       |
| Investment Securities,  held to maturity at cost (fair value approximates $8,052 in 2007) (Note 5)      |       | —           |       | 7,869                |       |
| Other  Investments (Note 6)                                                                             |       | 3,788            |       | 2,824                |       |
| Loans Held for  Sale, at lower of cost or market                                                        |       | 251              |       | 1,887                |       |
| Loans, net of  allowance for loan losses of $2,029 in 2008; $2,028 in 2007 (Note 7)                     |       | 158,937          |       | 166,861              |       |
| Bank Premises  and Equipment, Net                                                                       |       | 5,087            |       | 4,874                |       |
| Cash Surrender  Value of Life Insurance                                                                 |       | 3,906            |       | 3,845                |       |
| Other Real  Estate Owned                                                                                |       | 2,668            |       | —               |       |
| Interest  Receivable and Other Assets                                                                   |       | 5,301            |       | 7,527                |       |
| Total Assets                                                                                            |       | $                | 266,833    |                 | $          | 253,865 |   |
|                                                                                                    |       |             |       |                 |       |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY:                                                             |       |             |       |                 |       |
|                                                                                                    |       |             |       |                 |       |
| Non-interest  bearing demand                                                                            |       | $                | 25,521     |                 | $          | 24,814 |   |
| Interest-bearing  demand                                                                                |       | 16,230           |       | 15,600               |       |
| Savings                                                                                                 |       | 5,005            |       | 5,487                |       |
| Time less than  $100,000                                                                                |       | 71,224           |       | 58,812               |       |
| Time in  denominations of $100,000 or more                                                              |       | 58,911           |       | 62,620               |       |
| Total Deposits                                                                                          |       | 176,891          |       | 167,333              |       |
|                                                                                                    |       |             |       |                 |       |
| Federal Home  Loan Bank Borrowed Funds                                                                  |       | 60,500           |       | 52,500               |       |
| Junior  Subordinated Debt Securities                                                                    |       | 8,248            |       | 8,248                |       |
| Revolving Line  of Credit                                                                               |       | 250              |       | —               |       |
| Payable for  investment securities purchased                                                            |       | 285              |       | 5,225                |       |
| Interest Payable  and Other Liabilities                                                                 |       | 7,628            |       | 6,125                |       |
| Total  Liabilities                                                                                      |       | 253,802          |       | 239,431              |       |
|                                                                                                    |       |             |       |                 |       |
| Shareholders’  Equity:                                                                             |       |             |       |                 |       |
| Common Stock -  No Par Value, authorized 2,500,000 Outstanding:1,815,908 in 2008 and  1,845,918 in 2007 |       | 5,220            |       | 5,502                |       |
| Retained  Earnings                                                                                      |       | 9,325            |       | 8,831                |       |
| Accumulated  Other Comprehensive Income (Loss) (Note 8)                                                 |       | (1,514           | )          | 101                  |       |
| Total  Shareholders’ Equity                                                                        |       | 13,031           |       | 14,434               |       |
| Total  Liabilities & Shareholders’ Equity                                                 |       | $                | 266,833    |                 | $          | 253,865 |   |

 

3

----

Table of Contents

 

NORTHERNCALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATEDSTATEMENTS OF OPERATIONS (UNAUDITED)

 
| ** **                                                              | ** ** | **THREE-MONTH PERIOD  ENDING** | ** ** | **SIX-MONTH PERIOD  ENDING** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| ** **                                                              | ** ** | **June 30**                    | ** ** | **June 30**                  | ** ** |
| **(in thousands except share data)**                | ** ** | **2008**                            | ** ** | **2007**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| INTEREST INCOME:                                                        |       |                                |       |                              |       |   |   |   |   |
| Loans                                                                   |       | $                                   | 2,963      |                              | $          | 3,443 |   | $ | 6,711 |   | $ | 6,733 |   |
| Time deposits  with other financial institutions                        |       | —                              |       | 14                                |       | 12 |   | 28 |   |
| Investment  securities                                                  |       | 965                                 |       | 435                               |       | 1,722 |   | 835 |   |
| Federal funds  sold                                                     |       | 47                                  |       | 110                               |       | 151 |   | 234 |   |
| Total Interest  Income                                                  |       | 3,975                               |       | 4,002                             |       | 8,596 |   | 7,830 |   |
|                                                                    |       |                                |       |                              |       |   |   |   |   |
| INTEREST  EXPENSE:                                                      |       |                                |       |                              |       |   |   |   |   |
| Interest-bearing  transaction accounts                                  |       | 12                                  |       | 13                                |       | 24 |   | 26 |   |
| Savings and time  deposit accounts                                      |       | 831                                 |       | 655                               |       | 1,673 |   | 1,185 |   |
| Time deposits in  denominations of $100,000 or more                     |       | 711                                 |       | 525                               |       | 1,482 |   | 997 |   |
| Notes payable  and other                                                |       | 863                                 |       | 628                               |       | 1,727 |   | 1,253 |   |
| Total Interest  Expense                                                 |       | 2,417                               |       | 1,821                             |       | 4,906 |   | 3,461 |   |
|                                                                    |       |                                |       |                              |       |   |   |   |   |
| Net Interest  Income                                                    |       | 1,558                               |       | 2,181                             |       | 3,690 |   | 4,369 |   |
| Provision for  loan losses                                              |       | —                              |       | 275                               |       | — |   | 275 |   |
| Net interest  income, after provision for loan losses                   |       | 1,558                               |       | 1,906                             |       | 3,690 |   | 4,094 |   |
|                                                                    |       |                                |       |                              |       |   |   |   |   |
| NON-INTEREST  INCOME:                                                   |       |                                |       |                              |       |   |   |   |   |
| Service charges  on deposit accounts                                    |       | 241                                 |       | 142                               |       | 404 |   | 307 |   |
| Income from  sales and servicing of Small Business Administration Loans |       | 51                                  |       | 173                               |       | 216 |   | 355 |   |
| Other income                                                            |       | 403                                 |       | 714                               |       | 1,865 |   | 1,692 |   |
| Total  non-interest income                                              |       | 695                                 |       | 1,029                             |       | 2,485 |   | 2,354 |   |
|                                                                    |       |                                |       |                              |       |   |   |   |   |
| NON-INTEREST  EXPENSE:                                                  |       |                                |       |                              |       |   |   |   |   |
| Salaries and  Employee Benefits                                         |       | 899                                 |       | 983                               |       | 2,004 |   | 2,060 |   |
| Occupancy and  Equipment Expense                                        |       | 234                                 |       | 221                               |       | 472 |   | 427 |   |
| Professional  Fees                                                      |       | 63                                  |       | 50                                |       | 117 |   | 88 |   |
| Data Processing                                                         |       | 90                                  |       | 90                                |       | 191 |   | 178 |   |
| Other general  and administrative                                       |       | 963                                 |       | 916                               |       | 1,691 |   | 1,709 |   |
| Total  non-interest expenses                                            |       | 2,249                               |       | 2,260                             |       | 4,475 |   | 4,462 |   |
|                                                                    |       |                                |       |                              |       |   |   |   |   |
| Income before  tax provision                                            |       | 4                                   |       | 675                               |       | 1,700 |   | 1,986 |   |
| Income tax  provision                                                   |       | 68                                  |       | 364                               |       | 844 |   | 865 |   |
| Net income  (loss)                                                      |       | $                                   | (64        | )                                 | $          | 311 |   | $ | 856 |   | $ | 1,121 |   |
|                                                                    |       |                                |       |                              |       |   |   |   |   |
| Earnings per  common share                                              |       |                                |       |                              |       |   |   |   |   |
| Basic                                                                   |       | $                                   | (0.035     | )                                 | $          | 0.179 |   | $ | 0.465 |   | $ | 0.644 |   |
| Diluted                                                                 |       | $                                   | (0.034     | )                                 | $          | 0.173 |   | $ | 0.461 |   | $ | 0.622 |   |

 

4

----

Table of Contents

 

NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OFCHANGES IN SHAREHOLDERS’ EQUITY

 
| ** **                                                                                                        | ** ** | ** **         | ** ** | ** ** | ** ** | ** **   | ** ** | **Accumulated**         | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------|------------|--------------|------------|-------------------------|------------|------------|------------|
| ** **                                                                                                        | ** ** | ** **         | ** ** | ** ** | ** ** | ** **   | ** ** | **Other Compre-**  | ** ** | ** ** | ** ** |
| ** **                                                                                                        | ** ** | **Number of** | ** ** | **Common** | ** ** | **Retained** | ** ** | **hensive Income** | ** ** | ** ** | ** ** |
| **(in thousands except share data)**                                                          | ** ** | **Shares**         | ** ** | **Stock**  | ** ** | **Earnings** | ** ** | **(Loss)**              | ** ** | **Total**  | ** ** |
| ** **                                                                                                        | ** ** | ** **         | ** ** | ** ** | ** ** | ** **   | ** ** | ** **              | ** ** | ** ** | ** ** |
| Balance at  December 31, 2006                                                                                |       | 1,721,715          |       | $          | 5,060      |         | $          | 7,363                   |       | $          | (21        | ) | $ | 12,402 |   |
|                                                                                                              |       |               |       |       |       |         |       |                    |       |       |       |
| Comprehensive  income:                                                                                            |       |               |       |       |       |         |       |                    |       |       |       |
| Net income                                                                                                        |       | —             |       | —     |       | 1,929        |       | —                  |       | 1,929      |       |
| Change in net  unrealized gain on securities and other assets net of reclassification  adjustment and tax effects |       | —             |       | —     |       | —       |       | 122                     |       | 122        |       |
| Total comprehensive  income                                                                                       |       |               |       |       |       |         |       |                    |       | 2,051      |       |
|                                                                                                              |       |               |       |       |       |         |       |                    |       |       |       |
| $0.25 per share  dividend                                                                                         |       | —             |       | —     |       | (461         | )          | —                  |       | (461       | )          |
| Exercise of  stock options, net of tax benefit                                                                    |       | 124,203            |       | 442        |       | —       |       | —                  |       | 442        |       |
|                                                                                                              |       |               |       |       |       |         |       |                    |       |       |       |
| Balance at  December 31, 2007 (audited)                                                                      |       | 1,845,918          |       | 5,502      |       | 8,831        |       | 101                     |       | 14,434     |       |
| Cumulative  effect – application of new accounting standard EITF 06-4 and EITF 06-10                         |       | —             |       | —     |       | (362         | )          | —                  |       | (362       | )          |
|                                                                                                              |       | 1,845,918          |       | 5,502      |       | 8,469        |       | 101                     |       | 14,072     |       |
| Comprehensive  income:                                                                                            |       |               |       |       |       |         |       |                    |       |       |       |
| Net income                                                                                                        |       | —             |       | —     |       | 856          |       | —                  |       | 856        |       |
| Change in net  unrealized loss on securities and other assets net of reclassification  adjustment and tax effects |       | —             |       | —     |       | —       |       | (1,615                  | )          | (1,615     | )          |
| Total  comprehensive income                                                                                       |       |               |       |       |       |         |       |                    |       | (759       | )          |
| Repurchase of  common stock                                                                                       |       | (34,010            | )          | (294       | )          |         |       |                    |       | (294       | )          |
| Exercise of  stock options, net of tax benefit                                                                    |       | 4,000              |       | 12         |       | —       |       | —                  |       | 12         |       |
|                                                                                                              |       |               |       |       |       |         |       |                    |       |       |       |
| Balance at  June 30, 2008 (unaudited)                                                                        |       | 1,815,908          |       | $          | 5,220      |         | $          | 9,325                   |       | $          | (1,514     | ) | $ | 13,031 |   |

