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

**Washington,D.C.  20549**

**FORM 10-QSB**

** **

**x   Quarterly report under Section 13 or 15(d) ofthe Securities Exchange Act of 1934**

**forthe quarterly period ended June 30, 2007**

 

**o   Transition report under Section 13 or 15(d)of the Securities Exchange Act of 1934**

**(No fee required) for theperiod from          to           **

**Commission File Number 0-27666**

**NORTHERNCALIFORNIA BANCORP, INC.**

(Name of Small Business Issuer in its Charter)

**Incorporatedin the State of California**

**IRS EmployerIdentification Number 77-0421107**

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

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

Check whether theissuer: (1) filed all reports required to be filed by Section 13 or 15(d) ofthe 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 x | No o |   |
|--|-------|------|--------|

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Act).
|  | Large accelerated filer o | Accelerated filer o | Non-accelerated filer x |
|--|---------------------------|---------------------|-------------------------|

 

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

As of July 27,2007, the Corporation had 1,792,238 shares of common stock outstanding.

 

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TABLE OF CONTENTS
| **Facing Page**       |                                                                                        | 1      |
|-----------------------|---------------------------------------------------------------------------------------------|--------|
| **Table of Contents** |                                                                                        | 2      |
| **PART  I**           | Financial  Information                                                                      | 3-6    |
| Item 1                | Financial  Statements                                                                       |   |
|                  | Consolidated  Balance Sheets                                                                | 3      |
|                  | Consolidated  Statements of Operations                                                      | 4      |
|                  | Consolidated****Statements****of  Changes in Shareholders’ Equity                      | 5      |
|                  | Consolidated  Statements of Cash Flows                                                      | 6      |
|                  | Summary  of Accounting Policies                                                             | 7-11   |
| Item  2               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 11-29  |
| Item 3                | Controls and  Procedures                                                                    | 30     |
|                  |                                                                                        |   |
| **PART II**           | Other Information                                                                           |   |
| Item 1                | Legal Proceedings                                                                           | 30     |
| Item 2                | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 30     |
| Item 3                | Defaults Upon  Senior Securities                                                            | 30     |
| Item 4                | Submission of  Matters to a Vote of Security Holders                                        | 31     |
| Item 5                | Other Information                                                                           | 31     |
| Item 6                | Exhibits and  Reports on Form 8-K                                                           | 31     |
| Signatures            |                                                                                        | 32     |
| Certifications        |                                                                                        | 33-36  |
|                       |                                                                                             |        |  |  |

 

2

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**PARTI-FINANCIAL INFORMATION**

### Item 1.                          FINANCIAL STATEMENTS

NORTHERNCALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATEDBALANCE SHEETS

 
| ** **                                                                                                          | ** ** | **JUNE 30** | ** ** | **DECEMBER 31** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|----------------------|------------|
| **(in thousands except share data)**                                                            | ** ** | **2007**         | ** ** | **2006**             | ** ** |
| ** **                                                                                                          | ** ** | **(Unaudited)**  | ** ** | **(Audited)**        | ** ** |
| ASSETS:                                                                                                             |       |             |       |                 |       |
| Cash and Due From Banks                                                                                             |       | $                | 13,461     |                 | $          | 4,979 |   |
| Federal Funds Sold                                                                                                  |       | 10,565           |       | 17,455               |       |
| Total Cash and  Cash Equivalents                                                                                    |       | 24,026           |       | 22,434               |       |
| Trading Assets                                                                                                      |       | 1,708            |       | 1,762                |       |
| Time Deposits with  other Financial Institutions                                                                    |       | 1,000            |       | 1,000                |       |
| Investment Securities,  available for sale (Note 5)                                                                 |       | 27,435           |       | 15,286               |       |
| Investment Securities,  held to maturity at cost (fair value approximates $7,142 in 2007; $7,072 in  2006) (Note 5) |       | 7,006            |       | 7,012                |       |
| Other Investments (Note  6)                                                                                         |       | 2,203            |       | 1,967                |       |
| Loans Held for Sale, at  lower of cost or market                                                                    |       | 996              |       | 1,182                |       |
| Loans, net of allowance  for loan losses of $1,439 in 2007; $1,409 in 2006 (Note 7)                                 |       | 140,789          |       | 128,868              |       |
| Bank Premises and  Equipment, Net                                                                                   |       | 4,888            |       | 4,613                |       |
| Cash Surrender Value of  Life Insurance                                                                             |       | 3,733            |       | 3,671                |       |
| Interest Receivable and  Other Assets                                                                               |       | 2,436            |       | 2,775                |       |
| Total Assets                                                                                                        |       | $                | 216,220    |                 | $          | 190,570 |   |
|                                                                                                                |       |             |       |                 |       |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY:                                                                         |       |             |       |                 |       |
| Non interest bearing  demand                                                                                        |       | $                | 26,437     |                 | $          | 30,079 |   |
| Interest-bearing demand                                                                                             |       | 16,112           |       | 17,262               |       |
| Savings                                                                                                             |       | 4,779            |       | 5,326                |       |
| Time less than $100,000                                                                                             |       | 52,347           |       | 43,135               |       |
| Time in denominations  of $100,000 or more                                                                          |       | 49,700           |       | 35,826               |       |
| Total Deposits                                                                                                      |       | 149,375          |       | 131,628              |       |
|                                                                                                                |       |             |       |                 |       |
| Federal Home Loan Bank  Borrowed Funds                                                                              |       | 39,750           |       | 34,750               |       |
| Junior Subordinated  Debt Securities                                                                                |       | 8,248            |       | 8,248                |       |
| Interest Payable and  Other Liabilities                                                                             |       | 5,182            |       | 3,542                |       |
| Total  Liabilities                                                                                                  |       | 202,555          |       | 178,168              |       |
|                                                                                                                |       |             |       |                 |       |
| Shareholders’ Equity:                                                                                          |       |             |       |                 |       |
| Common Stock -  No Par Value, authorized 2,500,000 Outstanding:1,792,238 in 2007 and  1,721,715 in 2006             |       | 5,328            |       | 5,060                |       |
| Retained  Earnings                                                                                                  |       | 8,484            |       | 7,363                |       |
| Accumulated Other  Comprehensive Loss (Note 8)                                                                      |       | (147             | )          | (21                  | )          |
| Total  Shareholders’ Equity                                                                                    |       | 13,665           |       | 12,402               |       |
| Total Liabilities &  Shareholders’ Equity                                                                  |       | $                | 216,220    |                 | $          | 190,570 |   |

 

