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

 

**WashingtonD.C.  20549**

 

**FORM 10-QSB**

 
| **ý**                                                                                                                                                                                         |   | **Quarterly  report under Section 13 or 15(d) of the Securities Exchange Act of 1934**                     |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                               |
| **for the quarterly period ended June 30,  2004**                                                                                                                                                  |
|                                                                                                                                                                                               |   |                                                                                                       |
| **o**                                                                                                                                                                                              |   | **Transition  report under Section 13 or 15(d) of the Securities Exchange Act of 1934 (No  fee required)** |
|                                                                                                                                                                                               |
| **for the period  from              to              ** |
|                                                                                                                                                                                                    |        |                                                                                                            |  |  |

 

**Commission File Number 0-27666**

 

**NORTHERNCALIFORNIA BANCORP, INC.**(Name of Small Business Issuer in its Charter)

 

Incorporated in the **State of California**

 

IRS Employer Identification Number **77-0421107**

 

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

 

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

 

 

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

 

As of August3, 2004, the Corporation had 1,566,658 shares of common stock outstanding.

 

 

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**PARTI-FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

NORTHERN CALIFORNIA BANCORP, INC.AND SUBSIDIARYCONSOLIDATED BALANCE SHEET

 
|                                                |   | **JUNE 30  2004** |   | **DECEMBER  31  2003** |   |
|-----------------------------------------------------|--------|-------------------|--------|------------------------|--------|
| ASSETS:                                             |   |              |   |                   |   |
| Cash and Due From Banks                             |   | 6,694,700         |   | 4,798,100              |   |
| Federal Funds Sold                                  |   | 5,410,000         |   | 12,395,000             |   |
| Total Cash and Cash Equivalents                     |   | 12,104,700        |   | 17,193,100             |   |
| Trading Assets                                      |   | 155,400           |   | 163,300                |   |
| Investment Securities, available for sale  (Note 1) |   | 12,713,100        |   | 6,075,500              |   |
| Other Investments (Note 2)                          |   | 1,854,600         |   | 1,667,500              |   |
| Loans Held for Sale                                 |   | 2,304,800         |   | 2,347,800              |   |
| Loans, Net (Note 3)                                 |   | 84,483,600        |   | 74,560,600             |   |
| Bank Premises and Equipment, Net                    |   | 2,204,800         |   | 2,197,700              |   |
| Cash Surrender Value of Life Insurance              |   | 2,335,600         |   | 2,251,000              |   |
| Interest Receivable and Other Assets                |   | 1,917,900         |   | 1,415,500              |   |
| Total Assets                                        |   | 120,074,500       |   | 107,872,000            |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY:          |   |              |   |                   |   |
| Total Deposits (Note 5)                             |   | 87,641,000        |   | 78,132,400             |   |
| Federal Home Loan Bank Borrowed Funds               |   | 16,150,000        |   | 13,750,000             |   |
| Junior Subordinated Debt Securities                 |   | 8,248,000         |   | 8,248,000              |   |
| Interest Payable and Other Liabilities              |   | 1,216,900         |   | 1,331,100              |   |
| Total Liabilities                                   |   | 113,255,900       |   | 101,461,500            |   |
| Shareholders’ Equity:                          |   |              |   |                   |   |
| Common Stock - No Par Value                         |   |              |   |                   |   |
| Authorized: 2,500,000 in 2004 and 2003              |   |              |   |                   |   |
| Outstanding:1,566,658 in 2004 and 2003              |   | 4,630,900         |   | 4,630,900              |   |
| Retained Earnings                                   |   | 2,176,700         |   | 1,725,700              |   |
| Accumulated Other Comprehensive Income  (Loss)      |   | 11,000            |   | 53,900                 |   |
| Total Shareholders’ Equity                     |   | 6,818,600         |   | 6,410,500              |   |
| Total Liabilities & Shareholders’  Equity  |   | 120,074,500       |   | 107,872,000            |   |

 

2

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NORTHERN CALIFORNIA BANCORP, INC.AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

 
|                                  |   | **Three Months  Ended  June 30** |   | **Six Months  Ended  June 30** |   |
|---------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                  |   | **2004**                         |   | **2003**                       |   | **2004** |   | **2003** |   |
| INTEREST  INCOME:                     |   |                             |   |                           |   |   |   |   |   |
| Interest and Fees on Loans            |   | 1,600,600                        |   | 1,213,800                      |   | 3,109,700 |   | 2,409,300 |   |
| Interest on Investment Securities     |   | 115,300                          |   | 99,200                         |   | 175,700 |   | 181,400 |   |
| Interest on Federal Funds             |   | 27,000                           |   | 31,600                         |   | 51,900 |   | 51,300 |   |
| Total Interest Income                 |   | 1,742,900                        |   | 1,344,600                      |   | 3,337,300 |   | 2,642,000 |   |
|                                  |   |                             |   |                           |   |   |   |   |   |
| INTEREST EXPENSE:                     |   |                             |   |                           |   |   |   |   |   |
| Interest-Bearing Transaction Accounts |   | 18,100                           |   | 11,900                         |   | 32,100 |   | 24,100 |   |
| Savings Accounts                      |   | 19,300                           |   | 17,000                         |   | 38,900 |   | 31,200 |   |
| Time Deposits                         |   | 308,600                          |   | 284,000                        |   | 566,300 |   | 578,400 |   |
| Notes Payable and other               |   | 257,400                          |   | 171,500                        |   | 484,100 |   | 314,800 |   |
| Total Interest Expense                |   | 603,400                          |   | 484,400                        |   | 1,121,400 |   | 948,500 |   |
|                                  |   |                             |   |                           |   |   |   |   |   |
| Net Interest Income                   |   | 1,139,500                        |   | 860,200                        |   | 2,215,900 |   | 1,693,500 |   |
| PROVISION FOR LOAN LOSSES             |   | 35,000                           |   | 25,000                         |   | 105,000 |   | 75,000 |   |
| Net Interest Income After             |   |                             |   |                           |   |   |   |   |   |
| Provision for Possible Loan Losses    |   | 1,104,500                        |   | 835,200                        |   | 2,110,900 |   | 1,618,500 |   |
|                                  |   |                             |   |                           |   |   |   |   |   |
| NONINTEREST INCOME:                   |   |                             |   |                           |   |   |   |   |   |
| Service Charges on Deposit Accounts   |   | 130,600                          |   | 118,800                        |   | 258,300 |   | 256,300 |   |
| SBA Loan Sales & Servicing Income |   | 212,100                          |   | 112,800                        |   | 400,700 |   | 291,000 |   |
| Other Operating Income                |   | 785,200                          |   | 785,100                        |   | 1,477,200 |   | 1,414,000 |   |
| Total Noninterest Income              |   | 1,127,900                        |   | 1,016,700                      |   | 2,136,200 |   | 1,961,300 |   |
|                                  |   |                             |   |                           |   |   |   |   |   |
| NONINTEREST EXPENSE:                  |   |                             |   |                           |   |   |   |   |   |
| Salaries and Employee Benefits        |   | 788,700                          |   | 600,200                        |   | 1,518,500 |   | 1,211,600 |   |
| Occupancy and Equipment Expense       |   | 141,500                          |   | 122,000                        |   | 273,700 |   | 262,800 |   |
| Professional Fees                     |   | 37,100                           |   | 26,800                         |   | 70,500 |   | 48,700 |   |
| Data Processing                       |   | 93,800                           |   | 92,200                         |   | 185,000 |   | 182,900 |   |
| FDIC & State Assessments          |   | 6,600                            |   | 7,400                          |   | 18,900 |   | 14,900 |   |
| Other Operating Expenses              |   | 731,000                          |   | 682,800                        |   | 1,411,900 |   | 1,313,000 |   |
| Income Tax Expense                    |   | 184,300                          |   | 109,100                        |   | 317,600 |   | 188,300 |   |
| Total Non-interest Expense            |   | 1,983,000                        |   | 1,640,500                      |   | 3,796,100 |   | 3,222,200 |   |
| NET INCOME (LOSS)                     |   | 249,400                          |   | 211,400                        |   | 451,000 |   | 357,600 |   |
|                                  |   |                             |   |                           |   |   |   |   |   |
| Earnings per common share             |   |                             |   |                           |   |   |   |   |   |
| Primary                               |   | 0.159                            |   | 0.142                          |   | 0.288 |   | 0.239 |   |
| Diluted                               |   | 0.131                            |   | 0.119                          |   | 0.237 |   | 0.201 |   |