 

5

----

Table ofContents

 

NORTHERNCALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATEDSTATEMENTS OF CASH FLOWS (UNAUDITED)

SIX MONTHS ENDEDJUNE 30, 2008 AND 2007

 
| **(in thousands except share data)**                           | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **CASH  FLOWS FROM OPERATING ACTIVITIES**                                          |       |     |       |     |       |
| Net income                                                                         |       | $        | 856        |     | $          | 1,121 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |     |       |     |       |
| Depreciation and  amortization expense                                             |       | 154      |       | 141      |       |
| Realized gain on  sales of available-for-sale securities, net                      |       | (449     | )          | —   |       |
| Amortization of  deferred loan costs                                               |       | 243      |       | 159      |       |
| Accretion of  discounts and premiums on investment securities, net                 |       | (93      | )          | (10      | )          |
| Gain on sale of  equipment                                                         |       | —   |       | (1       | )          |
| Provision for  loan losses                                                         |       | —   |       | 275      |       |
| Increase in cash  surrender value of life insurance                                |       | (61      | )          | (62      | )          |
| (Increase)  decrease in assets:                                                    |       |     |       |     |       |
| Trading assets                                                                     |       | 480      |       | 54       |       |
| Loans held for  sale                                                               |       | 1,636    |       | 186      |       |
| Interest  receivable                                                               |       | (685     | )          | (161     | )          |
| Other assets                                                                       |       | 2,920    |       | 483      |       |
| Increase  (decrease) in liabilities:                                               |       |     |       |     |       |
| Interest payable                                                                   |       | (327     | )          | 235      |       |
| Other  liabilities                                                                 |       | 1,468    |       | 1,405    |       |
| Net cash  provided by operating activities                                         |       | 6,142    |       | 3,825    |       |
|                                                                               |       |     |       |     |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES**                                          |       |     |       |     |       |
| Proceeds from  maturity/sale of investment securities                              |       | 36,763   |       | 9,904    |       |
| Purchase of  investments                                                           |       | (68,119  | )          | (22,383  | )          |
| Net increase in  loans                                                             |       | (9,239   | )          | (32,369  | )          |
| Loan purchases                                                                     |       | —   |       | (1,462   | )          |
| Loan sales                                                                         |       | 14,252   |       | 21,474   |       |
| Proceeds from  sale of equipment                                                   |       | —   |       | 1        |       |
| Additions to  bank premises and equipment                                          |       | (364     | )          | (414     | )          |
| Net cash used by  investing activities                                             |       | (26,707  | )          | (25,249  | )          |
|                                                                               |       |     |       |     |       |
| **CASH  FLOWS FROM FINANCING ACTIVITIES**                                          |       |     |       |     |       |
| Net increase in  deposits                                                          |       | 9,558    |       | 17,747   |       |
| Proceeds from  borrowings                                                          |       | 8,250    |       | 5,000    |       |
| Repurchase of  common stock                                                        |       | (294     | )          | —   |       |
| Proceeds from  exercise of stock options                                           |       | 12       |       | 269      |       |
| Net cash  provided by financing activities                                         |       | 17,526   |       | 23,016   |       |
|                                                                               |       |     |       |     |       |
| Net increase  (decrease) in cash and cash equivalents                              |       | (3,039   | )          | 1,592    |       |
|                                                                               |       |     |       |     |       |
| **CASH  AND CASH EQUIVALENTS, BEGINNING**                                          |       | 20,153   |       | 22,434   |       |
|                                                                               |       |     |       |     |       |
| **CASH  AND CASH EQUIVALENTS, ENDING**                                             |       | $        | 17,114     |     | $          | 24,026 |   |

 

6

----

Table of Contents

 

**SUMMARY OF ACCOUNTING POLICIES**

 

(NOTE 1) NATURE OFBUSINESS AND ****BASIS OFPRESENTATION****

 

*Nature of Business*

 

Northern CaliforniaBancorp, Inc. (the “Corporation”) was incorporated on August 29,1995, as a for-profit corporation under the California Corporate laws for theprincipal purpose of engaging in banking and non-banking activities as allowedfor a bank holding company.  TheCorporation’s sources of revenues at this time are dividends on investments,gains on securities transactions and potential dividends, management fees andtax equalization payments, if any, from the Bank.

 

The Corporation owns 100%of Monterey County Bank (the “Bank”) which operates five full service branchesin Monterey County, California. The Corporation owns 100% of the common stockof two unconsolidated special purpose business trusts, “Northern CaliforniaBancorp, Inc. Trust I” and “Northern California Bancorp, Inc. TrustII”.

 

*Basisof Presentation*

 

Theinterim condensed financial statements of Northern California Bancorp, Inc.and subsidiary (“Corporation”) are unaudited and reflect all adjustments(consisting only of normal recurring adjustments), which are, in the opinion ofmanagement, necessary for a fair presentation, in all material respects, of thefinancial position and operating results of the Corporation for the interimperiods.  The results of operations for the six months ended June 30,2008 are not necessarily indicative of the results to be expected for theentire fiscal year ending December 31, 2008.  The year-endbalance sheet data at December 31, 2007 was derived from the auditedfinancial statements.  All materialintercompany balances and transactions have been eliminated in consolidation.

 

Thisfinancial information should be read in conjunction with the audited financialstatements and notes thereto included in the Corporation’s Form 10-KSB forthe fiscal year ended December 31, 2007.

 

(NOTE 2) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

InSeptember 2006, the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standard (SFAS) No. 157, *Fair Value Measurements,* which definesfair value, establishes a framework for measuring fair value, and expandsdisclosures about fair value measurements. SFAS No. 157 does not requireany new fair value measurements, but applies under other existing accountingpronouncements that require or permit fair value measurements. SFAS No. 157emphasizes that fair value is a market-based measurement, not anentity-specific measurement and, therefore, should be determined based on theassumptions that market participants would use in pricing that asset orliability. SFAS No. 157 also establishes a fair value hierarchy thatdistinguishes between market participant assumptions developed based on marketdata obtained from independent sources and the Corporation’s own assumptionsabout market participant assumptions based on the best information available.SFAS No. 157 is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007 and interim periods within those fiscalyears with earlier adoption permitted.  The adoption of SFAS 

 

7

----

Table of Contents

 

No. 157did not have an impact on the Corporation’s consolidated financial statementsand results of operations.

 

InFebruary 2007, the FASB issued SFAS No. 159, *The Fair Value Option for Financial Assets andFinancial Liabilities – including an amendment of FASB Statement No. 115*which is effective for financial statements issued for fiscal years beginningafter November 15, 2007. The Corporation adopted SFAS 159 on January 1,2008.  The Corporation did not elect the fair value option, underSFAS 159, for any of our existing financial assets or financial liabilities asof January 1, 2008, nor have we elected the fair value option for any newfinancial assets or financial liabilities originated or entered into during thefirst two quarters of 2008.

 

OnSeptember 7, 2006, the Task Force reached a consensus on EITF Issue No. 06-4,Accounting for Deferred Compensation and Postretirement Benefit Aspects ofEndorsement Split-Dollar Life Insurance Arrangements (“EITF 06-4”) and on March 15,2007, the Task Force reached a consensus on EITF Issue No. 06-10,Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements(“EITF06-10”). The scope of these two issues relates to the recognition of aliability and related compensation costs for endorsement split-dollar lifeinsurance arrangements and for collateral assignment split-dollar lifeinsurance arrangements, respectively.  EITF06-4 and EITF 06-10 are both effective for fiscal years beginning after December 15,2007, although early adoption is permitted. The Corporation adopted EITF 06-4 and EITF 06-10 effective as of January 1,2008 as a change in accounting principle through a $362,000 cumulative-effectadjustment to retained earnings. Beginning January 1, 2008, a monthlycharge to expense of approximately $9,143 is made to recognize the liabilityfor future benefits.

 

(NOTE3) STOCK BASED COMPENSATION

 

TheCorporation records compensation expense associated with stock-based awards inaccordance with Statement of Financial Accounting Standards (SFAS) No. 123(revised 2004), *Share-Based Payment*(SFAS No. 123R) as interpreted by SEC Staff Accounting Bulletin No. 107.SFAS No. 123R supersedes APB No. 25, and amends SFAS No. 95 *Statement of Cash Flows*. Generally, theapproach in SFAS No. 123R is similar to the approach described in SFAS No. 123,*Accounting for Stock Based Compensation*(SFASNo. 123).  However, SFAS No. 123R requires all stock-basedpayments to employees, including grants of employee stock options, to berecognized in the income statement based on their fair values at the date ofgrant. No stock-based compensation expense was recorded for the six monthsended June 30, 2008 and 2007, respectively.  The Corporation selectedto use the modified prospective method of adopting SFAS 123R.  Thus, stockoption expense is recognized only for options that vested after January 1,2006.  Future compensation expense may be greater if additional stockoptions are granted by the Corporation.

 

Underthe Corporation’s 1998 Stock Option Plan, the Corporation may grant incentivestock options and non-qualified stock options to directors, officers, andemployees of the Corporation and its subsidiary, so long as the Corporationowns a majority of the equity interest of such subsidiary.  Incentive stock options are granted at fairvalue of the common stock on the date of grant. However, an incentive stock option granted to an individual owning 10%or more of the Corporation’s stock after such grant must have an exercise priceof at least 110%****of such fair market value and anexercise period of not more than five years. Non-qualified stock options may be granted at prices not lower than 85%of the fair market value of the common stock on the date of grant.  The Board of Directors is authorized todetermine when options become 

 

8

----

Table of Contents

 

exercisablewithin a period not exceeding 10 years from the date of grant.  Under the Plan, 211,081 shares of commonstock have been reserved for the granting of these options.  At June 30, 2008, 64,661 options wereoutstanding.  During 2008, no optionswere granted, and 4,000 options were exercised by officers, employees, andboard members.  As of June 30, 2008,all options have been vested and all related compensation expense has beenformerly expensed.

 

Underthe Corporation’s 2007 Stock Option Plan, the Corporation may grant incentivestock options and non-qualified stock options to directors, officers, andemployees of the Corporation and its subsidiary, so long as the Corporationowns a majority of the equity interest of such subsidiary.  Incentive stock options are granted at fairvalue of the common stock on the date of grant. However, an incentive stock option granted to an individual owning 10%or more of the Corporation’s stock after such grant must have an exercise priceof at least 110%****of such fair market value and anexercise period of not more than five years. The Board of Directors is authorized to determine when options becomeexercisable within a period not exceeding 10 years from the date of grant.  Under the Plan, 300,000 shares of commonstock have been reserved for the granting of these options.  At June 30, 2008, no options weregranted or outstanding.