3

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NORTHERNCALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATEDSTATEMENTS OF OPERATIONS (UNAUDITED)
| ** **                                                              | ** ** | **THREE-MONTH  PERIOD ENDING** | ** ** | **SIX-MONTH  PERIOD ENDING** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| ** **                                                              | ** ** | **June 30**                    | ** ** | **June 30**                  | ** ** |
| **(in thousands except share data)**                | ** ** | **2007**                            | ** ** | **2006**                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| INTEREST INCOME:                                                        |       |                                |       |                              |       |   |   |   |   |
| Loans                                                                   |       | $                                   | 3,443      |                              | $          | 2,866 |   | $ | 6,733 |   | $ | 5,398 |   |
| Time deposits  with other financial institutions                        |       | 14                                  |       | 11                                |       | 28 |   | 22 |   |
| Investment  securities                                                  |       | 435                                 |       | 230                               |       | 835 |   | 455 |   |
| Federal funds  sold                                                     |       | 110                                 |       | 190                               |       | 234 |   | 362 |   |
| Total Interest Income                                                   |       | 4,002                               |       | 3,297                             |       | 7,830 |   | 6,237 |   |
|                                                                    |       |                                |       |                              |       |   |   |   |   |
| INTEREST  EXPENSE:                                                      |       |                                |       |                              |       |   |   |   |   |
| Interest-bearing  transaction accounts                                  |       | 13                                  |       | 16                                |       | 26 |   | 39 |   |
| Savings and time  deposit accounts                                      |       | 655                                 |       | 337                               |       | 1,185 |   | 655 |   |
| Time deposits in  denominations of $100,000 or more                     |       | 525                                 |       | 339                               |       | 997 |   | 640 |   |
| Notes payable  and other                                                |       | 628                                 |       | 511                               |       | 1,253 |   | 1,001 |   |
| Total Interest Expense                                                  |       | 1,821                               |       | 1,203                             |       | 3,461 |   | 2,335 |   |
|                                                                    |       |                                |       |                              |       |   |   |   |   |
| Net Interest Income                                                     |       | 2,181                               |       | 2,094                             |       | 4,369 |   | 3,902 |   |
| Provision for  loan losses                                              |       | 275                                 |       | 95                                |       | 275 |   | 95 |   |
| Net interest income, after provision for loan losses                    |       | 1,906                               |       | 1,999                             |       | 4,094 |   | 3,807 |   |
|                                                                    |       |                                |       |                              |       |   |   |   |   |
| NON-INTEREST  INCOME:                                                   |       |                                |       |                              |       |   |   |   |   |
| Service charges  on deposit accounts                                    |       | 142                                 |       | 143                               |       | 307 |   | 282 |   |
| Income from  sales and servicing of Small Business Administration Loans |       | 173                                 |       | 148                               |       | 355 |   | 436 |   |
| Sale of Pacific  Coast Bankers’ Bank Stock                         |       | —                              |       | —                            |       | — |   | 1,313 |   |
| Other income                                                            |       | 714                                 |       | 1,130                             |       | 1,692 |   | 2,114 |   |
| Total non-interest income                                               |       | 1,029                               |       | 1,421                             |       | 2,354 |   | 4,145 |   |
|                                                                    |       |                                |       |                              |       |   |   |   |   |
| NON-INTEREST  EXPENSE:                                                  |       |                                |       |                              |       |   |   |   |   |
| Salaries and  Employee Benefits                                         |       | 983                                 |       | 898                               |       | 2,060 |   | 1,834 |   |
| Stock Based  Compensation Expense                                       |       | —                              |       | —                            |       | — |   | 18 |   |
| Occupancy and  Equipment Expense                                        |       | 221                                 |       | 200                               |       | 427 |   | 381 |   |
| Professional  Fees                                                      |       | 50                                  |       | 43                                |       | 88 |   | 83 |   |
| Data Processing                                                         |       | 90                                  |       | 79                                |       | 178 |   | 166 |   |
| Other general  and administrative                                       |       | 916                                 |       | 871                               |       | 1,709 |   | 1,717 |   |
| Total non-interest expenses                                             |       | 2,260                               |       | 2,091                             |       | 4,462 |   | 4,199 |   |
|                                                                    |       |                                |       |                              |       |   |   |   |   |
| Income before  tax provision                                            |       | 675                                 |       | 1,329                             |       | 1,986 |   | 3,753 |   |
| Income tax  provision                                                   |       | 364                                 |       | 648                               |       | 865 |   | 1,650 |   |
| Net income                                                              |       | $                                   | 311        |                              | $          | 681 |   | $ | 1,121 |   | $ | 2,103 |   |
|                                                                    |       |                                |       |                              |       |   |   |   |   |
| Earnings per  common share                                              |       |                                |       |                              |       |   |   |   |   |
| Basic                                                                   |       | $                                   | 0.179      |                              | $          | 0.418 |   | $ | 0.644 |   | $ | 1.289 |   |
| Diluted                                                                 |       | $                                   | 0.173      |                              | $          | 0.377 |   | $ | 0.622 |   | $ | 1.163 |   |

 

4

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**NORTHERNCALIFORNIA BANCORP, INC. AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF CHANGES INSHAREHOLDERS’ EQUITY**
| ** **                                                                       | ** ** | ** **         | ** ** | ** ** | ** ** | ** **   | ** ** | **Accumulated**         | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------|------------|------------|------------|--------------|------------|-------------------------|------------|------------|------------|
| ** **                                                                       | ** ** | ** **         | ** ** | ** ** | ** ** | ** **   | ** ** | **Other Compre-**  | ** ** | ** ** | ** ** |
| ** **                                                                       | ** ** | **Number of** | ** ** | **Common** | ** ** | **Retained** | ** ** | **hensive Income** | ** ** | ** ** | ** ** |
| **(in thousands except share data)**                         | ** ** | **Shares**         | ** ** | **Stock**  | ** ** | **Earnings** | ** ** | **(Loss)**              | ** ** | **Total**  | ** ** |
| ** **                                                                       | ** ** | ** **         | ** ** | ** ** | ** ** | ** **   | ** ** | ** **              | ** ** | ** ** | ** ** |
| Balance at  December 31, 2005                                                    |       | 1,631,439          |       | $          | 4,772      |         | $          | 4,129                   |       | $          | 30         |   | $ | 8,931 |   |
|                                                                             |       |               |       |       |       |         |       |                    |       |       |       |
| Comprehensive income:                                                            |       |               |       |       |       |         |       |                    |       |       |       |
| Net income                                                                       |       | —             |       | —     |       | 3,837        |       | —                  |       | 3,837      |       |
| Change in net unrealized gain on securities and  other assets net of tax effects |       | —             |       | —     |       | —       |       | (51                     | )          | (51        | )          |
| Total comprehensive income                                                       |       |               |       |       |       |         |       |                    |       | 3,786      |       |
|                                                                             |       |               |       |       |       |         |       |                    |       |       |       |
| $0.35 per share dividend                                                         |       | —             |       | —     |       | (603         | )          | —                  |       | (603       | )          |
| Stock based compensation                                                         |       | —             |       | 18         |       | —       |       | —                  |       | 18         |       |
| Exercise of stock options                                                        |       | 90,276             |       | 270        |       | —       |       | —                  |       | 270        |       |
|                                                                             |       |               |       |       |       |         |       |                    |       |       |       |
| Balance at  December 31, 2006 audited)                                           |       | 1,721,715          |       | 5,060      |       | 7,363        |       | (21                     | )          | 12,402     |       |
|                                                                             |       |               |       |       |       |         |       |                    |       |       |       |
| Comprehensive income:                                                            |       |               |       |       |       |         |       |                    |       |       |       |
| Net income                                                                       |       | —             |       | —     |       | 1,121        |       | —                  |       | 1,121      |       |
| Change in net unrealized loss on securities and  other assets net of tax effects |       | —             |       | —     |       | —       |       | (126                    | )          | (126       | )          |
| Total comprehensive income                                                       |       |               |       |       |       |         |       |                    |       | 995        |       |
|                                                                             |       |               |       |       |       |         |       |                    |       |       |       |
| Exercise of  stock options                                                       |       | 70,523             |       | 268        |       | —       |       | —                  |       | 268        |       |
|                                                                             |       |               |       |       |       |         |       |                    |       |       |       |
| Balance at June 30,  2007 (unaudited)                                            |       | 1,792,238          |       | $          | 5,328      |         | $          | 8,484                   |       | $          | (147       | ) | $ | 13,665 |   |