 

3

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NORTHERN CALIFORNIA BANCORP, INC.AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWSSIX MONTHS ENDED JUNE 30, 2004 AND 2003

 
|                                                                               |   | **2004**    |       | **2003**   |   |
|------------------------------------------------------------------------------------|--------|-------------|------------|------------|--------|
| **CASH FLOWS FROM OPERATING ACTIVITIES**                                           |   |        |       |       |   |
| Net income                                                                         |   | $           | 451,000    |       | $      | 357,600 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |        |       |       |   |
| Depreciation and amortization expense                                              |   | 94,100      |       | 81,700     |   |
| Realized gain on sales of  available-for-sale securities, net                      |   | (35,700     | )          | (2,300     | )      |
| Amortization of deferred loan (fees) costs                                         |   | 72,100      |       | (53,600    | )      |
| Amortization (accretion) of discounts and  premiums                                |   |        |       |       |   |
| on investment securities                                                           |   | 19,800      |       | (15,700    | )      |
| Gain on sale of equipment                                                          |   | (1,300      | )          | —     |   |
| Provision for loan losses                                                          |   | 105,000     |       | 75,000     |   |
| (Increase) decrease in trading assets                                              |   | 7,900       |       | (16,200    | )      |
| (Increase) decrease in interest receivable                                         |   | (137,100    | )          | (41,800    | )      |
| Increase in other assets                                                           |   | (392,500    | )          | (432,900   | )      |
| (Increase) decrease in deferred tax asset                                          |   | (63,000     | )          | (21,700    | )      |
| Increase (decrease) in interest payable                                            |   | 6,900       |       | (77,300    | )      |
| Increase (decrease) in other liabilities                                           |   | (121,100    | )          | 85,500     |   |
| Net cash provided (used) by operating  activities                                  |   | 6,100       |       | (61,700    | )      |
|                                                                               |   |        |       |       |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES**                                           |   |        |       |       |   |
| Proceeds from maturity of investment  securities                                   |   | 2,537,200   |       | 1,297,700  |   |
| Purchase of investments                                                            |   | (9,402,500  | )          | (2,969,500 | )      |
| Net (increase) decrease in loans                                                   |   | (16,759,500 | )          | (6,864,400 | )      |
| Loan purchases                                                                     |   | (5,430,000  | )          | —     |   |
| Loan sales                                                                         |   | 12,088,200  |       | 2,141,800  |   |
| (Increase) decrease in loans held for sale                                         |   | 43,000      |       | (1,146,600 | )      |
| Proceeds from sale of equipment                                                    |   | 3,100       |       | 2,100      |   |
| Additions to bank premises and equipment                                           |   | (82,600     | )          | (90,500    | )      |
| Net cash used by investing activities                                              |   | (17,003,100 | )          | (7,629,400 | )      |
|                                                                               |   |        |       |       |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES**                                           |   |        |       |       |   |
| Net increase (decrease) in deposits                                                |   | 9,508,600   |       | 3,979,700  |   |
| Proceeds from borrowings                                                           |   | 4,900,000   |       | 5,827,800  |   |
| Repayments of borrowings                                                           |   | (2,500,000  | )          | (1,172,200 | )      |
| Proceeds from exercise of stock options                                            |   | —      |       | 15,700     |   |
| Repurchase of common stock and stock  options                                      |   | —      |       | (3,700     | )      |
| Net cash provided by financing activities                                          |   | 11,908,600  |       | 8,647,300  |   |
|                                                                               |   |        |       |       |   |
| Net increase (decrease) in cash and cash  equivalents                              |   | (5,088,400  | )          | 956,200    |   |
|                                                                               |   |        |       |       |   |
| **CASH AND CASH EQUIVALENTS, BEGINNING**                                           |   | 17,193,100  |       | 13,017,100 |   |
|                                                                               |   |        |       |       |   |
| **CASH AND CASH EQUIVALENTS, ENDING**                                              |   | $           | 12,104,700 |       | $      | 13,973,300 |   |

 

4

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NOTES TO FINANCIAL STATEMENTS 

 
|                                          |   | **JUNE 30  2004** |   | **DECEMBER  31  2003** |   |
|-----------------------------------------------|--------|-------------------|--------|------------------------|--------|
|                                          |   |              |   |                   |   |
| (NOTE 1) INVESTMENT SECURITIES:               |   |              |   |                   |   |
|                                          |   |              |   |                   |   |
| Available for sale:                           |   |              |   |                   |   |
| Corporate Debt Securities                     |   | 752,800           |   | 1,841,500              |   |
| Government National Mortgage Association      |   | 1,788,300         |   | 2,246,100              |   |
| State/Local Agency                            |   | 5,604,100         |   | —                 |   |
| U.S. government Agencies                      |   | 4,666,300         |   | 1,987,900              |   |
|                                          |   | 12,713,100        |   | 6,075,500              |   |
|                                          |   |              |   |                   |   |
| (Note 2) OTHER INVESTMENTS                    |   |              |   |                   |   |
|                                          |   |              |   |                   |   |
| AT Services LLC                               |   | 202,000           |   | 202,000                |   |
| Mission Valley Bank                           |   | 25,000            |   | 25,000                 |   |
| Federal Home Loan Bank stock, restricted      |   | 939,700           |   | 752,600                |   |
| Northern California Bancorp, Inc. Trust I     |   | 93,000            |   | 93,000                 |   |
| Northern California Bancorp, Inc. Trust II    |   | 155,000           |   | 155,000                |   |
| Pacific Coast Bankers’ Bank Stock        |   | 439,900           |   | 439,900                |   |
|                                          |   | 1,854,600         |   | 1,667,500              |   |
|                                          |   |              |   |                   |   |
| (NOTE 3) GROSS LOANS:                         |   |              |   |                   |   |
|                                          |   |              |   |                   |   |
| Commercial and Industrial                     |   | 17,315,400        |   | 16,869,700             |   |
| Construction                                  |   | 8,148,900         |   | 5,379,100              |   |
| Real Estate - Mortgage                        |   | 59,483,400        |   | 52,698,400             |   |
| Installment                                   |   | 598,000           |   | 523,600                |   |
| Government Guaranteed Loans Purchased         |   | 54,600            |   | 57,600                 |   |
| Gross Loans                                   |   | 85,600,300        |   | 75,528,400             |   |
| Allowance for Loan Losses                     |   | (881,000          | )      | (774,800               | )      |
| Deferred Origination Fees, net                |   | (235,700          | )      | (193,000               | )      |
| Loans, net                                    |   | 84,483,600        |   | 74,560,600             |   |
|                                          |   |              |   |                   |   |
| (NOTE 4) ALLOWANCE FOR POSSIBLE LOAN  LOSSES: |   |              |   |                   |   |
|                                          |   |              |   |                   |   |
| Balance at Beginning of Period                |   | 774,800           |   | 636,900                |   |
| Recoveries                                    |   | 1,200             |   | 1,300                  |   |
| Provision for Possible Loan Losses            |   | 105,000           |   | 155,000                |   |
| Loans Charged Off                             |   | 0                 |   | (18,400                | )      |
| Balance at End of Period                      |   | 881,000           |   | 774,800                |   |
|                                          |   |              |   |                   |   |
| (NOTE 5) DEPOSITS:                            |   |              |   |                   |   |
|                                          |   |              |   |                   |   |
| Demand                                        |   | 22,262,300        |   | 17,859,800             |   |
| Interest-Bearing Transaction                  |   | 14,764,300        |   | 16,454,500             |   |
| Savings                                       |   | 7,332,200         |   | 8,444,900              |   |
| Time Under $100,000                           |   | 26,472,700        |   | 19,241,100             |   |
| Time Equal to or Greater than $100,000        |   | 16,809,500        |   | 16,132,100             |   |
|                                          |   | 87,641,000        |   | 78,132,400             |   |