** **

**Pre-tax stock-basedcompensation expense was $0 for the six months ended June 30, 2008 and2007, respectively. There were no options granted during the six months ended June 30,2008 or 2007.**

 

(NOTE 4) EARNINGS PER SHARE

 

**Basicearnings per share represents income available to common stockholders dividedby the weighted-average number of common shares outstanding during theperiod.  Diluted earnings per sharereflects additional common shares that would have been outstanding, ifpotential dilutive common shares had been issued, as well as any adjustment toincome that would result from the assumed issuance.  Potential common shares that may be issued bythe Bank relate to outstanding stock options and warrants and are determinedusing the treasury stock method.**

** **

**Theweighted-average number of shares used in computing basic and diluted earningsper share is as follows:**

** **
| ** **                                                         | ** ** | **Earnings per share Calculation**                  | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **For the six months ended June 30** | ** ** |
| ** **                                                         | ** ** | **2008**                                                           | ** ** | **2007** | ** ** |
| ** **                                                         | ** ** | ** **                                                         | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                                                         | ** ** | **Net**                                                            | ** ** | **Average** | ** ** | **Per Share** | ** ** | **Net** | ** ** | **Average** | ** ** | **Per Share** | ** ** |
| ** **                                                         | ** ** | **Income**                                                         | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Basic earnings  per share                                          |       | $                                                                  | 856        |   | 1,840,880 |   | $ | 0.465 |   | $ | 1,121 |   | 1,739,254 |   | $ | 0.644 |   |
|                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Effect of  dilutive shares assumed exercise of outstanding options |       | —                                                             |       | 14,365 |   | (0.004 | ) | — |   | 61,794 |   | (0.022 | ) |
|                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Diluted earnings  per share                                        |       | $                                                                  | 856        |   | 1,855,245 |   | $ | 0.461 |   | $ | 1,121 |   | 1,801,048 |   | $ | 0.622 |   |

 

9

----

Table of Contents

 
| ** **                                              | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|---------------------------------------------------------|------------|------------------|------------|----------------------|------------|
| **(in thousands)**                                 | ** ** | **2008**         | ** ** | **2007**             | ** ** |
| ** **                                              | ** ** | **(Unaudited)**  | ** ** | **(Audited)**        | ** ** |
| (NOTE 5)  INVESTMENT SECURITIES:                        |       |             |       |                 |       |
|                                                    |       |             |       |                 |       |
| Available for  sale:                                    |       |             |       |                 |       |
| Government  National Mortgage Association               |       | $                | —     |                 | $          | 385 |   |
| State/Local  Agency                                     |       | 16,917           |       | 225                  |       |
| U.S. government  Agencies                               |       | 52,120           |       | 36,191               |       |
|                                                    |       | $                | 69,037     |                 | $          | 36,801 |   |
|                                                    |       |             |       |                 |       |
| Held to  maturity:                                      |       |             |       |                 |       |
| State/Local  Agency                                     |       | $                | —     |                 | $          | 7,869 |   |
|                                                    |       |             |       |                 |       |
| (NOTE 6) OTHER  INVESTMENTS:                            |       |             |       |                 |       |
|                                                    |       |             |       |                 |       |
| AT Services LLC                                         |       | $                | 20         |                 | $          | 20 |   |
| Federal Home  Loan Bank stock, restricted               |       | 2,881            |       | 2,495                |       |
| Independent  Bankers Financial Corporation              |       | 51               |       | 51                   |       |
| Metrocities  Mortgage, LLC                              |       | 10               |       | 10                   |       |
| Northern  California Bancorp, Inc. Trust I         |       | 93               |       | 93                   |       |
| Northern  California Bancorp, Inc. Trust II        |       | 155              |       | 155                  |       |
| Visa, Inc.                                         |       | 578              |       | —               |       |
|                                                    |       | $                | 3,788      |                 | $          | 2,824 |   |
|                                                    |       |             |       |                 |       |
| (NOTE 7) LOANS  AND ALLOWANCE FOR POSSIBLE LOAN LOSSES: |       |             |       |                 |       |
|                                                    |       |             |       |                 |       |
| Commercial and  Industrial                              |       | $                | 27,595     |                 | $          | 28,310 |   |
| Construction                                            |       | 22,062           |       | 23,396               |       |
| Real Estate -  Mortgage                                 |       | 110,694          |       | 116,625              |       |
| Installment                                             |       | 903              |       | 876                  |       |
| Government  Guaranteed Loans Purchased                  |       | 28               |       | 32                   |       |
|                                                    |       | 161,282          |       | 169,239              |       |
| Allowance for  loan losses                              |       | (2,029           | )          | (2,028               | )          |
| Deferred  origination fees, net                         |       | (316             | )          | (350                 | )          |
| Net Loans                                               |       | $                | 158,937    |                 | $          | 166,861 |   |
|                                                    |       |             |       |                 |       |
| Balance at  Beginning of Period                         |       | $                | 2,028      |                 | $          | 1,409 |   |
| Recoveries                                              |       | 1                |       | 4                    |       |
| Provision for  Possible Loan Losses                     |       | —           |       | 865                  |       |
| Loans Charged  Off                                      |       | —           |       | (250                 | )          |
| Balance at End  of Period                               |       | $                | 2,029      |                 | $          | 2,028 |   |

 

10

----

Table of Contents

 

(NOTE 8) COMPREHENSIVE INCOME (LOSS):

 

The components of other comprehensive income (loss) and related taxeffects for the six month period ended June 30, 2008 and the year ended December 31,2007 are as follows:

 
| ** **                                                                                | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                                                                                | ** ** | **2008**         | ** ** | **2007**             | ** ** |
| ** **                                                                                | ** ** | **(Unaudited)**  | ** ** | **(Audited)**        | ** ** |
| Unrealized  holding gains (losses) on available for sale securities and other assets, net |       | $                | (3,386     | )                    | $          | 438 |   |
| Reclassification  for (gains) losses realized in income                                   |       | 449              |       | (216                 | )          |
| Net unrealized  gains (losses)                                                            |       | (2,937           | )          | 222                  |       |
| Tax effect                                                                                |       | 1,322            |       | (100                 | )          |
|                                                                                      |       |             |       |                 |       |
| Net-of-tax  amount                                                                        |       | $                | (1,615     | )                    | $          | 122 |   |

 

The components of accumulated othercomprehensive income (loss) and related tax effects are as follows:

 
| ** **                                                             | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|------------------------------------------------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                                                             | ** ** | **2008**         | ** ** | **2007**             | ** ** |
| ** **                                                             | ** ** | **(Unaudited)**  | ** ** | **(Audited)**        | ** ** |
| Unrealized  holding gains (losses) on available for sale securities    |       | $                | (2,787     | )                    | $          | 163 |   |
| Unrealized  holding gains on available for sale asset strip receivable |       | 34               |       | 21                   |       |
| Tax effect                                                             |       | 1,239            |       | (83                  | )          |
|                                                                   |       |             |       |                 |       |
| Net-of-tax  amount                                                     |       | $                | (1,514     | )                    | $          | 101 |   |

 

(NOTE 9)SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 
| ** **                          | ** ** | **June 30** | ** ** |
|-------------------------------------|------------|------------------|------------|
| ** **                          | ** ** | **2008**         | ** ** | **2007** | ** ** |
| Payments during  the period ending: |       |             |       |   |   |
| Interest                            |       | $                | 5,000      |   | $ | 1,295 |   |
| Income Taxes                        |       | $                | 1,064      |   | $ | 279 |   |

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

** **

**StatementsRegarding Forward-Looking Information**

** **

Except for historicalinformation contained herein, the matters discussed or incorporated byreference in this report contain forward-looking statements within the meaningof Section 27A of the Securities Act of 1933, as amended (the “SecuritiesAct”), and Section 21E of the Securities Exchange Act of 1934 (the “ExchangeAct”), that involve substantial risks and uncertainties.  When used inthis report, or in the documents incorporated by reference herein, the words “anticipate,”“believe,” “estimate,” “may,” “intend,” “expect,” and similar expressionsidentify certain of such forward-looking statements.  Actual results ofMonterey County Bank could differ materially from such forward-lookingstatements 

** **

**11**

----

**Table of Contents**

** **

**contained herein. Factors that could cause future results to vary from current expectationsinclude, but are not limited to, the following: changes in economic conditions(both generally and more specifically in the markets in which the Bankoperates); changes in interest rates, deposit flows, loan demand, real estatevalues and competition; changes in accounting principles, policies orguidelines and in government legislation and regulation (which change from timeto time and over which the Bank has no control); other factors affecting theBank’s operations, markets, products and services; and other risks detailed inthis Form 10-Q and in the Bank’s other reports filed with the FederalDeposit Insurance Corporation and pursuant to the rules and regulations ofthe Securities and Exchange Commission.  Readers are cautioned not toplace undue reliance on these forward-looking statements, which reflectmanagement’s analysis only as of the date hereof.  The Corporationundertakes no obligation to publicly revise these forward-looking statements toreflect events or circumstances that arise after the date thereof.**

 

**CRITICALACCOUNTING POLICIES**

 

The preparation of financialstatements in accordance with accounting principles generally accepted in theUnited States of America requires management to make a number of judgments,estimates and assumptions that affect the reported amount of assets,liabilities, income and expenses in the Corporation’s financial statements andaccompanying notes.  Management believesthat the judgments, estimates and assumptions used in preparation of theCorporation’s financial statements are appropriate given the factualcircumstances as of June 30, 2008.

 

Various elements of the Corporation’s accounting policies, by theirnature, are inherently subject to estimation techniques, valuation assumptionsand other subjective assessments. Critical accounting policies are those that involve the most complex andsubjective decisions and assessments and have the greatest potential impact onthe Corporation’s results of operation. In particular, management has identified one accounting policy that, dueto judgments, estimates and assumptions inherent in this policy, and thesensitivity of the Corporation’s financial statements to those judgments,estimates and assumptions, is critical to an understanding of the Corporation’sfinancial statements.  This policyrelates to the methodology that determines the Corporation’s allowance for loanlosses.  Management has discussed thedevelopment and selection of this critical accounting policy with theCorporation’s Audit Committee of the Board of Directors.  Although Management believes the level of theallowance at June 30, 2008 is adequate to absorb losses inherent in theloan portfolio, a decline in the regional economy may result in increasinglosses that cannot reasonably be predicted at this time.  For further information regarding theallowance for loan losses see “Provision and Allowance for Loan Losses”included elsewhere herein.

 

**OVERVIEW**

 

Thefollowing discussion reviews and analyzes the operating results and financialcondition 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 six monthsended June 30, 2008 net income was $856,000, compared to $1,121,000 forthe same period in 2007.  For the sixmonths ended June 30, 2008 net interest income decreased $679,000, totalnon-interest income increased $131,000, non-interest expense increased $13,000and the income tax provision decreased $21,000.