 

5

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NORTHERNCALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATEDSTATEMENTS OF CASH FLOWS (UNAUDITED)

SIX MONTHS ENDEDJUNE 30, 2007 AND 2006
| ** **                                                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **CASH  FLOWS FROM OPERATING ACTIVITIES**                                                 |       |     |       |     |       |
| Net income                                                                                |       | $        | 1,121      |     | $          | 2,103 |   |
| Adjustments to reconcile net income to net cash provided  (used) by operating activities: |       |     |       |     |       |
| Depreciation and amortization expense                                                     |       | 141      |       | 138      |       |
| Realized gain on sales of available-for-sale  securities, net                             |       | —   |       | (1,313   | )          |
| Amortization of deferred loan (fees) costs                                                |       | 159      |       | 159      |       |
| Accretion of discounts and amortization of premiums on  investment securities, net        |       | (10      | )          | —   |       |
| Gain on sale of equipment                                                                 |       | (1       | )          | —   |       |
| Provision for loan losses                                                                 |       | 275      |       | 95       |       |
| Stock based compensation                                                                  |       | —   |       | 18       |       |
| Increase in trading assets                                                                |       | 54       |       | (377     | )          |
| Increase in interest receivable                                                           |       | (161     | )          | (95      | )          |
| (Increase) decrease in other assets                                                       |       | 560      |       | (1,089   | )          |
| Increase in deferred tax asset                                                            |       | (139     | )          | (94      | )          |
| Increase in interest payable                                                              |       | 235      |       | 139      |       |
| Increase in other liabilities                                                             |       | 1,405    |       | 27       |       |
| Net cash provided by (used by) operating activities                                       |       | 3,639    |       | (289     | )          |
|                                                                                      |       |     |       |     |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES**                                                 |       |     |       |     |       |
| Proceeds from maturity/sale of investment securities                                      |       | 9,904    |       | 1,874    |       |
| Purchase of investments                                                                   |       | (22,382  | )          | (3,237   | )          |
| Net increase in loans                                                                     |       | (33,809  | )          | (34,605  | )          |
| Loan purchases                                                                            |       | (1,462   | )          | (7,000   | )          |
| Loan sales                                                                                |       | 22,914   |       | 27,652   |       |
| Decrease in loans held for sale                                                           |       | 186      |       | 2,470    |       |
| Proceeds from sale of equipment                                                           |       | 1        |       | 18       |       |
| Additions to bank premises and equipment                                                  |       | (414     | )          | (246     | )          |
|                                                                                      |       |     |       |     |       |
| Net cash used by investing activities                                                     |       | (25,062  | )          | (13,074  | )          |
|                                                                                      |       |     |       |     |       |
| **CASH  FLOWS FROM FINANCING ACTIVITIES**                                                 |       |     |       |     |       |
| Net increase in deposits                                                                  |       | 17,747   |       | 4,578    |       |
| Proceeds from borrowings                                                                  |       | 5,000    |       | 4,000    |       |
| Repayments of borrowings                                                                  |       | —   |       | (2,000   | )          |
| Proceeds from exercise of stock options                                                   |       | 268      |       | 7        |       |
| Net cash provided by financing activities                                                 |       | 23,015   |       | 6,585    |       |
|                                                                                      |       |     |       |     |       |
| Net increase (decrease) in cash and cash equivalents                                      |       | 1,592    |       | (6,778   | )          |
|                                                                                      |       |     |       |     |       |
| **CASH  AND CASH EQUIVALENTS, BEGINNING**                                                 |       | 22,434   |       | 24,131   |       |
|                                                                                      |       |     |       |     |       |
| **CASH AND CASH EQUIVALENTS,  ENDING**                                                    |       | $        | 24,026     |     | $          | 17,353 |   |

 

See Note 9 for supplemental disclosures

6

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**SUMMARY OF ACCOUNTING POLICIES**

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

The interim condensed financial statements of Northern CaliforniaBancorp, Inc. and subsidiary (“Corporation”) are unaudited and reflect alladjustments (consisting only of normal recurring adjustments), which are, inthe opinion of management, necessary for a fair presentation, in all materialrespects, of the financial position and operating results of the Corporationfor the interim periods.  The results of operations for the sixmonths ended June 30, 2007 are not necessarily indicative of the results to beexpected for the entire fiscal year ending December 31, 2007.  Theyear-end balance sheet data at December 31, 2006 was derived from theaudited financial statements.

This financial information should be read in conjunction with theaudited financial statements and notes thereto included in the Corporation’sForm 10-KSB for the fiscal year ended December 31, 2006.

(NOTE 2) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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

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

This statement establishes a fair value hierarchy that distinguishesbetween valuations obtained from sources independent of the entity and thosefrom the entity’s own unobservable inputs that are not corroborated byobservable market data. SFAS 157 expands disclosures about the use of fairvalue to measure assets and liabilities in interim and annual periodssubsequent to initial recognition.  Thedisclosures focus on the inputs used to measure fair value and for recurringfair value measurements using significant unobservable inputs, the effect ofthe measurements on earnings or changes in net assets for the period. Thisstatement encourages an entity to combine the fair value information disclosedunder this statement with the fair value information disclosed under otheraccounting pronouncements, including SFAS 107, “Disclosures about Fair Value ofFinancial Instruments”, where practicable. The Bank is currently assessing theimpact of this guidance on its financial statements.

In February 2007, the FASBissued SFAS No. 159, “The Fair ValueOption for Financial Assets and Financial Liabilities — including an amendment of FASB StatementNo. 115” which is effective for the Company as of the beginning of thefirst fiscal year that begins after November 15, 2007.  Early adoption is permitted as of the fiscalyear that begins on or after November 15, 2006, provided that the Company alsoelects to apply the provisions of FASB Statement No. 

7

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157, “Fair Value Measurements”.  TheBank is currently evaluating the impact of adopting this Statement on theCompany’s financial statements.