 

5

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(Note 6) BASIS OF PRESENTATION

 

The interim condensed financial statements of Northern CaliforniaBancorp, Inc. are unaudited and reflect all adjustments (consisting onlyof normal recurring adjustments), which are, in the opinion of management,necessary for a fair presentation, in all material respects, of the financialposition and operating results of the Company for the interim periods. The results of operations for the six months ended June 30, 2004 are notnecessarily indicative of the results to be expected for the entire fiscal yearending December 31, 2004.  The year-end balance sheet dataat December 31, 2003 was derived from the audited financialstatements.

 

This financial information should be read in conjunction with theaudited financial statements and notes thereto included in the Company’s Form10-KSB for the fiscal year ended December 31, 2003.

 

(Note 7)STOCK OPTIONS PLAN

 

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

 

The Corporation applies APBOpinion 25 and related Interpretations in accounting for the plan.  Accordingly, no compensation cost has beenrecognized.  Had compensation cost forthe Corporation’s stock-based compensation plan been determined based on thefair value at the grant date for awards under the plan consistent with themethod prescribed by SFAS No. 123, the Corporation’s net income and basicearnings per share would have been adjusted to the pro forma amounts indicatedbelow:

 

6

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|                            |   | **3 Months  Ended  June 30** |    | **6 Months  Ended  June 30** |   |
|---------------------------------|--------|------------------------------|---------|------------------------------|--------|
|                            |   | **2004**                     |    | **2003**                     |   | **2004** |   | **2003** |   |
| Net income:                     |   |                         |    |                         |   |   |   |   |   |
| As reported                     |   | $                            | 249,400 |                         | $      | 211,400 |   | $ | 451,000 |   | $ | 357,600 |   |
| Pro forma                       |   | $                            | 244,200 |                         | $      | 211,400 |   | $ | 346,300 |   | $ | 332,500 |   |
|                            |   |                         |    |                         |   |   |   |   |   |
| Compensation cost, net of taxes |   | $                            | 5,200   |                         | $      | — |   | $ | 104,700 |   | $ | 25,100 |   |
|                            |   |                         |    |                         |   |   |   |   |   |
| Earnings per share:             |   |                         |    |                         |   |   |   |   |   |
| Basic - as reported             |   | $                            | 0.159   |                         | $      | 0.142 |   | $ | 0.288 |   | $ | 0.239 |   |
| Basic - pro forma               |   | $                            | 0.156   |                         | $      | 0.142 |   | $ | 0.221 |   | $ | 0.223 |   |
|                            |   |                         |    |                         |   |   |   |   |   |
| Diluted - as reported           |   | $                            | 0.131   |                         | $      | 0.119 |   | $ | 0.237 |   | $ | 0.201 |   |
| Diluted - pro forma             |   | $                            | 0.128   |                         | $      | 0.119 |   | $ | 0.182 |   | $ | 0.187 |   |

 

The fair value of these options was estimated at the grant date usingthe Black-Scholes option pricing model with the following weighted-averageassumptions for 2004 and 2003: risk-free interest rate of 5.31% and 4.57% for2004 and 2003, respectively; dividend yield of .017% and 0% for 2004 and 2003,respectively; expected option life of 4.9 years and 4.7 years for 2004 and2003, respectively; and volatility of 20% and 30% in 2004 and 2003,respectively.

 

(NOTE 8) SUPPLEMENTALDISCLOSURES OF CASH FLOW INFORMATION:

 
|                                |   | **6/30/2004** |   | **6/30/2003** |   |
|-------------------------------------|--------|---------------|--------|---------------|--------|
| Payments  during the period ending: |   |          |   |          |   |
| Interest                            |   | 1,114,600     |   | 992,000       |   |
| Income Taxes                        |   | 364,600       |   | 203,400       |   |

 

7

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

 

**OVERVIEW**

 

The followingdiscussion reviews and analyzes the operating results and financial conditionof the Corporation, focusing on the Bank. It should be read in conjunction with the financial statements and theother financial data presented elsewhere herein.

 

For the sixmonths, ended June 30, 2004 net income was $451,000, an increase of $93,400when compared to the same period in 2003. The increase in earnings during this period was the result of a $492,400increase in net interest income after provision for loan losses and a $174,900increase in non-interest income, partially offset by a $573,900 increase innon-interest expense.

 

8

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The followingtable sets forth certain selected financial ratios of the Corporation at andfor the six months ended, June 30, 2004 and 2003.