 

12

----

Table of Contents

 

The followingtable sets forth certain selected financial ratios of the Corporation for thethree and six months ended June 30, 2008 and 2007.

 
| ** **                                           | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                           | ** ** | **2008**                                           | ** ** | **2007**                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Summary of  Operating Results:                       |       |                                               |       |                                             |       |   |   |   |   |
|                                                 |       |                                               |       |                                             |       |   |   |   |   |
| Total interest  income                               |       | $                                                  | 3,975      |                                             | $          | 4,002 |   | $ | 8,596 |   | $ | 7,830 |   |
| Total interest  expense                              |       | 2,417                                              |       | 1,821                                            |       | 4,906 |   | 3,461 |   |
| Net interest  income                                 |       | 1,558                                              |       | 2,181                                            |       | 3,690 |   | 4,369 |   |
|                                                 |       |                                               |       |                                             |       |   |   |   |   |
| Provision for  possible loan losses                  |       | —                                             |       | 275                                              |       | — |   | 275 |   |
| Net interest  income after provision for loan losses |       | 1,558                                              |       | 1,906                                            |       | 3,690 |   | 4,094 |   |
|                                                 |       |                                               |       |                                             |       |   |   |   |   |
| Total  non-interest income                           |       | 695                                                |       | 1,029                                            |       | 2,485 |   | 2,354 |   |
| Total  non-interest expenses                         |       | 2,249                                              |       | 2,260                                            |       | 4,475 |   | 4,462 |   |
|                                                 |       |                                               |       |                                             |       |   |   |   |   |
| Income before  taxes                                 |       | 4                                                  |       | 675                                              |       | 1,700 |   | 1,986 |   |
| Provision for  income taxes                          |       | 68                                                 |       | 364                                              |       | 844 |   | 865 |   |
|                                                 |       |                                               |       |                                             |       |   |   |   |   |
| Net income  (loss)                                   |       | $                                                  | (64        | )                                                | $          | 311 |   | $ | 856 |   | $ | 1,121 |   |
|                                                 |       |                                               |       |                                             |       |   |   |   |   |
| Per Common Share  Data:                              |       |                                               |       |                                             |       |   |   |   |   |
|                                                 |       |                                               |       |                                             |       |   |   |   |   |
| Net income -  Primary (1)                            |       | $                                                  | (0.035     | )                                                | $          | 0.179 |   | $ | 0.465 |   | $ | 0.644 |   |
| Net income -  Diluted (2)                            |       | (0.034                                             | )          | 0.173                                            |       | 0.461 |   | 0.622 |   |
| Book value, end  of period                           |       | 7.18                                               |       | 8.36                                             |       | 7.18 |   | 8.36 |   |
| Avg shares  outstanding (3)                          |       | 1,835,038                                          |       | 1,792,238                                        |       | 1,840,880 |   | 1,739,254 |   |
|                                                 |       |                                               |       |                                             |       |   |   |   |   |
| Balance Sheet  Data:                                 |       |                                               |       |                                             |       |   |   |   |   |
|                                                 |       |                                               |       |                                             |       |   |   |   |   |
| Total loans, net  of unearned income (4)             |       | $                                                  | 159,188    |                                             | $          | 141,785 |   | $ | 159,188 |   | $ | 141,785 |   |
| Total assets                                         |       | 266,833                                            |       | 216,220                                          |       | 266,833 |   | 216,220 |   |
| Total deposits                                       |       | 176,891                                            |       | 149,375                                          |       | 176,891 |   | 149,375 |   |
| Stockholders’  equity                           |       | 13,031                                             |       | 13,665                                           |       | 13,031 |   | 13,665 |   |

 

13

----

Table of Contents

 
| ** **                                                     | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                     | ** ** | **2008**                                           | ** ** | **2007**                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Selected  Financial Ratios:                                    |       |                                               |       |                                             |       |   |   |   |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Return on  average assets (5) (6)                         |       | (0.10                                              | )%         | 0.63                                             | %          | 0.43 | % | 1.16 | % |
| Return on  average stockholders’ equity (5) (6)      |       | (1.77                                              | )%         | 9.17                                             | %          | 7.86 | % | 16.96 | % |
| Net interest  spread                                           |       | 2.12                                               | %          | 4.14                                             | %          | 2.57 | % | 4.28 | % |
| Net yield on  interest earning assets (5)                      |       | 2.63                                               | %          | 4.86                                             | %          | 3.11 | % | 4.97 | % |
| Avg  shareholders’ equity to average assets (5)           |       | 5.40                                               | %          | 6.82                                             | %          | 5.51 | % | 6.83 | % |
| Risked-Based  capital ratios                                   |       |                                               |       |                                             |       |   |   |   |   |
| Tier 1                                                         |       | 9.25                                               | %          | 10.29                                            | %          | 9.25 | % | 10.29 | % |
| Total                                                          |       | 13.70                                              | %          | 14.04                                            | %          | 13.70 | % | 14.04 | % |
| Total loans to  total deposits at end of period (4)            |       | 89.99                                              | %          | 94.92                                            | %          | 89.99 | % | 94.92 | % |
| Allowance for  loan losses to total loans at end of period (4) |       | 1.26                                               | %          | 1.00                                             | %          | 1.26 | % | 1.00 | % |
| Nonperforming  loans to total loans at end of period (4)       |       | 2.60                                               | %          | 0.11                                             | %          | 2.60 | % | 0.11 | % |
| Net charge-offs  to average loans (4)                          |       | 0.00                                               | %          | 0.18                                             | %          | 0.00 | % | 0.18 | % |

 

----

(1)   Basic earnings per share amounts were computed on thebasis of the weighted average number of shares of common stock outstandingduring the year.  The weighted averagenumber of common shares used for this computation was 1,840,880 and 1,739,254for June 30, 2008 and 2007, respectively.

 

(2)   Diluted earnings per share amounts were computed onthe basis of the weighted average number of shares of common stock and commonstock equivalents outstanding during the year. Common stock equivalents include director/employee stock options. Theweighted average number of shares used for this computation was 1,855,245 and1,801,048 for June 30, 2008 and 2007, respectively.

 

(3)   Weighted average common shares.

 

(4)   Includes loans being held for sale.

 

(5)   Averages are of daily balances.

 

(6)   June 30, 2008 calculated on an annualized basis.

 

**NETINTEREST INCOME**

 

Netinterest income, the difference between (a) interest and fees earned oninterest-earning assets and (b) interest paid on interest-bearingliabilities, is the most significant component of the Bank’s earnings.  Changes in net interest income from period toperiod result from increases or decreases in the average balances ofinterest-earning assets and interest-earning liabilities, the availability ofparticular sources of funds and changes in prevailing interest rates.

 

14

----

Tableof Contents

 

Netinterest income for the six months ended June 30, 2008 was $3,690,000compared to $4,369,000 for the same period in 2007. The decrease of $679,000resulted primarily from a reduction in interest income of $142,000 on loansplaced on non-accrual status during the period and the decline in loan rates asshown on page 18 in the rate and volume analysis table.

 

Thefollowing tables show the components of the Bank’s net interest income, settingforth, for each of the six months ended June 30, 2008 and 2007, (i) averageassets, liabilities and investments, (ii) interest income earned oninterest-earning assets and interest expense paid on interest-bearingliabilities, (iii) average yields earned on interest-earning assets andaverage rates paid on interest-bearing liabilities, (iv) the net interestspread (i.e., the average yield earned on interest-earning assets less theaverage rate paid on interest-bearing liabilities) and (v) the netinterest yield on average interest-earning assets (i.e., net interest incomedivided by average interest-earning assets). Yields are computed on atax-equivalent basis, resulting in adjustments to interest earned on municipalbonds of $135,000 and $70,000 for the six months ended June 30, 2008 and2007, respectively. Non-accrual loans and overdrafts are included in averageloan balances. Average loans are presented net of unearned income.

 

**DISTRIBUTION,RATE AND YIELD ANALYSIS OF NET INTEREST INCOME:**

 

Thefollowing tables show the consolidated average balances of earning assets, andinterest-bearing liabilities; the amount of interest income and interestexpense; the average yield or rate for each category of averageinterest-earning assets and average interest-bearing liabilities; and the netinterest income and the net interest spread for the periods indicated:

 

15

----

Tableof Contents

 
| ** **                                                  | ** ** | **Three Months Ended June 30, 2008** | ** ** | **Three Months Ended June 30, 2007** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **Average**                                                   | ** ** | ** **                                                    | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| **(dollars in thousands)**                        | ** ** | **Balance**                                                   | ** ** | **Interest**                                                  | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| Assets:                                                     |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Loans                                                       |       | $                                                             | 166,770    |                                                          | $          | 2,963 |   | 7.11 | % | $ | 139,026 |   | $ | 3,443 |   | 9.91 | % |
| Time deposits -  in other banks                             |       | —                                                        |       | —                                                        |       | — |   | 1,000 |   | 14 |   | 5.73 | % |
| Invest  securities - taxable                                |       | 58,725                                                        |       | 796                                                           |       | 5.42 | % | 26,923 |   | 360 |   | 5.34 | % |
| Invest  securities - nontaxable                             |       | 14,000                                                        |       | 246                                                           |       | 7.02 | % | 7,007 |   | 112 |   | 6.39 | % |
| Federal funds  sold                                         |       | 9,076                                                         |       | 47                                                            |       | 2.08 | % | 8,698 |   | 110 |   | 5.07 | % |
| Total  interest-earning assets                              |       | 248,571                                                       |       | 4,051                                                         |       | 6.52 | % | 182,654 |   | 4,039 |   | 8.85 | % |
|                                                        |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Allowance for  credit losses                                |       | (2,097                                                        | )          |                                                          |       |   |   | (1,306 | ) |   |   |   |   |
| Non-interest  bearing assets:                               |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Cash and due  from banks                                    |       | 5,348                                                         |       |                                                          |       |   |   | 6,566 |   |   |   |   |   |
| Premises and  equipment                                     |       | 4,983                                                         |       |                                                          |       |   |   | 4,886 |   |   |   |   |   |
| Accrued interest  receivable                                |       | 1,639                                                         |       |                                                          |       |   |   | 1,061 |   |   |   |   |   |
| Other assets                                                |       | 7,656                                                         |       |                                                          |       |   |   | 5,172 |   |   |   |   |   |
| Total average  assets                                       |       | $                                                             | 266,100    |                                                          |       |   |   |   | $ | 199,033 |   |   |   |   |   |
|                                                        |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Liabilities and  Shareholders’ Equity:                 |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                              |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Interest-bearing  demand                                    |       | $                                                             | 14,022     |                                                          | $          | 9 |   | 0.25 | % | $ | 14,740 |   | $ | 10 |   | 0.25 | % |
| Money market  savings                                       |       | 1,822                                                         |       | 3                                                             |       | 0.73 | % | 1,870 |   | 3 |   | 0.73 | % |
| Savings deposits                                            |       | 5,528                                                         |       | 14                                                            |       | 1.05 | % | 4,388 |   | 11 |   | 1.01 | % |
| Time deposits  >$100M                                    |       | 60,032                                                        |       | 711                                                           |       | 4.74 | % | 40,817 |   | 525 |   | 5.14 | % |
| Time deposits  <$100M                                    |       | 71,304                                                        |       | 816                                                           |       | 4.58 | % | 49,898 |   | 644 |   | 5.16 | % |
| Other Borrowing                                             |       | 66,983                                                        |       | 864                                                           |       | 5.16 | % | 43,108 |   | 633 |   | 5.84 | % |
| Total  interest-bearing liabilities                         |       | 219,691                                                       |       | 2,417                                                         |       | 4.40 | % | 154,821 |   | 1,826 |   | 4.70 | % |
|                                                        |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Non-interest  bearing liabilities:                          |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Noninterest-bearing  checking                               |       | 25,188                                                        |       |                                                          |       |   |   | 26,271 |   |   |   |   |   |
| Accrued interest  payable                                   |       | 2,102                                                         |       |                                                          |       |   |   | 1,501 |   |   |   |   |   |
| Other  liabilities                                          |       | 4,753                                                         |       |                                                          |       |   |   | 2,857 |   |   |   |   |   |
| Total  Liabilities                                          |       | 251,734                                                       |       |                                                          |       |   |   | 185,450 |   |   |   |   |   |
| Total  shareholders equity                                  |       | 14,366                                                        |       |                                                          |       |   |   | 13,583 |   |   |   |   |   |
| Total average  liabilities and shareholders equity          |       | $                                                             | 266,100    |                                                          |       |   |   |   | $ | 199,033 |   |   |   |   |   |
|                                                        |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Net interest  income                                        |       |                                                          |       | $                                                             | 1,634      |   |   |   |   |   | $ | 2,213 |   |   |   |
|                                                        |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Interest income  as a percentage of average earning assets  |       |                                                          |       |                                                          |       | 6.52 | % |   |   |   |   | 8.85 | % |
| Interest expense  as a percentage of average earning assets |       |                                                          |       |                                                          |       | 3.89 | % |   |   |   |   | 3.99 | % |
| Net yield on  interest earning assets                       |       |                                                          |       |                                                          |       | 2.63 | % |   |   |   |   | 4.86 | % |
|                                                        |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Net interest  spread                                        |       |                                                          |       |                                                          |       | 2.12 | % |   |   |   |   | 4.14 | % |