(NOTE 3). STOCK BASED COMPENSATION

The Corporation records compensation expense associated withstock-based awards in accordance with Statement of Financial AccountingStandards (SFAS) No. 123 (revised 2004), *Share-BasedPayment* (SFAS No. 123R) as interpreted by SEC Staff AccountingBulletin No. 107. SFAS No. 123R supersedes APB No. 25, and amends SFAS No. 95 *Statement of Cash Flows*. Generally, theapproach in SFAS No. 123R is similar to the approach described in SFAS No. 123,*Accounting for Stock Based Compensation*(SFASNo. 123).  However, SFAS No. 123R requires all stock-based payments toemployees, including grants of employee stock options, to be recognized in theincome statement based on their fair values at the date of grant.  Thestock-based compensation expense totaled $0 and $17,800 for the six monthsended June 30, 2007 and 2006, respectively.  The Corporation selected touse the modified prospective method of adopting SFAS 123R.  Thus, stockoption expense is recognized only for options that vested after January 1,2006.  Future compensation expense may be greater if additional stockoptions are granted by the Corporation.

Under the Corporation’s Stock Option Plan, the Bank may grant incentivestock options and non-qualified stock options to directors, officers, andemployees of the Corporation and its subsidiary, so long as the Corporationowns a majority of the equity interest of such subsidiary.  IncentiveStock Options are granted at fair value of the common stock on the date ofgrant.  However, an incentive stock option granted to an individual owning10% or more of the Corporation’s stock after such grant must have an exerciseprice of at least 110%****of suchfair market value and an exercise period of not more than five years. Non-qualified stock options may be granted at prices not lower than 85% of thefair market value of the common stock on the date of grant.  The Board ofDirectors is authorized to determine when options become exercisable within aperiod not exceeding 10 years from the date of grant.

**There were no options granted during the six months endedJune 30, 2007 or 2006.**

(NOTE 4). EARNINGS PER SHARE

**Basic earnings per share represents income available tocommon stockholders divided by the weighted-average number of common sharesoutstanding during the period.  Dilutedearnings per share reflects additional common shares that would have beenoutstanding, if potential dilutive common shares had been issued, as well asany adjustment to income that would result from the assumed issuance.  Potential common shares that may be issued bythe Bank relate to outstanding stock options and warrants and are determinedusing the treasury stock method.**

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

8

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| ** **                                                         | ** ** | **Earnings per share calculation**                   | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **For the six months ended June 30,** | ** ** |
| ** **                                                         | ** ** | **2007**                                                            | ** ** | **2006** | ** ** |
| ** **                                                         | ** ** | ** **                                                          | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                                                         | ** ** | **Net**                                                             | ** ** | **Average** | ** ** | **Per Share** | ** ** | **Net** | ** ** | **Average** | ** ** | **Per Share** | ** ** |
| ** **                                                         | ** ** | **Income**                                                          | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Basic earnings  per share                                          |       | $                                                                   | 1,121      |   | 1,739,254 |   | $ | 0.644 |   | $ | 2,103 |   | 1,631,766 |   | $ | 1.289 |   |
|                                                               |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Effect of  dilutive shares assumed exercise of outstanding options |       | —                                                              |       | 61,794 |   | (0.022 | ) | — |   | 176,119 |   | (0.126 | ) |
|                                                               |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Diluted earnings per  share                                        |       | $                                                                   | 1,121      |   | 1,801,048 |   | $ | 0.622 |   | $ | 2,103 |   | 1,807,885 |   | $ | 1.163 |   |

 
|                                             | ** ** | **JUNE 30** | ** ** | **DECEMBER 31** | ** ** |
|---------------------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                                  | ** ** | **2007**         | ** ** | **2006**             | ** ** |
|                                        |       |             |       |                 |       |
| (NOTE 5)  INVESTMENT SECURITIES:            |       |             |       |                 |       |
| Available for  sale:                        |       |             |       |                 |       |
| Government  National Mortgage Association   |       | $                | 474        |                 | $          | 626 |   |
| U.S. government  Agencies                   |       | 26,961           |       | 14,660               |       |
|                                        |       | $                | 27,435     |                 | $          | 15,286 |   |
|                                        |       |             |       |                 |       |
| Held to  maturity:                          |       |             |       |                 |       |
| State/Local  Agency                         |       | $                | 7,006      |                 | $          | 7,012 |   |
|                                        |       |             |       |                 |       |
| (NOTE 6) OTHER  INVESTMENTS                 |       |             |       |                 |       |
| AT Services LLC                             |       | $                | 20         |                 | $          | 20 |   |
| Federal Home  Loan Bank stock, restricted   |       | 1,869            |       | 1,634                |       |
| Independent  Bankers Financial Corporation  |       | 51               |       | 50                   |       |
| MasterCard Inc  Class “B” Stock   |       | 5                |       | 5                    |       |
| Metrocities  Mortgage, LLC                  |       | 10               |       | 10                   |       |
| Northern  California Bancorp, Inc. Trust I  |       | 93               |       | 93                   |       |
| Northern  California Bancorp, Inc. Trust II |       | 155              |       | 155                  |       |
|                                        |       | $                | 2,203      |                 | $          | 1,967 |   |

 

9

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(NOTE 7) LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES:

 
| Commercial and Industrial              |   | $       | 26,337  |    | $      | 26,361  |   |
|----------------------------------------|--------|---------|---------|---------|--------|---------|--------|
| Construction                           |   | 21,826  |    | 17,326  |   |
| Real Estate -  Mortgage                |   | 93,581  |    | 86,207  |   |
| Installment                            |   | 734     |    | 695     |   |
| Government  Guaranteed Loans Purchased |   | 36      |    | 39      |   |
|                                   |   | 142,514 |    | 130,628 |   |
| Allowance for  loan losses             |   | (1,439  | )       | (1,409  | )      |
| Deferred  origination fees, net        |   | (286    | )       | (351    | )      |
| Net Loans                              |   | $       | 140,789 |    | $      | 128,868 |   |
|                                   |   |    |    |    |   |
| Balance at  Beginning of Period        |   | $       | 1,409   |    | $      | 1,101   |   |
| Recoveries                             |   | 1       |    | 7       |   |
| Provision for  Possible Loan Losses    |   | 275     |    | 410     |   |
| Loans Charged  Off                     |   | (246    | )       | (109    | )      |
| Balance at End of  Period              |   | $       | 1,439   |    | $      | 1,409   |   |

 

 (NOTE 8) COMPREHENSIVE INCOME (LOSS):

The components of other comprehensive income and related tax effects forthe six month period ended June 30, 2007 and the year ended December 31, 2006are as follows:
|                                                                                       | ** ** | **June**        | ** ** | **December**  | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------|------------|---------------|------------|
| ** **                                                                            | ** ** | **2007**        | ** ** | **2006**      | ** ** |
| ** **                                                                            | ** ** | **(Unaudited)** | ** ** | **(Audited)** | ** ** |
| Unrealized  holding losses on available - for - sale securities and other assets, net |       | $               | (228       | )             | $          | (93 | ) |
| Tax effect                                                                            |       | 102             |       | 42            |       |
|                                                                                  |       |            |       |          |       |
| Net-of-tax amount                                                                     |       | $               | (126       | )             | $          | (51 | ) |