 
|                                               |   | **For the  six months  Ended June 30, 2004**      |   | **For the  six months  Ended June 30, 2003** |   |
|----------------------------------------------------|--------|---------------------------------------------------|--------|----------------------------------------------|--------|
|                                               |   | **(Dollars  in thousands except per share data)** |   |
| Summary of  Operating Results:                     |   |                                              |   |                                         |   |
|                                               |   |                                              |   |                                         |   |
| Total interest income                              |   | 3,337                                             |   | 2,642                                        |   |
| Total interest expense                             |   | 1,121                                             |   | 948                                          |   |
| Net interest income                                |   | 2,216                                             |   | 1,694                                        |   |
|                                               |   |                                              |   |                                         |   |
| Provision for possible loan losses                 |   | 105                                               |   | 75                                           |   |
| Net interest income after provision for  loan loss |   | 2,111                                             |   | 1,619                                        |   |
|                                               |   |                                              |   |                                         |   |
| Total other income                                 |   | 2,136                                             |   | 1,961                                        |   |
| Total other expense                                |   | 3,479                                             |   | 3,034                                        |   |
|                                               |   |                                              |   |                                         |   |
| Income (loss) before taxes                         |   | 769                                               |   | 546                                          |   |
| Provision for income tax                           |   | 318                                               |   | 188                                          |   |
|                                               |   |                                              |   |                                         |   |
| Net income (loss)                                  |   | 451                                               |   | 358                                          |   |
|                                               |   |                                              |   |                                         |   |
| Per Common Share Data:                             |   |                                              |   |                                         |   |
|                                               |   |                                              |   |                                         |   |
| Net income - Primary (1)                           |   | 0.288                                             |   | 0.239                                        |   |
| Net income - Diluted (2)                           |   | 0.237                                             |   | 0.201                                        |   |
| Book value, end of period                          |   | 4.39                                              |   | 4.01                                         |   |
| Avg shares outstanding (3)                         |   | 1,566,658                                         |   | 1,493,605                                    |   |
|                                               |   |                                              |   |                                         |   |
| Balance Sheet Data:                                |   |                                              |   |                                         |   |
|                                               |   |                                              |   |                                         |   |
| Total loans, net of unearned income (4)            |   | 86,788                                            |   | 68,192                                       |   |
| Total assets                                       |   | 120,129                                           |   | 96,353                                       |   |
| Total deposits                                     |   | 87,641                                            |   | 71,596                                       |   |
| Stockholders’ equity                          |   | 6,873                                             |   | 6,015                                        |   |

 

9

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|                                                 |   | **For the  six months  Ended June 30, 2004** |   | **For the  six months  Ended June 30, 2003** |   |
|------------------------------------------------------|--------|----------------------------------------------|--------|----------------------------------------------|--------|
| Selected Financial Ratios (5):                       |   |                                         |   |                                         |   |
|                                                 |   |                                         |   |                                         |   |
| Return on average assets (6)                         |   | 0.79                                         | %      | 0.78                                         | %      |
| Return on average stockholders’ equity (6)      |   | 13.54                                        | %      | 12.35                                        | %      |
| Net interest spread                                  |   | 3.78                                         | %      | 3.86                                         | %      |
|                                                 |   |                                         |   |                                         |   |
| Net interest margin                                  |   | 4.21                                         | %      | 4.19                                         | %      |
|                                                 |   |                                         |   |                                         |   |
| Avg shareholders’ equity to average assets      |   | 5.80                                         | %      | 6.36                                         | %      |
|                                                 |   |                                         |   |                                         |   |
| Risked-Based capital ratios                          |   |                                         |   |                                         |   |
| Tier 1                                               |   | 8.65                                         | %      | 12.17                                        | %      |
| Total                                                |   | 16.01                                        | %      | 14.27                                        | %      |
| Total loans to total deposits at end of  period      |   | 99.03                                        | %      | 95.25                                        | %      |
|                                                 |   |                                         |   |                                         |   |
| Allowance to total loans at end of period            |   | 1.01                                         | %      | 1.02                                         | %      |
|                                                 |   |                                         |   |                                         |   |
| Nonperforming loans to total loans at end  of period |   | 0.03                                         | %      | 0.03                                         | %      |
|                                                 |   |                                         |   |                                         |   |
| Net charge-offs to average loans                     |   | 0.00                                         | %      | 0.03                                         | %      |

 

----

(1)          Primary earnings per share amounts werecomputed on the basis of the weighted average number of shares of common stockoutstanding during the year.  Theweighted average number of common shares used for this computation was1,566,658 and 1,493,605 for June 30, 2004 and 2003, respectively.

(2)          Diluted earnings (loss) per share amountswere computed on the basis of the weighted average number of shares of commonstock and common stock equivalents outstanding during the year.  Common stock equivalents includedirector/employee stock options. The weighted average number of shares used forthis computation was 1,902,384 and 1,782,722 for June 30, 2004 and 2003,respectively.

(3)          Weighted average common shares.

(4)          Includes loans being held for sale.

(5)          Averages are of daily balances.

(6)          June 30, 2004 calculated on an annualizedbasis.

 

10

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**NET INTEREST INCOME**

 

Net interestincome, the difference between (a) interest and fees earned on interest-earningassets and (b) interest paid on interest-bearing liabilities, is the mostsignificant component of the Bank’s earnings. Changes in net interest income from period to period result fromincreases or decreases in the average balances of interest earning assetsportfolio, the availability of particular sources of funds and changes inprevailing interest rates.

 

Net interestincome for the six-month period ended June 30, 2004 was $2,215,900 compared to$1,693,500 for the same period in 2003. The increase of $522,400 resulted from total interest income increasing$695,300, while total interest expense increased $172,900.  Average interest earning assets increased$22,090,000 (27.39%) with average loans increasing $18,927,000 and investmentsincreasing $3,163,000, while the average rate earned decreased 22 basis points.  The average interest rate earned on loansdecreased 1 basis point while the average interest rated earned on investmentsdecreased 72 basis points.  Averageinterest bearing liabilities increased $18,410,000 (26.30%), while the averagerate paid decreased 78 basis points.

 

The followingtable shows the components of the Bank’s net interest income, setting forth,for each the six months ended June 30, 2004 and 2003 and for the twelve monthsended December 31, 2003, (i) average assets, liabilities and investments, (ii)interest income earned on interest-earning assets and interest expense paid oninterest-bearing liabilities, (iii) average yields earned on interest-earningassets and average rates paid on interest-bearing liabilities, (iv) the netinterest spread (i.e., the average yield earned on interest-earning assets lessthe average rate paid on interest-bearing liabilities) and (v) the net interestyield on average interest-earning assets (i.e., net interest income divided byaverage interest-earning assets). Yields are computed on a tax-equivalent basis, resulting in anadjustment to interest earned on non-taxable securities of $21,300 for the sixmonths ended June 30, 2004; no non-taxable securities were held in 2003.  Non-accrual loans and overdrafts areincluded in average loan balances. Average loans are presented net of unearned income.

 

11

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**INTEREST SPREADANALYSIS:**