 

16

----

Tableof Contents

 
| ** **                                                  | ** ** | **Six Months Ended June 30, 2008** | ** ** | **Six Months Ended June 30, 2007** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **Average**                                                 | ** ** | ** **                                                  | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| **(dollars in thousands)**                        | ** ** | **Balance**                                                 | ** ** | **Interest**                                                | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| Assets:                                                     |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |
| Loans                                                       |       | $                                                           | 169,528    |                                                        | $          | 6,711 |   | 7.92 | % | $ | 134,895 |   | $ | 6,733 |   | 9.98 | % |
| Time deposits -  in other banks                             |       | 739                                                         |       | 12                                                          |       | 3.34 | % | 1,072 |   | 28 |   | 5.23 | % |
| Invest  securities - taxable                                |       | 52,311                                                      |       | 1,422                                                       |       | 5.44 | % | 25,029 |   | 638 |   | 5.10 | % |
| Invest  securities - nontaxable                             |       | 12,530                                                      |       | 435                                                         |       | 6.94 | % | 7,009 |   | 227 |   | 6.48 | % |
| Federal funds  sold                                         |       | 10,977                                                      |       | 151                                                         |       | 2.75 | % | 8,943 |   | 234 |   | 5.23 | % |
| Total  interest-earning assets                              |       | 246,085                                                     |       | 8,731                                                       |       | 7.10 | % | 176,948 |   | 7,860 |   | 8.88 | % |
|                                                        |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |
| Allowance for  credit losses                                |       | (2,063                                                      | )          |                                                        |       |   |   | (1,357 | ) |   |   |   |   |
| Non-interest  bearing assets:                               |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |
| Cash and due  from banks                                    |       | 6,361                                                       |       |                                                        |       |   |   | 6,529 |   |   |   |   |   |
| Premises and  equipment                                     |       | 4,940                                                       |       |                                                        |       |   |   | 4,807 |   |   |   |   |   |
| Accrued interest  receivable                                |       | 1,407                                                       |       |                                                        |       |   |   | 1,039 |   |   |   |   |   |
| Other assets                                                |       | 6,562                                                       |       |                                                        |       |   |   | 5,046 |   |   |   |   |   |
| Total average  assets                                       |       | $                                                           | 263,292    |                                                        |       |   |   |   | $ | 193,012 |   |   |   |   |   |
|                                                        |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |
| Liabilities and  Shareholders’ Equity:                 |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |
| Interest Bearing  Liabilities:                              |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |
| Interest-bearing  demand                                    |       | $                                                           | 13,804     |                                                        | $          | 17 |   | 0.25 | % | $ | 14,588 |   | $ | 18 |   | 0.25 | % |
| Money market  savings                                       |       | 1,759                                                       |       | 6                                                           |       | 0.73 | % | 1,935 |   | 7 |   | 0.73 | % |
| Savings deposits                                            |       | 5,902                                                       |       | 31                                                          |       | 1.06 | % | 4,555 |   | 23 |   | 1.00 | % |
| Time deposits  >$100M                                    |       | 60,862                                                      |       | 1,482                                                       |       | 4.87 | % | 39,279 |   | 997 |   | 5.08 | % |
| Time deposits  <$100M                                    |       | 69,094                                                      |       | 1,642                                                       |       | 4.75 | % | 46,929 |   | 1,163 |   | 4.96 | % |
| Other Borrowing                                             |       | 65,297                                                      |       | 1,728                                                       |       | 5.29 | % | 43,053 |   | 1,253 |   | 5.82 | % |
| Total  interest-bearing liabilities                         |       | 216,718                                                     |       | 4,906                                                       |       | 4.53 | % | 150,339 |   | 3,461 |   | 4.60 | % |
|                                                        |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |
| Non-interest  bearing liabilities:                          |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |
| Non-interest-bearing  checking                              |       | 25,690                                                      |       |                                                        |       |   |   | 25,791 |   |   |   |   |   |
| Accrued interest  payable                                   |       | 2,060                                                       |       |                                                        |       |   |   | 1,442 |   |   |   |   |   |
| Other  liabilities                                          |       | 4,313                                                       |       |                                                        |       |   |   | 2,225 |   |   |   |   |   |
| Total  Liabilities                                          |       | 248,781                                                     |       |                                                        |       |   |   | 179,798 |   |   |   |   |   |
| Total  shareholders equity                                  |       | 14,511                                                      |       |                                                        |       |   |   | 13,214 |   |   |   |   |   |
| Total average  liabilities and shareholders equity          |       | $                                                           | 263,292    |                                                        |       |   |   |   | $ | 193,012 |   |   |   |   |   |
| Net interest  income                                        |       |                                                        |       | $                                                           | 3,825      |   |   |   |   |   | $ | 4,399 |   |   |   |
| Interest income  as a percentage of average earning assets  |       |                                                        |       |                                                        |       | 7.10 | % |   |   |   |   | 8.88 | % |
| Interest expense  as a percentage of average earning assets |       |                                                        |       |                                                        |       | 3.99 | % |   |   |   |   | 3.91 | % |
| Net yield on  interest earning assets                       |       |                                                        |       |                                                        |       | 3.11 | % |   |   |   |   | 4.97 | % |
| Net interest  spread                                        |       |                                                        |       |                                                        |       | 2.57 | % |   |   |   |   | 4.28 | % |

 

17

----

Tableof Contents

 

**Rate andVolume Analysis:**

 

Thefollowing tables show the increase or decrease in interest income, interestexpense and net interest income, resulting from changes in rates and volumes,for the six months ended June 30, 2008 compared with the same period in2007.

 
| ** **                                   | ** ** | **Increase (decrease) in the three months ended**  | ** ** |
|----------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **June 30, 2008 compared with June 30, 2007** | ** ** |
| ** **                                   | ** ** | **Volume**                                                                       | ** ** | **Rate** | ** ** | **Total** | ** ** |
| Increase  (decrease) in interest income:     |       |                                                                             |       |   |   |   |   |
| Loans                                        |       | $                                                                                | 687        |   | $ | (1,168 | ) | $ | (481 | ) |
| Time deposits -  in other banks              |       | (14                                                                              | )          | — |   | (14 | ) |
| Invest  securities - taxable                 |       | 425                                                                              |       | 11 |   | 436 |   |
| Invest  securities - nontaxable              |       | 112                                                                              |       | 22 |   | 134 |   |
| Federal funds  sold                          |       | 5                                                                                |       | (68 | ) | (63 | ) |
|                                         |       | 1,215                                                                            |       | (1,203 | ) | 12 |   |
|                                         |       |                                                                             |       |   |   |   |   |
| Increase (decrease)  in interest expense:    |       |                                                                             |       |   |   |   |   |
| Interest-bearing  demand                     |       | $                                                                                | —     |   | $ | (1 | ) | $ | (1 | ) |
| Money market  savings                        |       | —                                                                           |       | (1 | ) | (1 | ) |
| Savings deposits                             |       | 2                                                                                |       | 2 |   | 4 |   |
| Time deposits  >$100M                     |       | 247                                                                              |       | (60 | ) | 187 |   |
| Time deposits  <$100M                     |       | 276                                                                              |       | (104 | ) | 172 |   |
| Other Borrowing                              |       | 351                                                                              |       | (121 | ) | 230 |   |
|                                         |       | 876                                                                              |       | (285 | ) | 591 |   |
| Increase  (decrease) in net interest income: |       | $                                                                                | 339        |   | $ | (918 | ) | $ | (579 | ) |

 
| ** **                                    | ** ** | **Increase (decrease) in the six months ended**    | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **June 30, 2008 compared with June 30, 2007** | ** ** |
| ** **                                    | ** ** | **Volume**                                                                       | ** ** | **Rate** | ** ** | **Total** | ** ** |
| Increase  (decrease) in interest income:      |       |                                                                             |       |   |   |   |   |
| Loans                                         |       | $                                                                                | 1,729      |   | $ | (1,751 | ) | $ | (22 | ) |
| Time deposits -  in other banks               |       | (9                                                                               | )          | (7 | ) | (16 | ) |
| Invest  securities - taxable                  |       | 695                                                                              |       | 89 |   | 784 |   |
| Invest  securities - nontaxable               |       | 179                                                                              |       | 29 |   | 208 |   |
| Federal funds  sold                           |       | 53                                                                               |       | (136 | ) | (83 | ) |
|                                          |       | 2,647                                                                            |       | (1,776 | ) | 871 |   |
|                                          |       |                                                                             |       |   |   |   |   |
| Increase  (decrease) in interest expense:     |       |                                                                             |       |   |   |   |   |
| Interest-bearing  demand                      |       | (1                                                                               | )          | — |   | (1 | ) |
| Money market  savings                         |       | (1                                                                               | )          | — |   | (1 | ) |
| Savings deposits                              |       | 7                                                                                |       | 2 |   | 9 |   |
| Time deposits  >$100M                      |       | 548                                                                              |       | (63 | ) | 485 |   |
| Time deposits  <$100M                      |       | 549                                                                              |       | (71 | ) | 478 |   |
| Other Borrowing                               |       | 647                                                                              |       | (172 | ) | 475 |   |
|                                          |       | 1,749                                                                            |       | (304 | ) | $ | 1,445 |   |
| Increase  (decrease) in net interest expense: |       | $                                                                                | 898        |   | $ | (1,472 | ) | $ | (574 | ) |

 

18

----

Table of Contents

 

**Provisionand Allowance for Loan Losses**

 

The Company maintains a detailed, systematicanalysis and procedural discipline to determine the amount of the allowance forloan losses (“ALL”).  The ALL is based on estimates and is intendedto be adequate to provide for probable losses inherent in the loanportfolio.  This process involves deriving probable loss estimatesthat are based on individual loan loss estimation, historical loss rates andmanagement’s judgment.

 

The Company employs several methodologies forestimating probable losses.  Methodologies are determined based on anumber of factors, including type of asset, risk rating, concentrations, andcollateral value.

 

The Company calculates the required ALL on a monthlybasis and makes adjusting entries quarterly. The review of the adequacy ofthe allowance takes into consideration such factors as concentrations ofcredit, changes in the growth, size and composition of the loan portfolio,overall and individual portfolio quality, review of specific problem loans,collateral, guarantees and economic conditions that may affect the borrowers’ability to pay and/or the value of the underlyingcollateral.  Additional factors considered include: geographiclocation of borrowers, changes in the Company’s product-specific credit policyand lending staff experience.  These estimates depend on subjectivefactors and, therefore, contain inherent uncertainties.

 

The Company’s ALL is maintained at a level believedadequate by management to absorb known and inherent probable losses on existingloans.  A provision for loan losses is charged toexpense.  The allowance is charged for losses when managementbelieves that full recovery on the loan is unlikely.  Generally, theCompany charges off any loan classified as a “loss”; portions of loans whichare deemed to be uncollectible; overdrafts which have been outstanding for morethan 90 days; and, all other unsecured loans past due 120 or moredays.  Subsequent recoveries, if any, are credited to the ALL.

 

Althoughno assurance can be given that actual losses will not exceed the amountprovided for in the allowance, Management believes that the allowance isadequate to provide for all estimated credit losses in light of all knownrelevant factors. At June 30,2008 and 2007 the Bank’s allowance stood at 1.26 percent and 1.00percent, respectively.