 

The components of accumulatedother comprehensive income and related tax effects are as follows:
|                                                                      | ** ** | **2007**        | ** ** | **2006**      | ** ** |
|----------------------------------------------------------------------|------------|-----------------|------------|---------------|------------|
| ** **                                                           | ** ** | **(Unaudited)** | ** ** | **(Audited)** | ** ** |
| Unrealized  holding losses on available – for - sale securities |       | $               | (293       | )             | $          | (79 | ) |
| Unrealized  holding gains on available for                           |       |            |       |          |       |
| sale strip  receivable                                               |       | 27              |       | 41            |       |
| Tax effect                                                           |       | 119             |       | 17            |       |
|                                                                 |       |            |       |          |       |
| Net-of-tax amount                                                    |       | $               | (147       | )             | $          | (21 | ) |

 

10

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(NOTE9) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 
|                                                            | ** ** | **JUNE 30** | ** ** |
|------------------------------------------------------------|------------|------------------|------------|
| **Payments during the period ending:** | ** ** | **2007**         | ** ** | **2006** | ** ** |
| Interest                                                   |       | $                | 3,200      |   | $ | 2,196 |   |
| Income Taxes                                               |       | $                | 582        |   | $ | 1,668 |   |

 

**ITEM2:**         MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

**StatementsRegarding Forward-Looking Information**

**            **Except for historicalinformation contained herein, the matters discussed or incorporated byreference in this report contain forward-looking statements within the meaningof Section 27A of the Securities Act of 1933, as amended (the “Securities Act”),and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”),that involve substantial risks and uncertainties.  When used in thisreport, or in the documents incorporated by reference herein, the words “anticipate,”“believe,” “estimate,” “may,” “intend,” “expect,” and similar expressionsidentify certain of such forward-looking statements.  Actual results ofMonterey County Bank could differ materially from such forward-lookingstatements contained herein.  Factors that could cause future results tovary from current expectations include, but are not limited to, the following:changes in economic conditions (both generally and more specifically in themarkets in which the Bank operates); changes in interest rates, deposit flows, loandemand, real estate values and competition; changes in accounting principles,policies or guidelines and in government legislation and regulation (whichchange from time to time and over which the Bank has no control); other factorsaffecting the Bank’s operations, markets, products and services; and otherrisks detailed in this Form 10-QSB and in the Bank’s other reports filed withthe Federal Deposit Insurance Corporation and pursuant to the rules andregulations of the Securities and Exchange Commission.  Readers arecautioned not to place undue reliance on these forward-looking statements,which reflect management’s analysis only as of the date hereof.  TheCorporation undertakes no obligation to publicly revise these forward-lookingstatements to reflect events or circumstances that arise after the datethereof.

**CRITICALACCOUNTING POLICIES**

The preparation of financialstatements in accordance with accounting principles generally accepted in theUnited States of America requires management to make a number of judgments,estimates and assumptions that affect the reported amount of assets,liabilities, income and expenses in the Bank’s financial statements andaccompanying notes.  Management believesthat the judgments, estimates and assumptions used in preparation of the Bank’sfinancial statements are appropriate given the factual circumstances as of June30, 2007.

Variouselements of the Bank’s accounting policies, by their nature, are inherentlysubject to estimation techniques, valuation assumptions and other subjectiveassessments.  Critical accountingpolicies are those that involve the most complex and subjective decisions andassessments and have the greatest potential impact on the Bank’s results ofoperation.  In particular, management hasidentified one accounting policy that, due to judgments, estimates 

11

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and assumptions inherent inthis policy, and the sensitivity of the Bank’s financial statements to thosejudgments, estimates and assumptions, is critical to an understanding of theBank’s financial statements.  This policyrelates to the methodology that determines the Bank’s allowance for loanlosses.  Management has discussed thedevelopment and selection of this critical accounting policy with the Bank’sAudit Committee of the Board of Directors. Although Management believes the level of the allowance at June 30, 2007is adequate to absorb losses inherent in the loan portfolio, a decline in theregional economy may result in increasing losses that cannot reasonably bepredicted at this time.  For furtherinformation regarding the allowance for loan losses see “Provision andAllowance for Loan Losses” included elsewhere herein.

**OVERVIEW**

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

For the six monthsended June 30, 2007 net income was $1,121,000, compared to $2,103,000 for thesame period in 2006.  For the six monthsended June 30, 2007 net interest income after provision for loan lossesincreased $287,000, total non-interest income decreased $1,791,000, whilenon-interest expense increased $263,000 and income tax provision decreased $785,000.  The decrease in non-interest income wasattributable primarily to the recording of a $1,313,000 gain on the sale of aninvestment during the first quarter of 2006, decreased credit card programrevenues and a trading asset mark to market loss.

12

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The followingtable sets forth certain selected financial ratios of the Corporation at andfor the six months ended, June 30, 2007 and 2006.
| ** **                                           | ** ** | **The six months**                                                   | ** ** | **The six months**           | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                           | ** ** | **Ended June 30, 2007**                                         | ** ** | **Ended June 30, 2006** | ** ** |
| ** **                                           | ** ** | **(Dollars in thousands except per share data)** | ** ** |
| Summary of Operating  Results:                       |       |                                                                           |       |                                   |       |
|                                                 |       |                                                                           |       |                                   |       |
| Total interest income                                |       | $                                                                              | 7,830      |                                   | $          | 6,237 |   |
| Total interest expense                               |       | 3,461                                                                          |       | 2,335                                  |       |
| Net interest income                                  |       | 4,369                                                                          |       | 3,902                                  |       |
|                                                 |       |                                                                           |       |                                   |       |
| Provision for possible loan  losses                  |       | 275                                                                            |       | 95                                     |       |
| Net interest income  after provision for loan losses |       | 4,094                                                                          |       | 3,807                                  |       |
|                                                 |       |                                                                           |       |                                   |       |
| Total non-interest  income                           |       | 2,354                                                                          |       | 4,145                                  |       |
| Total non-interest  expenses                         |       | 4,462                                                                          |       | 4,199                                  |       |
|                                                 |       |                                                                           |       |                                   |       |
| Income before taxes                                  |       | 1,986                                                                          |       | 3,753                                  |       |
| Provision for income  taxes                          |       | 865                                                                            |       | 1,650                                  |       |
|                                                 |       |                                                                           |       |                                   |       |
| Net income                                           |       | $                                                                              | 1,121      |                                   | $          | 2,103 |   |
|                                                 |       |                                                                           |       |                                   |       |
| Per Common Share Data:                               |       |                                                                           |       |                                   |       |
|                                                 |       |                                                                           |       |                                   |       |
| Net income - Primary  (1)                            |       | $                                                                              | 0.644      |                                   | $          | 1.289 |   |
| Net income - Diluted  (2)                            |       | 0.622                                                                          |       | 1.163                                  |       |
| Book value, end of  period                           |       | 8.36                                                                           |       | 6.69                                   |       |
| Avg shares outstanding  (3)                          |       | 1,739,254                                                                      |       | 1,631,766                              |       |
|                                                 |       |                                                                           |       |                                   |       |
| Balance Sheet Data:                                  |       |                                                                           |       |                                   |       |
|                                                 |       |                                                                           |       |                                   |       |
| Total loans, net of unearned  income (4)             |       | $                                                                              | 141,785    |                                   | $          | 118,529 |   |
| Total assets                                         |       | 216,220                                                                        |       | 171,446                                |       |
| Total deposits                                       |       | 149,375                                                                        |       | 122,699                                |       |
| Stockholders’ equity                            |       | 13,665                                                                         |       | 10,938                                 |       |