 
|                                 |   | **Six Months  Ended June 30,** |   | **Twelve  Months  Ended December 31,** |   |
|--------------------------------------|--------|--------------------------------|--------|----------------------------------------|--------|
|                                 |   | **2004**                       |   | **2003**                               |   | **2003** |   |
|                                 |   | **Avg  Bal**                   |   | **Int  Earn  Paid**                    |   | **Avg  %  Rate** |   | **Avg  Bal** |   | **Int  Earn  Paid** |   | **Avg  %  Rate** |   | **Avg  Bal** |   | **Int  Earn  Paid** |   | **Avg  %  Rate** |   |
|                                 |   | **(Dollars  in thousands)**    |   |
| Interest Earning Assets:             |   |                           |   |                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Invest securities-Taxable            |   | 10,231                         |   | 138                                    |   | 2.70 |   | 7,364 |   | 181 |   | 4.93 |   | 8,113 |   | 299 |   | 3.69 |   |
| Invest securities-Non-Taxable        |   | 1,783                          |   | 58                                     |   | 6.47 |   | 0 |   | 0 |   | 0 |   | 0 |   | 0 |   | 0 |   |
| Federal funds sold                   |   | 10,552                         |   | 52                                     |   | 0.98 |   | 8,614 |   | 51 |   | 1.19 |   | 8,891 |   | 97 |   | 1.09 |   |
| Total investments                    |   | 22,566                         |   | 248                                    |   | 2.19 |   | 15,978 |   | 233 |   | 2.91 |   | 17,004 |   | 396 |   | 2.33 |   |
|                                 |   |                           |   |                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                                |   |                           |   |                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Construction                         |   | 7,037                          |   | 381                                    |   | 10.83 |   | 4,027 |   | 177 |   | 8.78 |   | 3,847 |   | 369 |   | 9.59 |   |
| Real estate                          |   | 56,927                         |   | 2,049                                  |   | 7.20 |   | 44,781 |   | 1,783 |   | 7.96 |   | 47,264 |   | 3,585 |   | 7.59 |   |
| Installment                          |   | 563                            |   | 22                                     |   | 7.95 |   | 450 |   | 21 |   | 9.42 |   | 494 |   | 38 |   | 7.62 |   |
| Commercial                           |   | 19,199                         |   | 659                                    |   | 6.86 |   | 15,540 |   | 428 |   | 5.51 |   | 16,344 |   | 1,182 |   | 7.23 |   |
| Total loans                          |   | 83,726                         |   | 3,111                                  |   | 7.43 |   | 64,799 |   | 2,409 |   | 7.44 |   | 67,949 |   | 5,174 |   | 7.61 |   |
|                                 |   |                           |   |                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Interest earning assets        |   | 106,293                        |   | 3,359                                  |   | 6.32 |   | 80,776 |   | 2,642 |   | 6.54 |   | 84,953 |   | 5,570 |   | 6.56 |   |
|                                 |   |                           |   |                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Bearing Liabilities:        |   |                           |   |                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Int-bearing demand                   |   | 13,347                         |   | 17                                     |   | 0.25 |   | 10,398 |   | 13 |   | 0.25 |   | 10,892 |   | 27 |   | 0.25 |   |
| Money market savings                 |   | 3,798                          |   | 15                                     |   | 0.82 |   | 2,160 |   | 11 |   | 1.04 |   | 2,592 |   | 22 |   | 0.86 |   |
| Savings deposits                     |   | 7,731                          |   | 39                                     |   | 1.01 |   | 6,067 |   | 31 |   | 1.03 |   | 6,011 |   | 62 |   | 1.03 |   |
| Time deposits >$100M              |   | 16,437                         |   | 242                                    |   | 2.95 |   | 16,496 |   | 265 |   | 3.21 |   | 16,378 |   | 511 |   | 3.12 |   |
| Time deposits <$100M              |   | 22,259                         |   | 324                                    |   | 2.91 |   | 19,889 |   | 314 |   | 3.15 |   | 20,074 |   | 618 |   | 3.08 |   |
| Other Borrowing                      |   | 24,845                         |   | 484                                    |   | 3.90 |   | 15,419 |   | 315 |   | 4.08 |   | 16,781 |   | 680 |   | 4.05 |   |
| Total interest bearing liabilities   |   | 88,417                         |   | 1,121                                  |   | 2.54 |   | 70,429 |   | 948 |   | 2.69 |   | 72,729 |   | 1,920 |   | 2.64 |   |
|                                 |   |                           |   |                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income                  |   |                           |   | 2,237                                  |   |   |   |   |   | 1,694 |   |   |   |   |   | 3,649 |   |   |   |
|                                 |   |                           |   |                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest spread                  |   |                           |   |                                   |   | 3.78 |   |   |   |   |   | 3.85 |   |   |   |   |   | 3.92 |   |
|                                 |   |                           |   |                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net yield on interest earning assets |   |                           |   |                                   |   | 4.21 |   |   |   |   |   | 4.19 |   |   |   |   |   | 4.30 |   |

 

12

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|                            |   | **Six Months  Ended June 30,  2004 vs 2003  Increase (Decrease)  Due to Changes** |   | **Twelve  Months  Ended December 31,  2003 vs 2002  Increase (Decrease)  Due to changes** |   |
|---------------------------------|--------|-----------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------|--------|
|                            |   | **Avg  Volume**                                                                   |   | **Avg  Rate**                                                                             |   | **Total** |   | **Avg  Volume** |   | **Avg  Rate** |   | **Total** |   |
|                            |   | **(Dollars  in thousands)**                                                       |   |
| Interest Earning Assets:        |   |                                                                              |   |                                                                                      |   |   |   |   |   |   |   |   |   |
| Invest securities - Taxable     |   | 71                                                                                |   | (114                                                                                      | )      | (43 | ) | (125 | ) | 7 |   | (118 | ) |
| Invest securities - Tax Free    |   | 0                                                                                 |   | 58                                                                                        |   | 58 |   | — |   | — |   | — |   |
| Federal funds sold              |   | 12                                                                                |   | (11                                                                                       | )      | 1 |   | 30 |   | (48 | ) | (18 | ) |
| Total investments               |   | 82                                                                                |   | (67                                                                                       | )      | 15 |   | (96 | ) | (40 | ) | (136 | ) |
|                            |   |                                                                              |   |                                                                                      |   |   |   |   |   |   |   |   |   |
| Loans                           |   |                                                                              |   |                                                                                      |   |   |   |   |   |   |   |   |   |
| Construction                    |   | 132                                                                               |   | 72                                                                                        |   | 204 |   | 108 |   | (11 | ) | 97 |   |
| Real estate                     |   | 484                                                                               |   | (218                                                                                      | )      | 266 |   | 715 |   | 24 |   | 739 |   |
| Installment                     |   | 5                                                                                 |   | (4                                                                                        | )      | 1 |   | (18 | ) | (10 | ) | (28 | ) |
| Commercial                      |   | 101                                                                               |   | 129                                                                                       |   | 230 |   | 57 |   | (58 | ) | (1 | ) |
| Total loans                     |   | 722                                                                               |   | (20                                                                                       | )      | 702 |   | 862 |   | (55 | ) | 807 |   |
|                            |   |                                                                              |   |                                                                                      |   |   |   |   |   |   |   |   |   |
| Total Interest Earning Assets   |   | 804                                                                               |   | (87                                                                                       | )      | 717 |   | 766 |   | (95 | ) | 671 |   |
|                            |   |                                                                              |   |                                                                                      |   |   |   |   |   |   |   |   |   |
| Interest Bearing Deposits:      |   |                                                                              |   |                                                                                      |   |   |   |   |   |   |   |   |   |
| Int-bearing demand              |   | 4                                                                                 |   | 0                                                                                         |   | 4 |   | (0 | ) | (46 | ) | (46 | ) |
| Money market savings            |   | 9                                                                                 |   | (4                                                                                        | )      | 4 |   | 6 |   | (5 | ) | 1 |   |
| Savings deposits                |   | 9                                                                                 |   | (1                                                                                        | )      | 8 |   | 23 |   | (16 | ) | 8 |   |
| Time deposits >$100M         |   | (1                                                                                | )      | (22                                                                                       | )      | (22 | ) | 12 |   | (101 | ) | (89 | ) |
| Time deposits <$100M         |   | 37                                                                                |   | (27                                                                                       | )      | 10 |   | (13 | ) | (195 | ) | (207 | ) |
| Other Borrowing                 |   | 192                                                                               |   | (23                                                                                       | )      | 169 |   | 590 |   | (284 | ) | 306 |   |
|                            |   |                                                                              |   |                                                                                      |   |   |   |   |   |   |   |   |   |
| Total interest bearing deposits |   | 250                                                                               |   | (77                                                                                       | )      | 173 |   | 618 |   | (646 | ) | (28 | ) |
|                            |   |                                                                              |   |                                                                                      |   |   |   |   |   |   |   |   |   |
| Net change in net interest      |   | 554                                                                               |   | (11                                                                                       | )      | 544 |   | 148 |   | 550 |   | 699 |   |

 

13

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**Provision andAllowance for Loan Losses**

 

The provisionfor loan losses is an expense charged against operating income and added to theallowance for loan losses.  Theallowance for loan losses represents amounts, which have been set aside for thespecific purpose of absorbing losses, which may occur in the Bank’s loanportfolio.