 

Noprovisions were made to the allowance during the six months ended June 30,2008 compared to $275,000 for the same period in 2007. No loans were chargedoff during the six months ended June 30, 2008 compared to $246,000 for thesame period in 2007. Recoveries of $1,000 were made in each year.

 

TheBank’s non-performing (delinquent 90 days or more and on non-accrual) net loansas a percentage of total loans were 2.60 percent and 0.11 percent as of the endof June 30, 2008 2007, respectively. The significant increase innon-accrual loans is primarily attributable to the continued economic slowdownand the softening of the real estate market.

 

**Non-InterestIncome**

 

Totalnon-interest income for the six months ended June 30, 2008 was $2,485,000compared with $2,354,000 for the same period in 2007. The increase of $131,000primarily resulted from income of $694,000 related to the Visa, Inc.initial public stock offering and increases in gains on sale of securities of$449,000, an increase in merchant credit card discount

 

19

----

Tableof Contents

 

fees of $178,000; partially offset by a charge of $532,000 to establishan evaluation allowance on other real estate owned, a mark to market loss of$585,000 in the trading assets compared with a $135,000 gain during the sameperiod in 2007 and decreases in sales and servicing of Small BusinessAdministration Loans of $139,000 and a decrease in credit card/stored valuecard revenue of $104,000.

 

TheBank will reduce its sponsorship of credit card and stored value card programsover the next six months by terminating sponsorship agreements on all programsexcept a drug manufactures’ rebate card program. The heightened monitoringrequired for third party relationships to ensure compliance with various lawsand regulations applicable to these types of programs makes it imprudent forthe Bank to continue with these programs. The characteristics of the drugmanufactures’ rebate card program significantly reduces the same level ofrequired monitoring.

 

Thesale of Small Business Administration (SBA) guaranteed loans is a significantcontributor 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. SBA loans are guaranteed by the full faithof the United States Government from 75 to 85 percent of the principal amount.

 

Therecan be no assurance that the gains on sale will continue at, or above, thelevels realized in the past three years. In addition, increasing competitionamong lenders 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.

 

**Non-InterestExpense**

 

Salaryand benefits expense for the six months ended June 30, 2008 decreased $56,000compared with the same periods in 2007. The decrease was due to reduced bonusaccruals and staff vacancies partially offset by merit pay increases and thehiring in March 2008 of four employees to staff the Salinas branch officewhich opened during the second quarter of 2008.

 

Totaloccupancy and equipment expense for the six months ended June 30, 2008 was $472,000compared to $427,000 for the same period in 2007. The increase was primarilydue to rental expense for the Salinas branch office.

 

Professionalfees for the six months ended June 30, 2008 were $117,000 compared to $88,000 for thesame period in 2007. The increase was primarily due to an increase in loancollection expense.

 

Dataprocessing expense for the six months ended June 30, 2008 was $191,000compared to $178,000 for the same period in 2007. The increase of $13,000 wasdue primarily to growth in deposit accounts.

 

Othergeneral and administrative expenses for the six months ended June 30, 2008 totaled $1,691,000compared with $1,709,000 for the same period in 2007, which is a decrease of$18,000. Significant changes occurred in the following categories; increases occurred in merchant creditcard processing expense of $131,000, FDIC insurance premiums of $22,000, ATM expense of $18,000, insurance expense of$14,000 and postage expense of $14,000; while decreases occurred indirector fees of $18,000, advertising expense of $31,000, donations of

 

20

----

Tableof Contents

 

$26,000, business development of $23,000 and shareholder expense of$18,000. Included in the Visa, Inc. initial public offering transactionwas the reversal of a litigation reserve, established in 2007, of $110,000representing the Bank’s share of the liability associated with the settlementby VISA of litigation brought by American Express and Discover.

 

**Provisionfor Income Taxes**

 

The tax provision was $844,000 for the six monthsended June 30, 2008 compared to tax provision of $865,000 for the sameperiod in 2007, representing 51.38% and 44.87% of pre-tax income for thoseperiods. The amount of the tax provision is determined by applying theCorporation’s statutory income tax rates to pre-tax book income, adjusted forpermanent differences between pre-tax book income and actual taxable income.Such permanent differences include but are not limited to tax-exempt interestincome; increases in the cash surrender value of bank-owned life insurance,certain other expenses that are not allowed as tax deductions, and tax credits.

 

Deferred tax assets and liabilities are measuredusing the enacted tax rates expected to apply to taxable income in the periodsin which the deferred tax asset or liability is expected to be realized orsettled. The Bank maintains a valuation allowance with respect to deferred taxassets due to the uncertainty surrounding the realization of certain netdeferred tax assets.

 

**LOANS**

 

Loansrepresented 68.89% of average earning assets, and 64.39% of average totalassets for the six months ended June 30, 2008 compared with 76.23% and 69.95%, respectivelyduring 2007. For the six months ended June 30,2008, average loans increased 25.67% from $134,895,000 for the sameperiod in 2007 to $169,528,000. Average real estate loans increased $26,950,000(30.55%), average construction loans increased $3,545,000 (18.34%), averagecommercial loans increased $3,879,000 (14.52%), and average installment loansincreased $259,000 (40.07%).

 

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 of one year or longer. 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 timeto time utilizes accounts receivable and inventory as security for loans.

 

TheBank is a recognized leader for Small Business Administration lending inMonterey County, and holds SBA’s coveted Preferred Lender Status. Generally,SBA loans are guaranteed, by the SBA, for 75 to 85 percent of their principalamount, which can be retained in portfolio or sold to investors. Such loans aremade at floating interest rates, generally with longer terms (up to 25 years)than are available on a conventional loan basis to small businesses.  Theunguaranteed portion of the loans, although generally supported by collateral,is considered to be more risky than conventional commercial loans because theymay be based upon credit standards the Bank would not otherwise apply, such aslower cash flow coverage, or longer repayment terms.

 

21

----

Tableof Contents

 

TheBank’s real estate loan portfolio consists both of real estate constructionloans and real estate mortgage loans. The Bank has initiated a program togenerate more commercial and industrial real estate loans, which generallyyield higher returns than normal commercial loans. The Bank has also developeda broker program for generating residential real estate loans. The Bank doesnot make real estate development loans.  Real estate construction loansare made for a much shorter term, and often at higher interest rates, thanconventional single-family residential real estate loans. The cost ofadministering such loans is often higher than for other real estate loans, asprincipal is drawn on periodically as construction progresses.

 

TheBank also makes real estate loans secured by a first deed of trust on singlefamily residential properties and commercial and industrial 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, the appraised value may exceed the actualamount that could be realized on foreclosure, or declines in market valuesubsequent to making the loan can impair the Bank’s security.

 

Consumerloans are made for the purpose of financing the purchase of various types ofconsumer goods, home improvement loans, auto loans and other personal loans. Consumerinstallment loans generally provide for monthly payments of principal andinterest, at a fixed rate. Most of the Bank’s consumer installment loans aregenerally secured by the personal property being purchased. The Bank generallymakes consumer loans to those customers with a prior banking relationship withthe Bank.

 

**Non-performingand Non-accrual Loans Net**

 

TheBank’s present policy is to cease accruing interest on loans which are past dueas to principal or interest 90 days or more, except for loans which are wellsecured or when collection of interest and principal is deemed likely. When 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.

 

TheBank generally repurchases from the secondary market the guaranteed portion ofSmall Business Administration (SBA) guaranteed loans when those loans areplaced on non-accrual status. After the foreclosure and collection process iscomplete, the SBA reimburses the Bank for this principal balance. Therefore,although these balances do not earn interest during this period, they generallydo not result in a loss of principal to the Bank. The information provided inthe following table is net of the amounts guaranteed by the Small BusinessAdministration.

 

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

 

22

----

Tableof Contents

 
| ** **                                                     | ** ** | **Six months as of**  | ** ** | **Twelve months as of** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------|------------|----------------------------------------|------------|
| ** **                                                     | ** ** | **June 30,**                    | ** ** | **December 31,**                  | ** ** |
| ** **                                                     | ** ** | **2008**                             | ** ** | **2007**                               | ** ** | **2007** | ** ** |
| ** **                                                     | ** ** | **(Dollars in thousands)** | ** ** |
| Accruing, past  due 90 days or more:                           |       |                                 |       |                                   |       |   |   |
|                                                           |       |                                 |       |                                   |       |   |   |
| Real Estate                                                    |       | $                                    | —     |                                   | $          | — |   | $ | — |   |
| Commercial                                                     |       | —                               |       | —                                 |       | — |   |
| Installment                                                    |       | —                               |       | —                                 |       | — |   |
| Other                                                          |       | —                               |       | —                                 |       | — |   |
| Total accruing                                                 |       | —                               |       | —                                 |       | — |   |
|                                                           |       |                                 |       |                                   |       |   |   |
| Nonaccrual  loans:                                             |       |                                 |       |                                   |       |   |   |
|                                                           |       |                                 |       |                                   |       |   |   |
| Real Estate                                                    |       | 2,640                                |       | —                                 |       | 3,200 |   |
| Commercial                                                     |       | 1,394                                |       | —                                 |       | 41 |   |
| Installment                                                    |       | 155                                  |       | 155                                    |       | 155 |   |
| Other                                                          |       | —                               |       | —                                 |       | — |   |
| Total nonaccrual                                               |       | 4,189                                |       | 155                                    |       | 3,396 |   |
|                                                           |       |                                 |       |                                   |       |   |   |
| Total  nonperforming                                           |       | $                                    | 4,189      |                                   | $          | 155 |   | $ | 3,396 |   |
|                                                           |       |                                 |       |                                   |       |   |   |
| Total loans end  of period                                     |       | $                                    | 161,217    |                                   | $          | 141,785 |   | $ | 171,126 |   |
|                                                           |       |                                 |       |                                   |       |   |   |
| Ratio of  non-performing loans to total loans at end of period |       | 2.60                                 | %          | 0.11                                   | %          | 1.98 | % |

 

23

----

Table of Contents

 