 

13

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| ** **                                                     | ** ** | **The six months**           | ** ** | **The six months**           | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                                                     | ** ** | **Ended June 30, 2007** | ** ** | **Ended June 30, 2006** | ** ** |
| Selected  Financial Ratios:                                    |       |                                   |       |                                   |       |
|                                                           |       |                                   |       |                                   |       |
| Return on  average assets (5) (6)                              |       | 1.16                                   | %          | 2.58                                   | %          |
| Return on  average stockholders’ equity (5) (6)           |       | 16.96                                  | %          | 41.14                                  | %          |
| Net interest  spread                                           |       | 4.28                                   | %          | 4.55                                   | %          |
| Net yield on  interest earning assets (5)                      |       | 4.97                                   | %          | 5.25                                   | %          |
| Avg shareholders’  equity to average assets (5)           |       | 6.83                                   | %          | 6.27                                   | %          |
| Risked-Based  capital ratios                                   |       |                                   |       |                                   |       |
| Tier 1                                                         |       | 10.29                                  | %          | 9.84                                   | %          |
| Total                                                          |       | 14.04                                  | %          | 14.65                                  | %          |
| Total loans to  total deposits at end of period (4)            |       | 94.92                                  | %          | 96.60                                  | %          |
| Allowance for  loan losses to total loans at end of period (4) |       | 1.00                                   | %          | 1.00                                   | %          |
| Nonperforming  loans to total loans at end of period (4)       |       | 0.11                                   | %          | 0.02                                   | %          |
| Net charge-offs to average  loans (4)                          |       | 0.18                                   | %          | 0.00                                   | %          |

 

----

(1)          Basic earnings per shareamounts were computed on the basis of the weighted average number of shares ofcommon stock outstanding during the year. The weighted average number of common shares used for this computationwas 1,739,254 and 1,631,766 for June 30, 2007 and 2006, respectively.

(2)          Diluted earnings pershare amounts were computed on the basis of the weighted average number ofshares of common stock and common stock equivalents outstanding during theyear.  Common stock equivalents includedirector/employee stock options. The weighted average number of shares used forthis computation was 1,801,048 and 1,807,885 for June 30, 2007 and 2006,respectively.

(3)   Weighted average common shares.

(4)   Includesloans being held for sale.

(5)   Averages are of daily balances.

(6)   June 30,2007 calculated on an annualized basis.

**NETINTEREST INCOME**

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

Netinterest income for the six months ended June 30, 2007 was $4,369,000 comparedto $3,902,000 for the same period in 2006. The increase of $467,000 resulted from total interest income increasing$1,593,000, while total interest expense increased $1,126,000.  Average 

14

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interestearning assets increased $26,062,000 (17.27%), while the average rate earnedincreased 54 basis points.  Averageinterest bearing liabilities increased $27,237,000 (22.13%), while the averagerate paid increased 81 basis points.

Thefollowing tables show the components of the Bank’s net interest income, settingforth, for each of the three months ended and six months ended June 30, 2007and 2006, (i) average assets, liabilities and investments, (ii) interest incomeearned on interest-earning assets and interest expense paid on interest-bearingliabilities, (iii) average yields earned on interest-earning assets and averagerates paid on interest-bearing liabilities, (iv) the net interest spread (i.e.,the average yield earned on interest-earning assets less the average rate paidon interest-bearing liabilities) and (v) the net interest yield on averageinterest-earning assets (i.e., net interest income divided by averageinterest-earning assets).  Yields arecomputed on a tax-equivalent basis, resulting in adjustments to interest earnedon municipal bonds of $37,000 and $37,000 for the three months ended June 30,2007 and 2006, respectively and $70,000 and $73,000 for the six months endedJune 30, 2007 and 2006, respectively. Non-accrual loans and overdrafts are included in average loanbalances.  Average loans are presentednet of unearned income.