 

The allowancefor loan losses reflects management’s ongoing evaluation of the risks inherentin the loan portfolio both generally and with respect to specific loans, thestate of the economy, and the level of net loan losses experienced in thepast.  Management and the Board ofDirectors review the results of the California Department of Financial Institutionsand FDIC examinations, independent accountants’ observations, and the Bank’sinternal review as additional indicators to determine if the amount in theallowance for loan losses is adequate to protect against estimated futurelosses.  It is the Bank’s currentpractice, which could change in accordance with the factors mentioned above, tomaintain an allowance that is at least equal to the sum of the followingpercentage of loan balances by loan category.

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

 

Although noassurance can be given that actual losses will not exceed the amount providedfor in the allowance, Management believes that the allowance is adequate toprovide for all estimated credit losses in light of all known relevant factors.At June 30, 2004 and 2003 the Bank’s allowance stood at 1.01 and 1.02 percentof gross loans, respectively.  Aprovision of $105,000 was made to the allowance during the six months endedJune 30, 2004 compared with $75,000 in the same period in 2003.   No loans were charged during the six monthsended June 30, 2004 compared with $18,400 for the same period in 2003.  Recoveries for the six months ended June 30,2004 and 2003 were $1,200 and $1,300, respectively.

 

14

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The Bank’snon-performing (delinquent 90 days or more and non-accrual) loans as apercentage of total loans were 0.03 percent at June 30, 2004, no change fromJune 30, 2003.

 

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

 

**Non-Interest Income**

 

Totalnon-interest income for the six months ended June 30, 2004 was $2,136,200,compared with $1,961,300 for the same period in 2003.  The increase of $174,900 was the result increases of a $2,000 inservice charges on deposit accounts, $109,700 in SBA loan sales and servicingand $63,200 in other operating income.

 

The sale ofSmall Business Administration (SBA) guaranteed loans is a significantcontributor to the Bank’s income.  SBAguaranteed loans yield up to 3 3/4% over the New York prime rate, and theguaranteed 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 80 percent of the principalamount.  The guaranteed portion hasrisks comparable for an investor to a U. S. Government security and can usuallybe sold in the secondary financial market, either at a premium or at a yield,which allows the Bank to maintain a significant spread for itself.

 

There can beno assurance that the gains on sale will continue at, or above, the levelsrealized in the past three years.  Inaddition, increasing competition among lenders for qualified SBA borrowersmakes it difficult for the Bank to continually expand its program in this area,and may limit the level of premium that can be earned with regard thereto.  The level of premium income on longer-termloans has been significantly reduced due to the volume of loans that have beenpaid off early.

 

**Non-Interest Expense**

 

Salary andbenefits expense for the six months ended June 30, 2004 increased $306,900compared with the same period in 2003. The increase was due to the addition of a Chief Lending Officer, meritpay increases and increased bonus accruals due to increased earnings.

 

Totaloccupancy and equipment expense for the six months ended June 30, 2004 was$273,700 compared to $262,800 for the same period in 2003.

 

For the sixmonths ended June 30, 2004 professional fees were $70,500 compared with $48,700the same period in 2003. Accounting/audit fees increased $20,600 and legal fees increased $1,200.  The increase in accounting/audit fees is dueto increased use of third parties for internal audit and loan reviewprocedures.

 

15

----

 

Dataprocessing for the six months ended June 30, 2004 increased $2,100 compared tothe same period in 2003.

 

Other expensesfor the six months ended June 30, 2004 totaled $1,748,400 compared with$1,516,200 for the same period in 2003. Significant changes occurred in the following categories with increasesin income tax expense of $129,300, merchant expense of $53,600, insuranceexpense $30,400, business development/promotions $20,500, entertainment &meals $12,500, stationary & supplies $12,500, FDIC & State assessments$4,000, advertising $3,700 and telephone expense $3,600; with decreases in duesand memberships $7,300, collection expense $7,200, loan expense $5,000,stationary/supplies expense $4,800, subscriptions/publications $3,800 andmiscellaneous $3,600.

 

**LOANS**

 

Loansrepresented 81.50% of average earning assets, and 73.23% of average totalassets for the six months ended June 30, 2004, compared with 80.48% and 71.21%,respectively during 2003.  For the sixmonths ended June 30, 2004 average loans increased 29.21% from $64,799,000 forthe same period in 2003 to $83,726,000. With increases of $12,146,000 (27.12%) in average real estate loans,$3,659,000 (23.55%) in average commercial loans, $3,010,000 (74.74%) in averageconstruction loans and $113,000 (25.04%) in average installment loans.

 

The Bank’scommercial and industrial loans are generally made for the purpose of providingworking capital, financing the purchase of equipment or inventory, and otherbusiness purposes. Such loans generally have terms ranging from one year toseveral years.  Short-term businessloans are generally intended to finance current transactions and typically providefor monthly interest payments with principal being payable at maturity or at90-day intervals. Term loans (usually for a term of two to five years) normallyprovide for monthly installments of principal and interest.  The Bank from time to time utilizes accountsreceivable and inventory as security for loans.

 

The Bank is arecognized leader for Small Business Administration lending in Monterey County,and holds SBA’s coveted Preferred Lender Status.  Generally, the SBA guarantees SBA loans for 75 to 80 percent oftheir principal amount, which can be retained in portfolio or sold toinvestors.  Such loans are made atfloating interest rates, but generally for longer terms (up to 25 years) thanare available on a conventional basis to small businesses.  Theunguaranteed portion of the loans, although generally supported by collateral,is considered to be more risky than conventional commercial loans because theymay be based upon credit standards the Bank would not otherwise apply, such aslower cash flow coverage, or longer repayment terms.

 

The Bank’sreal estate loan portfolio consists both of real estate construction loans andreal estate mortgage loans.  The Bankhas initiated a program to generate more commercial and industrial real estateloans, which generally yield higher returns than normal commercial loans.  The Bank has also developed a broker programfor generating residential real estate loans. The Bank does not make real estate development loans.  Real estateconstruction loans are made for a much shorter term, and often at higherinterest rates, than conventional single-family residential real estateloans.  The cost of administering suchloans

 

16

----

 

is often higher than for otherreal estate loans, as principal is drawn on periodically as constructionprogresses.

 

The Bank alsomakes real estate loans secured by a first deed of trust on single- familyresidential properties and commercial and industrial real estate.  California commercial banks are permitted,depending on the type and maturity of the loan, to lend up to 90 percent of thefair market value of real property (or more if the loan is insured either byprivate mortgage insurers or governmental agencies).  In certain instances, the appraised value may exceed the actualamount, which could be realized on foreclosure, or declines in market valuesubsequent to making the loan can impair the Bank’s security.