Summary of Loan LossExperience

 
| ** **                                                                     | ** ** | ** **                          | ** ** | ** **            | ** ** | **As of the** | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------|------------|-------------------------|------------|
| ** **                                                                     | ** ** | **As of the period** | ** ** | **Year ended**   | ** ** |
| ** **                                                                     | ** ** | **Ended June 30,**        | ** ** | **December 31,** | ** ** |
| ** **                                                                     | ** ** | **2008**                            | ** ** | **2007**              | ** ** | **2007**                | ** ** |
| ** **                                                                     | ** ** | **(Dollars in thousands)**          | ** ** |
| Average loans  outstanding                                                     |       | $                                   | 169,528    |                  | $          | 134,895                 |       | $ | 146,944 |   |
|                                                                           |       |                                |       |                  |       |                    |       |
| Allowance,  beginning of period                                                |       | $                                   | 2,028      |                  | $          | 1,409                   |       | $ | 1409 |   |
|                                                                           |       |                                |       |                  |       |                    |       |
| Loans charged  off during period:                                              |       |                                |       |                  |       |                    |       |
| Commercial                                                                     |       | —                              |       | 245                   |       | 249                     |       |
| Installment                                                                    |       | —                              |       | 1                     |       | 1                       |       |
| Real Estate                                                                    |       | —                              |       | —                |       | —                  |       |
| Other                                                                          |       | —                              |       | —                |       | —                  |       |
| Total charge  offs                                                             |       | —                              |       | 246                   |       | 250                     |       |
|                                                                           |       |                                |       |                  |       |                    |       |
| Recoveries  during period:                                                     |       |                                |       |                  |       |                    |       |
| Commercial                                                                     |       | 1                                   |       | 1                     |       | —                  |       |
| Installment                                                                    |       | —                              |       | —                |       | —                  |       |
| Real Estate                                                                    |       | —                              |       | —                |       | —                  |       |
| Other                                                                          |       | —                              |       | —                |       | 4                       |       |
| Total recoveries                                                               |       | 1                                   |       | 1                     |       | 4                       |       |
|                                                                           |       |                                |       |                  |       |                    |       |
| Net loans  charged off during the period                                       |       | (1                                  | )          | 245                   |       | 246                     |       |
|                                                                           |       |                                |       |                  |       |                    |       |
| Additions to  allowance for possible loan losses                               |       | —                              |       | 275                   |       | 865                     |       |
|                                                                           |       |                                |       |                  |       |                    |       |
| Allowance, end  of period                                                      |       | $                                   | 2,029      |                  | $          | 1,439                   |       | $ | 2,028 |   |
| Ratio of net  loans charged off to average loans outstanding during the period |       | 0.00                                | %          | 0.18                  | %          | 0.17                    | %          |
| Ratio of  allowance to total loans at end of period                            |       | 1.26                                | %          | 1.00                  | %          | 1.19                    | %          |
| Ratio of  allowance for loan losses to non-performing loans at end of period   |       | 48.44                               | %          | 928.39                | %          | 59.72                   | %          |

 

**Non-performingAssets**

 

Non-performingassets net totaled $6,857,000 or 2.57% of total assets at June 30, 2008compared with $155,000 or 0.07% of total assets at June 30, 2007. The June 30,2008 total non-performing assets consisted of $4,189,000 in non-accrual loansand $2,668,000 in other real estate owned, while the June 30, 2007 totalconsisted of one non-accrual loan. The non-accrual loans are net of theguaranteed portion of Small Business Administration loans and the other real

 

24

----

Tableof Contents

 

estate owned was acquired through foreclosure. The other real estateowned was recorded at fair value on the date of acquisition. Subsequent toacquisition a write down of $532,000 was recorded based on a current appraisalless estimated selling costs.

 

**Deposits**

 

Averageinterest bearing and non-interest bearing deposits for the six months ended June 30, 2008 were $177,110,000an increase of 33.09% compared with the same period in 2007. Averagecertificates of deposit represented 73.38% of average deposits for the sixmonths ended June 30, 2008compared with 64.78% for the same period in 2007. Average interest bearingchecking, money market and savings accounts as a group were 12.12% of averagedeposits for the six months ended June 30,2008 compared with 15.84% for the same period in 2007. Average demanddeposits represented 14.50% of average deposits for the six months ended June 30, 2008 compared with19.38% for the same period in 2007.

 

Thefollowing table sets forth the scheduled maturities of the Company’s timedeposits in denominations of $100,000 or greater at June 30, 2008:

 

Maturities of Time Deposits of$ 100,000 or More

(Dollars in Thousands)

 
| Three months or  less                  |   | $      | 12,190 |   |
|----------------------------------------|--------|--------|--------|--------|
| Over three  months through six months  |   | 9,350  |   |
| Over six months  through twelve months |   | 14,499 |   |
| Over twelve  months                    |   | 22,872 |   |
| Total                                  |   | $      | 58,911 |   |

 

**Borrowing**

 

**The Corporation has a$3,000,000 revolving line of credit from Marshall & Ilsley Bank with avariable interest rate based on the one month LIBOR Rate plus 2.25% with aminimum rate of 4.50% and maturity date of March 31, 2009. The line ofcredit is collateralized by 100% of the outstanding shares of Monterey CountyBank stock. At June 30, 2008, $250,000 was outstanding on the line and theinterest rate was 4.71%.**

 

**The Bank has lines of creditfrom the Federal Home Loan Bank (FHLB) of San Francisco, Bank of the West,Marshall & Ilsley Bank, Pacific Coast Bankers’ Bank and TheIndependent Bank with remaining available borrowing capacity on**June 30, 2008 of $6,164,000 (based on pledged collateral), $4,500,000,$5,000,000, $6,000,000 and $5,000,000, respectively. The Federal Home Loan Bankline of credit has a maximum borrowing capacity of twenty five percent (25%) ofthe Bank’s total assets, adjusted quarterly. The Federal Home Loan Bank line ofcredit is secured by a portion of the Bank’s real estate secured loans andsecurities at June 30, 2008. The total principal balance of pledged loanswas $39,843,000 and securities of $54,348,000. The following table providesinformation on twenty FHLB advances totaling $60,500,000 and outstanding at June 30, 2008.

 

25

----

Tableof Contents

 
| ** ** | ** ** | ** ** | ** ** | **Funding** | ** ** | **Maturity** | ** ** |
|------------|------------|------------|------------|-------------|------------|--------------|------------|
| **Amount** | ** ** | **Rate**   | ** ** | **Date**    | ** ** | **Date**     | ** ** |
| $          | 1,000,000  |       | 7.72       | %           | 6/1/00     |         | 6/3/30     |   |
| 4,000,000  |       | 5.96       | %          | 8/2/04      |       | 7/28/34      |       |
| 5,000,000  |       | 5.63       | %          | 12/24/04    |       | 12/22/34     |       |
| 2,000,000  |       | 5.13       | %          | 5/4/05      |       | 5/1/35       |       |
| 3,000,000  |       | 4.30       | %          | 6/17/05     |       | 6/17/10      |       |
| 5,000,000  |       | 4.96       | %          | 11/14/05    |       | 11/15/10     |       |
| 2,250,000  |       | 4.75       | %          | 1/26/06     |       | 1/26/11      |       |
| 1,750,000  |       | 4.72       | %          | 1/26/06     |       | 1/26/11      |       |
| 1,500,000  |       | 5.52       | %          | 7/17/06     |       | 7/18/11      |       |
| 3,500,000  |       | 5.49       | %          | 7/17/06     |       | 7/18/11      |       |
| 1,000,000  |       | 5.22       | %          | 8/25/06     |       | 8/25/11      |       |
| 2,000,000  |       | 5.31       | %          | 11/17/06    |       | 11/17/36     |       |
| 5,000,000  |       | 5.88       | %          | 6/29/07     |       | 6/29/37      |       |
| 5,000,000  |       | 5.20       | %          | 7/30/07     |       | 7/30/12      |       |
| 2,500,000  |       | 4.88       | %          | 8/20/07     |       | 8/20/10      |       |
| 5,000,000  |       | 5.00       | %          | 9/18/07     |       | 9/18/14      |       |
| 3,000,000  |       | 4.84       | %          | 10/1/07     |       | 10/1/12      |       |
| 4,000,000  |       | 2.70       | %          | 1/24/08     |       | 1/24/11      |       |
| 2,000,000  |       | 2.23       | %          | 5/14/08     |       | 11/14/08     |       |
| 2,000,000  |       | 3.32       | %          | 5/14/08     |       | 5/16/11      |       |
| $          | 60,500,000 |       |       |        |       |         |       |   |

 

**The**Bank of the West, Marshall & Ilsley Bank, PacificCoast Bankers’ Bank and The Independent Bank federal funds lines of credit are unsecured. TheBank did not utilize any overnight borrowings in 2008 or 2007.

 

**The Bank has a letter of creditin the amount of $330,000, expiring April 17, 2011, issued by Federal HomeLoan Bank of San Francisco, which is used to secure local agency deposits. Thebeneficiary of the letter of credit is the Administrator of Local AgencySecurity, Department of Financial Institutions.**

 

**CapitalResources**

 

The Corporation maintains capital to comply with regulatoryrequirements, to provide a margin of safety for its depositors andstockholders, and to provide for future growth and the ability to pay dividends.At June 30, 2008,stockholders’ equity was $13,031,000 versus $14,434,000 at December 31,2007. The Corporation paid cash dividends to shareholders of $0 and $461,000for the six months ended June 30,2008 and for the year ended December 31, 2007, respectively. TheBank paid cash dividends to the Corporation of $0 and $800,000 for the sixmonths ended June 30, 2008and for the year ended December 31, 2007, respectively.

 

TheFDIC and Federal Reserve Board have adopted capital adequacy guidelines for usein their examination and regulation of banks and bank holding companies. If thecapital 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 twomeasures of capital:  (1) risk-basedcapital and (2) leverage capital.

 

26

----

Tableof Contents

 

Ingeneral, the risk-based capital guidelines provide detailed definitions ofwhich obligations will be treated as capital, and assign different weights tovarious assets and off-balance sheet items, depending upon the perceived degreeof credit risk associated with each asset. Each asset is assigned to one offour risk-weighted categories. For example, 0 percent for cash andunconditionally guaranteed government securities; 20 percent for deposits withother banks and fed funds; 50 percent for state bonds and certain residentialreal estate loans; and 100 percent for commercial loans and other assets. Capitalis categorized as either Tier 1 capital, consisting of common stock andretained earnings (or deficit), or Tier 2 capital, which includes limited-lifepreferred stock and allowance for loan losses (subject to certain limitations).The guidelines also define and set minimum capital requirements (risk-basedcapital ratios), which increased over a transition period, ended December 31,1992. Under the final 1992 rules, all banks were required to maintain Tier 1capital of at least 4 percent and total capital of 8.0% of risk-adjustedassets. The Bank had a Tier 1 capital to total risk-adjusted assets capitalratio of 11.30% and 11.83% at June 30, 2008 and 2007, respectively. TheBank’s Tier 1 capital exceeds the minimum regulatory requirement by $13,831,000.The Bank had a Total Risk-Based capital to risk-adjusted assets ratio of 12.42%and 12.73% at June 30, 2008 and 2007, respectively. The Bank’s TotalRisk-Based capital exceeds the minimum regulatory requirement by $8,369,000.

 

TheTier 1 leverage capital ratio guidelines require a minimum leverage capitalratio of 4% of Tier 1 capital to total assets less goodwill. The Bank had aleverage capital ratio of 8.10% and 9.87% at June 30, 2008 and 2007,respectively. The Bank’s Tier 1 leverage capital exceeds the minimum regulatoryrequirement by $12,017,000.

 

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

 

TheCorporation’s Board of Directors approved a stock repurchase program pursuantto which the Corporation, from time to time and at management’s discretion, mayrepurchase up to $500,000 of the Corporation’s outstanding shares. Atprevailing market prices on the date of the approval, approximately 62,500shares (or about 3.38% of its 1,849,918 shares of common stock currentlyoutstanding) could be purchased pursuant to the Board’s approval. No time limitwas set for completion of the program.

 

TheCorporation repurchased 34,010 shares of common stock at an average cost of$8.73 per share in open market transactions during the six months ended June 30,2008.

 

**SubsequentEvent**

 

TheCorporation contributed $2,000,000 in additional capital to Monterey CountyBank in July 2008. The funding of the capital contribution was advancedfrom the Corporation’s revolving line of credit with Marshall & IlsleyBank.