15

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| ** **                                                  | ** ** | **Three Months Ended June 30,** | ** ** | **Three Months Ended June 30,** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                  | ** ** | **2007**                                            | ** ** | **2006**                                            | ** ** |
| ** **                                                  | ** ** | **Average**                                         | ** ** | ** **                                          | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| **(dollars in thousands)**                        | ** ** | **Balance**                                         | ** ** | **Interest**                                        | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| Assets:                                                     |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |
| Loans                                                       |       | $                                                   | 139,026    |                                                | $          | 3,443 |   | 9.91 | % | $ | 115,760 |   | $ | 2,867 |   | 9.91 | % |
| Time deposits -  in other banks                             |       | 1,000                                               |       | 14                                                  |       | 5.73 | % | 1,000 |   | 11 |   | 4.40 | % |
| Invest  securities - taxable                                |       | 26,923                                              |       | 360                                                 |       | 5.34 | % | 12,855 |   | 145 |   | 4.51 | % |
| Invest  securities - nontaxable                             |       | 7,007                                               |       | 112                                                 |       | 6.39 | % | 7,020 |   | 118 |   | 6.72 | % |
| Federal funds  sold                                         |       | 8,698                                               |       | 110                                                 |       | 5.07 | % | 15,509 |   | 190 |   | 4.90 | % |
| Total  interest-earning assets                              |       | 182,654                                             |       | 4,039                                               |       | 8.85 | % | 152,144 |   | 3,331 |   | 8.76 | % |
|                                                        |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |
| Allowance for  credit losses                                |       | (1,306                                              | )          |                                                |       |   |   | (1,103 | ) |   |   |   |   |
| Non-interest  bearing assets:                               |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |
| Cash and due  from banks                                    |       | 6,566                                               |       |                                                |       |   |   | 5,405 |   |   |   |   |   |
| Premises and  equipment                                     |       | 4,886                                               |       |                                                |       |   |   | 4,382 |   |   |   |   |   |
| Accrued interest  receivable                                |       | 1,061                                               |       |                                                |       |   |   | 734 |   |   |   |   |   |
| Other assets                                                |       | 5,172                                               |       |                                                |       |   |   | 6,523 |   |   |   |   |   |
| Total average  assets                                       |       | $                                                   | 199,033    |                                                |       |   |   |   | $ | 168,085 |   |   |   |   |   |
|                                                        |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |
| Liabilities and  Shareholders’ Equity:                 |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                              |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |
| Interest-bearing  demand                                    |       | $                                                   | 14,740     |                                                | $          | 9 |   | 0.25 | % | $ | 13,214 |   | $ | 9 |   | 0.27 | % |
| Money market  savings                                       |       | 1,870                                               |       | 3                                                   |       | 0.73 | % | 4,101 |   | 7 |   | 0.68 | % |
| Savings deposits                                            |       | 4,388                                               |       | 11                                                  |       | 1.01 | % | 7,793 |   | 20 |   | 1.03 | % |
| Time deposits  >$100M                                    |       | 40,817                                              |       | 525                                                 |       | 5.14 | % | 30,429 |   | 338 |   | 4.44 | % |
| Time deposits  <$100M                                    |       | 49,898                                              |       | 644                                                 |       | 5.16 | % | 32,167 |   | 318 |   | 3.95 | % |
| Other Borrowing                                             |       | 43,108                                              |       | 634                                                 |       | 5.89 | % | 34,998 |   | 511 |   | 5.84 | % |
| Total  interest-bearing liabilities                         |       | 154,821                                             |       | 1,827                                               |       | 4.72 | % | 117,148 |   | 1,203 |   | 3.92 | % |
|                                                        |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |
| Non-interest  bearing liabilities:                          |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |
| Noninterest-bearing  checking                               |       | 26,274                                              |       |                                                |       |   |   | 31,685 |   |   |   |   |   |
| Accrued interest  payable                                   |       | 1,501                                               |       |                                                |       |   |   | 786 |   |   |   |   |   |
| Other  liabilities                                          |       | 2,857                                               |       |                                                |       |   |   | 2,170 |   |   |   |   |   |
| Total Liabilities                                           |       | 185,450                                             |       |                                                |       |   |   | 157,343 |   |   |   |   |   |
| Total  shareholders equity                                  |       | 13,583                                              |       |                                                |       |   |   | 10,742 |   |   |   |   |   |
| Total average  liabilities and shareholders equity          |       | $                                                   | 199,033    |                                                |       |   |   |   | $ | 168,085 |   |   |   |   |   |
| Net interest  income                                        |       |                                                |       | $                                                   | 2,213      |   |   |   |   |   | $ | 2,128 |   |   |   |
| Interest income  as a percentage of average earning assets  |       |                                                |       |                                                |       | 8.85 | % |   |   |   |   | 8.76 | % |
| Interest expense  as a percentage of average earning assets |       |                                                |       |                                                |       | 4.00 | % |   |   |   |   | 3.16 | % |
| Net yield on  interest earning assets                       |       |                                                |       |                                                |       | 4.85 | % |   |   |   |   | 5.59 | % |
| Net interest  spread                                        |       |                                                |       |                                                |       | 4.13 | % |   |   |   |   | 4.84 | % |

 

16

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| ** **                                                  | ** ** | **Six Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                  | ** ** | **2007**                                          | ** ** | **2006**                                          | ** ** |
| ** **                                                  | ** ** | ** **                                        | ** ** | **Int**                                           | ** ** | **Avg** | ** ** | ** ** | ** ** | **Int** | ** ** | **Avg** | ** ** |
| ** **                                                  | ** ** | **Avg**                                           | ** ** | **Earn**                                          | ** ** | **%** | ** ** | **Avg** | ** ** | **Earn** | ** ** | **%** | ** ** |
| ** **                                                  | ** ** | **Bal**                                           | ** ** | **Paid**                                          | ** ** | **Rate** | ** ** | **Bal** | ** ** | **Paid** | ** ** | **Rate** | ** ** |
| ** **                                                  | ** ** | ** **                                        | ** ** | ** **                                        | ** ** | ** ** | ** ** | **(Dollars in  thousands)** | ** ** |
| Assets:                                                     |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Loans                                                       |       | $                                                 | 134,895    |                                              | $          | 6,733 |   | 9.98 | % | $ | 112,837 |   | $ | 5,400 |   | 9.57 | % |
| Time deposits -  in other banks                             |       | 1,072                                             |       | 28                                                |       | 5.23 | % | 1,000 |   | 22 |   | 4.38 | % |
| Invest  securities - taxable                                |       | 25,030                                            |       | 638                                               |       | 5.10 | % | 14,316 |   | 279 |   | 3.87 | % |
| Invest  securities - nontaxable                             |       | 7,009                                             |       | 227                                               |       | 6.48 | % | 7,022 |   | 236 |   | 6.73 | % |
| Federal funds  sold                                         |       | 8,943                                             |       | 234                                               |       | 5.23 | % | 15,711 |   | 362 |   | 4.61 | % |
| Total  interest-earning assets                              |       | 176,948                                           |       | 7,860                                             |       | 8.88 | % | 150,885 |   | 6,299 |   | 8.34 | % |
|                                                        |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Allowance for  credit losses                                |       | (1,357                                            | )          |                                              |       |   |   | (1,102 | ) |   |   |   |   |
| Non-interest  bearing assets:                               |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Cash and due  from banks                                    |       | 6,529                                             |       |                                              |       |   |   | 5,984 |   |   |   |   |   |
| Premises and  equipment                                     |       | 4,807                                             |       |                                              |       |   |   | 4,375 |   |   |   |   |   |
| Accrued interest  receivable                                |       | 1,039                                             |       |                                              |       |   |   | 720 |   |   |   |   |   |
| Other assets                                                |       | 5,046                                             |       |                                              |       |   |   | 2,849 |   |   |   |   |   |
| Total average  assets                                       |       | $                                                 | 193,012    |                                              |       |   |   |   | $ | 163,711 |   |   |   |   |   |
|                                                        |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Liabilities and  Shareholders’ Equity:                 |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Interest Bearing  Liabilities:                              |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Interest-bearing  demand                                    |       | $                                                 | 14,588     |                                              | $          | 18 |   | 0.25 | % | $ | 12,868 |   | $ | 23 |   | 0.36 | % |
| Money market  savings                                       |       | 1,935                                             |       | 7                                                 |       | 0.73 | % | 4,275 |   | 16 |   | 0.75 | % |
| Savings deposits                                            |       | 4,555                                             |       | 23                                                |       | 1.00 | % | 7,969 |   | 40 |   | 1.00 | % |
| Time deposits  >$100M                                    |       | 39,279                                            |       | 997                                               |       | 5.08 | % | 30,297 |   | 640 |   | 4.23 | % |
| Time deposits  <$100M                                    |       | 46,929                                            |       | 1,163                                             |       | 4.96 | % | 32,679 |   | 615 |   | 3.76 | % |
| Other Borrowing                                             |       | 43,053                                            |       | 1,252                                             |       | 5.82 | % | 35,015 |   | 1,001 |   | 5.72 | % |
| Total  interest-bearing liabilities                         |       | 150,339                                           |       | 3,461                                             |       | 4.60 | % | 123,101 |   | 2,335 |   | 3.79 | % |
|                                                        |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Non-interest  bearing liabilities:                          |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Noninterest-bearing  checking                               |       | 25,791                                            |       |                                              |       |   |   | 27,930 |   |   |   |   |   |
| Accrued interest  payable                                   |       | 1,442                                             |       |                                              |       |   |   | 733 |   |   |   |   |   |
| Other  liabilities                                          |       | 2,226                                             |       |                                              |       |   |   | 1,688 |   |   |   |   |   |
| Total  Liabilities                                          |       | 179,798                                           |       |                                              |       |   |   | 153,451 |   |   |   |   |   |
| Total shareholders  equity                                  |       | 13,214                                            |       |                                              |       |   |   | 10,260 |   |   |   |   |   |
| Total average  liabilities and shareholders equity          |       | $                                                 | 193,012    |                                              |       |   |   |   | $ | 163,711 |   |   |   |   |   |
| Net interest  income                                        |       |                                              |       | $                                                 | 4,398      |   |   |   |   |   | $ | 3,964 |   |   |   |
| Interest income  as a percentage of average earning assets  |       |                                              |       |                                              |       | 8.88 | % |   |   |   |   | 8.34 | % |
| Interest expense  as a percentage of average earning assets |       |                                              |       |                                              |       | 3.91 | % |   |   |   |   | 3.09 | % |
| Net yield on  interest earning assets                       |       |                                              |       |                                              |       | 4.97 | % |   |   |   |   | 5.25 | % |
| Net interest spread                                         |       |                                              |       |                                              |       | 4.28 | % |   |   |   |   | 4.55 | % |