 

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

 

17

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**Nonperforming andNonaccrual Loans**

 

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

 

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

 
|                                                          |   | **Six Months  Ended  June 30,** |   |
|---------------------------------------------------------------|--------|---------------------------------|--------|
|                                                          |   | **2004**                        |   | **2003** |   |
|                                                          |   | **(Dollars  in thousands)**     |   |
| Accruing, past due 90 days or more:                           |   |                            |   |   |   |
|                                                          |   |                            |   |   |   |
| Real Estate                                                   |   | 0                               |   | 0 |   |
| Commercial                                                    |   | 0                               |   | 0 |   |
| Installment                                                   |   | 0                               |   | 0 |   |
| Other                                                         |   | 0                               |   | 0 |   |
| Total accruing                                                |   | 0                               |   | 0 |   |
|                                                          |   |                            |   |   |   |
| Nonaccrual Loans:                                             |   |                            |   |   |   |
|                                                          |   |                            |   |   |   |
| Real Estate                                                   |   | 0                               |   | 0 |   |
| Commercial                                                    |   | 28                              |   | 20 |   |
| Installment                                                   |   | 0                               |   | 0 |   |
| Other                                                         |   | 0                               |   | 0 |   |
| Total nonaccrual                                              |   | 28                              |   | 20 |   |
|                                                          |   |                            |   |   |   |
| Total nonperforming                                           |   | 28                              |   | 20 |   |
|                                                          |   |                            |   |   |   |
| Total loans end of period                                     |   | 86,788                          |   | 68,192 |   |
|                                                          |   |                            |   |   |   |
| Ratio of nonperforming loans to total loans  at end of period |   | 0.03                            | %      | 0.03 | % |

 

These ratioshave been maintained as a result of a strengthening of underwriting criteria,frequent review of new and delinquent loans and a firm collection policy (withthe assistance of outside legal counsel). The Bank does not have any foreign loans or loans for highly leveragedtransactions.

 

18

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**Summary of Loan LossExperience**

 
|                                                                           |   | **Six Months  Ended  June 30, 2004** |   | **Six Months  Ended  June 30, 2003** |   |
|--------------------------------------------------------------------------------|--------|--------------------------------------|--------|--------------------------------------|--------|
|                                                                           |   | **(Dollars  in thousands)**          |   |
| Average loans outstanding                                                      |   | 83,726                               |   | 64,799                               |   |
|                                                                           |   |                                 |   |                                 |   |
| Allowance, beginning of period                                                 |   | 775                                  |   | 637                                  |   |
|                                                                           |   |                                 |   |                                 |   |
| Loans charged off during period:                                               |   |                                 |   |                                 |   |
| Commercial                                                                     |   | 0                                    |   | 18                                   |   |
| Installment                                                                    |   | 0                                    |   | 0                                    |   |
| Real Estate                                                                    |   | 0                                    |   | 0                                    |   |
| Other                                                                          |   | 0                                    |   | 0                                    |   |
| Total charge offs                                                              |   | 0                                    |   | 18                                   |   |
|                                                                           |   |                                 |   |                                 |   |
| Recoveries during period:                                                      |   |                                 |   |                                 |   |
| Real Estate                                                                    |   |                                 |   |                                 |   |
| Commercial                                                                     |   | 0                                    |   | 1                                    |   |
| Installment                                                                    |   | 0                                    |   | 0                                    |   |
| Other                                                                          |   | 0                                    |   | 0                                    |   |
| Total recoveries                                                               |   | 0                                    |   | 1                                    |   |
|                                                                           |   |                                 |   |                                 |   |
| Net Loans charged off during the period                                        |   | (0                                   | )      | 17                                   |   |
|                                                                           |   |                                 |   |                                 |   |
| Additions to allowance for possible loan  losses                               |   | 105                                  |   | 75                                   |   |
|                                                                           |   |                                 |   |                                 |   |
| Allowance, end of period                                                       |   | 880                                  |   | 695                                  |   |
|                                                                           |   |                                 |   |                                 |   |
| Ratio of net loans charged off to average  Loans outstanding during the period |   | (0.000                               | )%     | 0.027                                | %      |
|                                                                           |   |                                 |   |                                 |   |
| Ratio of allowance to total loans at end of  period                            |   | 1.01                                 | %      | 1.02                                 | %      |

 

19

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**Funding Sources**

 

Averagedeposits for the six months ended June 30, 2004 were $82,003,000 an increase of18.37% compared with the average balance for 2003.  Average certificates of deposit represented 47.19% of averagedeposits for the six months ended June 30, 2004.  Average interest bearing checking, money market and savingsaccounts as a group was 30.34% of average deposits.  Average demand deposits represented 22.48% of average deposits.

 

The Bank haslines of credit from the Federal Home Loan Bank of San Francisco and PacificCoast Bankers’ Bank with available borrowing capacity on June 30, 2004 of$4,606,000 and $4,500,000, respectively. The Federal Home Loan Bank line of credit has a maximum borrowingcapacity of twenty five percent (25%) of the Bank’s total assets, adjustedquarterly.  The Federal Home Loan Bankline of credit is secured by some of the Bank’s real estate secured loans andsecurities.  At June 30, 2004 the totalprincipal balances of pledged loans was $27,066,000 and securities of$5,572,700.  The following tableprovides information on ten advances totaling $16,150,000 outstanding at June30, 2004.

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

 

The Bank has a$105,000 letter of credit issued by the Federal Home Loan Bank of San Franciscoto secure the uninsured portion of local agency deposits maintained with theBank.  The letter of credit maturesApril 17, 2006.

 

**Capital Resources**

 

The Bankmaintains capital to comply with legal requirements, to provide a margin ofsafety for its depositors and stockholders, and to provide for future growthand the ability to pay dividends.  AtJune 30, 2004, stockholders’ equity was $6,872,700 versus $6,410,500 atDecember 31, 2003. The Company paid a $0.15 per share cash dividend in 2003 anda ten (10%) percent stock dividend in 2002. The Bank paid no cash dividends during the six months ended June 30,2004 and cash dividends totaling $50,000 to the Corporation in 2003.

 

20

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

 

Under currentrules, all banks were required to maintain Tier 1 capital of at least 4 percentand total capital of 8.0% of risk-adjusted assets.  On a consolidated basis the Company had a Tier 1 risk-basedcapital ratio of 8.61% and a total risk-based capital ratio of 16.01% at June30, 2004 well above the minimum regulatory requirements.

 

The leveragecapital ratio guidelines require a minimum leverage capital ratio of 3% of Tier1 capital to total assets less goodwill. The Company’s consolidated leverage capital ratio was 6.93% at June 30,2004.

 

**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, liquidity considerationsinvolve the capacity to meet expected and potential requirements of depositorsseeking access to balances and to provide for the credit demands of borrowingcustomers.  In the ordinary course ofthe Bank’s business, funds are generated from the repayment of loans,maturities within the investment securities portfolio and the acquisition of depositbalances and short-term borrowings. The Bank has a line of credit from theFederal Home Loan Bank of San Francisco of approximately $27,066,000 and a$4,500,000 unsecured Federal Funds Purchased line with the Pacific CoastBankers’ Bank to meet temporary liquidity requirements.