 

**Liquidity**

 

Liquidityrepresents a bank’s ability to provide sufficient cash flows or cash resourcesin a manner that enables it to meet obligations in a timely fashion andadequately provides for anticipated future 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 ordinary course of the Bank’s

 

27

----

Tableof Contents

 

business, funds are generated from the repayment of loans, maturitieswithin the investment securities portfolio and the acquisition of depositbalances and short-term borrowings. In addition, the Bank has a securedborrowing arrangement with the Federal Home Loan Bank of San Francisco ofapproximately $66,994,000,based on twenty five per cent of the Bank’s total assets as reported in themost recent quarterly Consolidated Reports of Condition and Income for a bankwith Domestic Offices Only. The line of credit is subject to pledging ofacceptable collateral. Additionally the Bank has unsecured federal funds linesof credit with Bank of the West, Marshall &Ilsley Bank,****Pacific Coast Bankers’ Bank and The Independent Bank of $4,500,000,$5,000,000, $6,000,000 and $5,000,000, respectively; to meet temporaryliquidity requirements. Available borrowing capacities on June 30, 2008were $4,500,000, $5,000,000, $6,000,000 and $5,000,000, respectively.

 

Asa matter of policy, the Bank seeks to maintain a level of liquid assets,including marketable investment securities, equal to a least 15 percent oftotal assets (“total liquidity”). Additionally the Bank maintains secondarysources of liquidity (borrowing lines from other institutions) equal to atleast an additional 10 percent of assets. Within these ratios, the Bankgenerally has excess funds available to sell as federal funds on a daily basis,and is able to fund its own liquidity needs without the need of short-termborrowing. The Bank’s total liquidity at June 30, 2008 and 2007was 33.04% and 28.10%, respectively, while its average loan to average depositratio for such years was 95.88% and 95.75%, respectively.

 

Brokereddeposits are deposit instruments, such as certificates of deposit, depositnotes, bank investment contracts and certain municipal investment contractsthat are issued through brokers and dealers who then offer and/or sell thesedeposit instruments to one or more investors. Additionally, deposits on which afinancial institution pays an interest rate significantly higher thanprevailing rates are considered to be brokered deposits. Federal law andregulation restricts banks from soliciting or accepting brokered deposits,unless the bank is well capitalized under Federal guidelines. The Bank had nobrokered deposits at June 30, 2008 or at June 30, 2007.

 

**Interest Rate Risk**

 

Management of interestrate sensitivity (asset/liability management) involves matching and repricingrates of interest-earning assets with interest-bearing liabilities in a mannerdesigned to optimize net interest income within the constraints imposed byregulatory authorities, liquidity determinations and capital considerations. TheBank instituted formal asset/liability policies at the end of 1989.

 

Thepurpose for asset/liability management is to provide stable net interest incomegrowth by protecting the Bank’s earnings from undue interest rate risk. TheBank expects to generate earnings from increasing loan volume, appropriate loanpricing and expense control and not from trying to accurately forecast interestrates. Another important function of asset/liability management is managing therisk/return relationships between interest rate risk, liquidity, market riskand capital adequacy. The Bank gives priority to liquidity concerns followed bycapital adequacy, then interest rate risk and market risk in the investmentportfolio. The policy of the Bank will be to control the exposure of the Bank’searnings to changing interest rates by generally maintaining a position withina narrow range around an “earnings neutral position.” An earnings neutralposition is defined as the mix of assets and liabilities that generate a netinterest margin that is not affected by interest rate changes. However,Management does not believe that the Bank can maintain a totally earningsneutral position.

 

28

----

Tableof Contents

 

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 of interest will generally impact the Bank’snet interest income and net 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 ratechange into rate changes for each major class of asset and liability, thensimulates the bank’s net interest margin based on the bank’s actual repricingover a one year period, assuming that maturities are reinvested in instrumentsidentical to those maturing during the period. The following table shows theaffect on net interest income of an upward or downward 100 and a 150 basispoint rate shocks at June 30, 2008.

 
| **Rate Shock  Increase(Decrease) in Basis  Points** | ** ** | **Percent  Increase(Decrease) in Net  Interest Income** | ** ** | **Asset/Liability Policy Limits  for Increase(Decrease) in Net  Interest Income** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|
| 100                                                                |       | 6.0                                                               | %          | 10.0                                                                                                            | %          |
| (100                                                               | )          | (7.3                                                              | )%         | (10.0                                                                                                           | )%         |
| 150                                                                |       | 12.0                                                              | %          | 20.0                                                                                                            | %          |
| (150                                                               | )          | (10.9                                                             | )%         | (20.0                                                                                                           | )%         |

 

**InvestmentSecurities**

 

The Corporation maintains a trading account, at fair value, consisting of marketable securities. At June 30, 2008 and 2007 the account value was $744,000 and $1,708,000, respectively. The Corporation has investments of $20,000 in AT Service LLC, which provides title insurance services for commercial, industrial and residential properties, as well as other real estate related financial and informational services, including escrow, real estate information, trustee sale guarantees and real estate tax exchanges, and $10,000 in Metrocities Mortgage, LLC. In addition the Corporation has investments in Northern California Bancorp Trust I of $93,000 and Northern California Bancorp Trust II of $155,000. These are special-purpose trust subsidiaries which were formed to facilitate the issuance of trust preferred securities.

 

The following table sets forth the book and marketvalue of the investment securities at June 30, 2008:

 
| ** **                                 | ** ** | **INVESTMENT PORTFOLIO MIX** | ** ** |
|--------------------------------------------|------------|----------------------------------------|------------|
| ** **                                 | ** ** | **JUNE 30, 2008**            | ** ** |
| **(in thousands)**                         | ** ** | **Book Value**                         | ** ** | **Market Value** | ** ** |
| Investment  Securities, Available for Sale |       |                                   |       |   |   |
| State/Local  Agency Bonds                  |       | $                                      | 17,628     |   | $ | 16,917 |   |
| U.S. Government  Agency Securities         |       | 54,348                                 |       | 52,120 |   |
| Total                                      |       | $                                      | 71,976     |   | $ | 69,037 |   |

 

29

----

Table of Contents

 
| ** **                                       | ** ** | **INVESTMENT PORTFOLIO MIX** | ** ** |
|--------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                       | ** ** | **JUNE 30, 2008**            | ** ** |
| ** **                                       | ** ** | **Book Value**                    | ** ** | **Market Value** | ** ** |
| Other  Investments, at cost                      |       |                                   |       |   |   |
| AT Services LLC                                  |       | $                                      | 20         |   | $ | 20 |   |
| Metrocities  Mortgage, LLC                       |       | 10                                     |       | 10 |   |
| Federal Home  Loan Bank stock, restricted        |       | 2,881                                  |       | 2,881 |   |
| Northern  California Bancorp, Inc. Trust I  |       | 93                                     |       | 93 |   |
| Northern  California Bancorp, Inc. Trust II |       | 155                                    |       | 155 |   |
| Independent  Bankers Financial Corporation       |       | 51                                     |       | 51 |   |
| Visa, Inc.  Stock                           |       | 426                                    |       | 578 |   |
|                                             |       | $                                      | 3,636      |   | $ | 3,788 |   |

 

The following tablesummarizes the maturity of the investment securities at June 30, 2008:

 

INVESTMENT PORTFOLIO MATURITIES

(Dollars in thousands)

 
| ** **                         | ** ** | **Amortized Cost** | ** ** | **Fair Value** | ** ** |
|------------------------------------|------------|-------------------------|------------|---------------------|------------|
| Available for  Sale                |       |                    |       |                |       |
| Due between five  and ten years    |       | $                       | 417        |                | $          | 415 |   |
| Due between ten  and fifteen years |       | 50,894                  |       | 48,918              |       |
| Due over fifteen  years            |       | 20,665                  |       | 19,704              |       |
|                               |       | $                       | 71,976     |                | $          | 69,037 |   |

 

**Item 4T. Controls andProcedures**

 

(a) The Bank’s Chief Executive Officer and itsChief Financial Officer, after evaluating the effectiveness of the Bank’sdisclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) promulgatedunder the Exchange Act as of the end of the period covered by this report (the “EvaluationDate”) have concluded that as of the Evaluation Date, the Bank’s disclosurecontrols and procedures were adequate and effective to ensure that materialinformation relating to the Bank would be made known to them by others withinthe Bank, particularly during the period in which this report was beingprepared. Disclosure controls and procedures are designed to ensure thatinformation required to be disclosed by us in the reports that we file orsubmit under the Exchange Act is recorded, processed, summarized and reported,within the time periods specified in the Securities and Exchange Commission’s rules andforms. Disclosure controls and procedures include, without limitation, controlsand procedures designed to ensure that information required to be disclosed byus in the reports that we file under the Exchange Act is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate to allow timely decisions regarding requireddisclosure.

 

(b) Changes inInternal Controls:  In the quarter ended June 30, 2008,the Company did not make any significant changes in, nor take any correctiveactions regarding, its internal controls or other factor that couldsignificantly affect these controls.

 

30

----

Table ofContents

 

**PART II-OTHER INFORMATION**

 

**Item 1. LegalProceedings.**

 

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

 

**Item 2. UnregisteredSales of Equity Securities and Use of Proceeds**

 

None

 

**Item 3. Defaultsof Senior Securities**

 

None

 

**Item4. Submission of Matters to a Vote of Security Holders.**

 

**The following proposal was presented to shareholders at theCorporation’s annual shareholders’ meeting held on May 29, 2008.**

 

**Proposal Number 1:**          Electionof Directors

 
| ** **                        | ** ** | **Number of  Affirmative Votes** | ** ** | **Number of  Votes Withheld** | ** ** |
|-----------------------------------|------------|--------------------------------------------|------------|-----------------------------------------|------------|
| Mark A. Briant                    |       | 1,454,576                                  |       | 2,014                                   |       |
| Charles T.  Chrietzberg, Jr. |       | 1,453,772                                  |       | 2,818                                   |       |
| Sandra G.  Chrietzberg            |       | 1,450,442                                  |       | 6,148                                   |       |
| Stephanie G.  Chrietzberg         |       | 1,450,442                                  |       | 6,148                                   |       |
| Peter J.  Coniglio                |       | 1,454,576                                  |       | 2,014                                   |       |
| Carla S. Hudson                   |       | 1,454,576                                  |       | 2,014                                   |       |
| John M. Lotz                      |       | 1,454,576                                  |       | 2,014                                   |       |

 

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

####  

None

 

31

----

Tableof Contents

 

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

####  

| A.     |   | EXHIBITS                  |
|--------|--------|---------------------------|
|   |   |                      |
|   |   | 31.1                      | Certification of the  Chief Executive Officer of Northern California Bancorp, Inc. pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|   |   |                      |   |
|   |   | 31.2                      | Certification of the Chief Financial Officer of Northern California  Bancorp, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of  2002. |
|   |   |                      |   |
|   |   | 32.1                      | Certification of the Chief Executive Officer of Northern California  Bancorp, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of  2002. |
|   |   |                      |   |
|   |   | 32.2                      | Certification of the Chief Financial Officer of Northern California  Bancorp, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of  2002. |
|   |   |                      |   |
| B.     |   | Reports on  Form 8-K |
|   |   |                      |
|   |   |                      | None |
|        |        |                           |  |  |

 

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

 
|                             | NORTHERN  CALIFORNIA BANCORP, INC. |
|-----------------------------|------------------------------------|
|                        |                               |
| Date:  August 12, 2008 | By:                                |   /s/  Charles T. Chrietzberg, Jr. |
|                        |                               |     Charles  T. Chrietzberg, Jr. |
|                        |                               |     Chairman  of the Board & |
|                        |                               |     Chief  Executive Officer |
|                        |                               |   |
|                        |                               |   |
| Date:  August 12, 2008 | By:                                |   /s/  Bruce N. Warner |
|                        |                               |     Bruce  N. Warner |
|                        |                               |     Chief Financial Officer and |
|                        |                               |     Principal Accounting Officer |

 

32

----