 

As a matter ofpolicy, the Bank seeks to maintain a level of liquid assets, includingmarketable investment securities, equal to a least 10 percent of total assets(“primary liquidity”), while maintaining sources of secondary liquidity(borrowing lines from other institutions) equal to at least an additional 10percent of assets.  In addition, itseeks to generally limit loans to not more than 90 percent of total fundingsources (total deposits plus Federal Home Loan Bank advances).  Withinthese ratios, the Bank generally has excess funds available to sell as federalfunds on a daily basis, and is able to fund its own liquidity needs without theneed of short-term borrowing.  At June30, 2004 the Bank’s primary liquidity was 10.56% and total liquidity was 21.23percent; while its average loan to funding sources ratio for the six monthsended June 30, 2004 was 84.96 percent.

 

**InterestRate Risk**

 

Management of interest rate sensitivity (asset/liability management)involves matching and repricing rates of interest-earning assets withinterest-bearing liabilities in a manner designed to optimize net interestincome within the constraints imposed by regulatory authorities, liquiditydeterminations and capital considerations. The Bank instituted formal asset/liability policies at the end of 1989.

 

21

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The purposefor asset/liability management is to provide stable net interest income growthby protecting the Bank’s earnings from undue interest rate risk.  The Bank expects to generate earnings fromincreasing loan volume, appropriate loan pricing and expense control and notfrom trying to accurately forecast interest rates.  Another important function of asset/liability management is managingthe risk/return relationships between interest rate risk, liquidity, marketrisk and capital adequacy.  The Bankgives priority to liquidity concerns followed by capital adequacy, theninterest rate risk and market risk in the investment portfolio.  The policy of the Bank will be to controlthe exposure of the Bank’s earnings to changing interest rates by generallymaintaining a position within a narrow range around an “earnings neutralposition.” An earnings neutral position is defined as the mix of assets andliabilities that generate a net interest margin that is not affected byinterest rate changes.  However,Management does not believe that the Bank can maintain a totally earningsneutral position.  Further, the actualtiming of repricing of assets and liabilities does not always correspond to thetiming assumed by the Bank for analytical purposes.  Therefore, changes in market rates of interest will generallyimpact on the Bank’s net interest income and net interest margin for long orshort periods of time.

 

The Bankmonitors its interest rate risk on a quarterly basis through the use of a modelwhich calculates the effect on earnings of changes in the fed funds rate.  The model converts a fed funds rate changeinto rate changes for each major class of asset and liability, then simulatesthe bank’s net interest margin based on the bank’s actual repricing over a oneyear period, assuming that maturities are reinvested in instruments identicalto those maturing during the period.  AtJune 30, 2004 the affect of a 2% increase in the federal funds sold rate wouldresult in a 5.00% decrease in equity. At June 30, 2004 the fed funds target rate was 1.00%; therefore, themodel assumed a 1% decrease in the fed funds rate resulting in a negativeaffect on capital of 2.50%.

 

**Investment Securities**

 

The followingtable sets forth the book and market value of the Bank’s investment securitiesat June 30, 2004:

 

INVESTMENT PORTFOLIO MIX

 
|                                     |   | **Book  Value**            |   | **Market  value** |   |
|------------------------------------------|--------|----------------------------|--------|-------------------|--------|
|                                     |   | **(Dollars in thousands)** |   |
| Securities Available for Sale            |   |                       |   |              |   |
|                                     |   |                       |   |              |   |
| U. S. Government Agency Securities       |   | 4,695,500                  |   | 4,666,300         |   |
| Government National Mortgage Association |   | 1,817,300                  |   | 1,788,300         |   |
| State/Local Agencies                     |   | 5,604,100                  |   | 5,505,700         |   |
| Corporate Debt Securities                |   | 750,000                    |   | 752,800           |   |
| Total                                    |   | 12,866,900                 |   | 12,713,100        |   |

 

22

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The followingtable summarizes the maturity of the Bank’s investment securities at June 30,2004:

 

INVESTMENT PORTFOLIO MATURITIES(Dollars in thousands)

 
|                              |   | **Available  for Sale** |   |
|-----------------------------------|--------|-------------------------|--------|
|                              |   | **Amortized  Cost**     |   | **Fair Value** |   |
| Due between one and five years    |   | 2,695,500               |   | 2,669,000 |   |
| Due between five and ten years    |   | 2,750,000               |   | 2,749,300 |   |
| Due between ten and fifteen years |   | —                  |   | — |   |
| Due in over fifteen years         |   | 7,421,400               |   | 7,294,800 |   |
|                              |   | 12,866,900              |   | 12,713,100 |   |

 

**Item3.  Controls and Procedures**

 

(a) Evaluation of Disclosure Controls and Procedures:  An evaluation of the Company’s disclosurecontrols and procedures (as Defined in Section 13(a) – 14(c) of the SecuritiesExchange Act of 1934 (the “Act”) was carried out under the supervision and withthe participation of the Company’s Chief Executive Officer, Chief FinancialOfficer and other members of the Company’s management within the 90-day periodpreceding the filing date of this quarterly report.  The Company’s Chief Executive Officer and Chief Financial Officerconcluded that the Company’s disclosure controls and procedures as currently ineffect are effective in ensuring that the information required to be disclosedby the Registrant in the reports it files or submits under the Act is (i)accumulated and communicated to the Company’s management (including the ChiefExecutive Officer and Chief Financial Officer) in a timely manner, and (ii)recorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms.

 

(b) Changes in InternalControls:  In the quarter ended June 30,2004, the Company did not make any significant changes in, nor take anycorrective actions regarding, its internal controls or other factor that couldsignificantly affect these controls.

 

23

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**PART II-OTHER INFORMATION**

 

**Item 1.  Legal Proceedings.**

 

None

 

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

 

The followingproposals were presented to shareholders at the Corporation’s annualshareholders’ meeting held on May 20, 2004.

 

Proposal Number 1:   Electionof Directors

** **
|                        |   | **Number of  Affirmative Votes** |   | **Number of  Votes Withheld** |   |
|-----------------------------|--------|----------------------------------|--------|-------------------------------|--------|
| Charles T. Chrietzberg, Jr. |   | 1,286,922                        |   | 54,452                        |   |
| Sandra G. Chrietzberg       |   | 1,286,922                        |   | 54,452                        |   |
| Peter J. Coniglio           |   | 1,289,124                        |   | 52,250                        |   |
| Carla S. Hudson             |   | 1,289,247                        |   | 52,127                        |   |
| John M. Lotz                |   | 1,284,243                        |   | 57,131                        |   |

 

**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 FORM8-K

 

None

 

In accordancewith the requirements of the Exchange Act, the registrant caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 

24

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|   |            |   |   |   | NORTHERN CALIFORNIA BANCORP, INC. |
|--------|-----------------|--------|--------|--------|-----------------------------------|
|   |            |   |   |   |                              |
| Date:  | August 11, 2004 |   |   |   | By:                               | /s/ Charles T. Chrietzberg, Jr. |   |
|   |            |   |   |   |                              | Charles T. Chrietzberg, Jr. |
|   |            |   |   |   |                              | Chief Executive Officer |
|   |            |   |   |   |                              | and President |
|   |            |   |   |   |                              |   |
| Date:  | August 11, 2004 |   |   |   | By:                               | /s/ Bruce N. Warner |   |
|   |            |   |   |   |                              | Bruce N. Warner |
|   |            |   |   |   |                              | Chief Financial Officer and |
|   |            |   |   |   |                              | Principal Accounting Officer |

 

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