 

17

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**Rate and Volume Analysis:**

The following tables show the increase or decrease in interest income,interest expense and net interest income, resulting from changes in rates andvolumes, for each of the three months ended and the six months ended June 30,2007 compared with the same periods in 2006.

 
|                                           | ** ** | **Increase (decrease) in the three months ended**  | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                | ** ** | **June 30, 2007 compared with June 30, 2006** | ** ** |
| ** **                                | ** ** | **Volume**                                                                       | ** ** | **Rate** | ** ** | **Total** | ** ** |
| Increase in  interest income:             |       |                                                                             |       |   |   |   |   |
| Loans                                     |       | $                                                                                | 576        |   | $ | — |   | 576 |   |
| Time deposits -  in other banks           |       | —                                                                           |       | 3 |   | 3 |   |
| Invest  securities - taxable              |       | 159                                                                              |       | 56 |   | 215 |   |
| Invest  securities - nontaxable           |       | —                                                                           |       | (6 | ) | (6 | ) |
| Federal funds  sold                       |       | (84                                                                              | )          | 4 |   | (80 | ) |
| Total  interest-earning assets            |       | 651                                                                              |       | 57 |   | 708 |   |
|                                      |       |                                                                             |       |   |   |   |   |
| Increase  (decrease) in interest expense: |       |                                                                             |       |   |   |   |   |
| Interest-bearing  demand                  |       | $                                                                                | 1          |   | $ | (1 | ) | $ | — |   |
| Money market  savings                     |       | (4                                                                               | )          | — |   | (4 | ) |
| Savings deposits                          |       | (9                                                                               | )          | — |   | (9 | ) |
| Time deposits  >$100M                  |       | 115                                                                              |       | 71 |   | 187 |   |
| Time deposits  <$100M                  |       | 175                                                                              |       | 151 |   | 326 |   |
| Other Borrowing                           |       | 118                                                                              |       | 5 |   | 123 |   |
| Total  interest-bearing liabilities       |       | 398                                                                              |       | 226 |   | 624 |   |
| Increase in net  interest income:         |       | $                                                                                | 253        |   | $ | (169 | ) | $ | 84 |   |

 
|                                               | ** ** | **Increase (decrease) in the six months ended**    | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **June 30, 2007 compared with June 30, 2006** | ** ** |
| ** **                                    | ** ** | **Volume**                                                                       | ** ** | **Rate** | ** ** | **Total** | ** ** |
| Increase  (decrease) in interest income:      |       |                                                                             |       |   |   |   |   |
| Loans                                         |       | $                                                                                | 1,056      |   | $ | 277 |   | $ | 1,333 |   |
| Time deposits -  in other banks               |       | 2                                                                                |       | 4 |   | 6 |   |
| Invest  securities - taxable                  |       | 205                                                                              |       | 153 |   | 358 |   |
| Invest  securities - nontaxable               |       | (0                                                                               | )          | (9 | ) | (9 | ) |
| Federal funds  sold                           |       | (156                                                                             | )          | 28 |   | (128 | ) |
|                                          |       |                                                                             |       |   |   |   |   |
| Total  interest-earning assets                |       | 1,106                                                                            |       | 454 |   | 1,560 |   |
|                                          |       |                                                                             |       |   |   |   |   |
| Increase  (decrease) in interest expense:     |       |                                                                             |       |   |   |   |   |
| Interest-bearing  demand                      |       | 3                                                                                |       | (8 | ) | (5 | ) |
| Money market  savings                         |       | (9                                                                               | )          | (0 | ) | (9 | ) |
| Savings deposits                              |       | (17                                                                              | )          | (0 | ) | (17 | ) |
| Time deposits  >$100M                      |       | 190                                                                              |       | 167 |   | 357 |   |
| Time deposits  <$100M                      |       | 268                                                                              |       | 281 |   | 549 |   |
| Other Borrowing                               |       | 230                                                                              |       | 21 |   | 251 |   |
| Total  interest-bearing liabilities           |       | 665                                                                              |       | 461 |   | 1,126 |   |
| Increase (decrease) in  net interest expense: |       | $                                                                                | 441        |   | $ | (7 | ) | $ | 434 |   |

 

18

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**Provisionand Allowance for Loan Losses**

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

The allowance for loan losses reflects management’songoing evaluation of the risks inherent in the loan portfolio both generallyand with respect to specific loans, the state of the economy, and the level ofnet loan losses experienced in the past. Management and the Board of Directors review the results of the StateBanking Department and FDIC examinations, independent accountants’observations, and the Bank’s external credit reviews as additional indicatorsto determine if the amount in the allowance for loan losses is adequate toprotect against estimated future losses

Provisions to the allowance for loan losses are made quarterly ifneeded, in anticipation of future potential loan losses.  The quarterly provision is calculated on apredetermined formula to ensure adequacy as the portfolio grows.  The formula is composed of variouscomponents.  Allowance factors areutilized in estimating the adequacy of the allowance for loan losses.  The allowance is determined by assignedspecific allowances for all loans.  Ashigher allowance levels become necessary as a result of this analysis, theallowance for loan losses will be increased through the provision for loanlosses.

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

 

Although no assurance can be given that actual losseswill not exceed the amount provided for in the allowance, Management believesthat the allowance is adequate to provide for all estimated credit losses inlight of all known relevant factors. At June 30, 2007 and 2006 the Bank’s allowance stood at 1.00percent.  Provisions made to theallowance during the six months ended June 30, 2007 or 2006 were $275,000 and$95,000, respectively.  Loans charged offduring the six months ended June30, 2007 totaled $246,000, while no loans were charged 

19

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offduring the same period in 2006.  Recoveries were $1,000 for both June 30, 2007and 2006, respectively.

TheBank’s non-performing (delinquent 90 days or more and non-accrual) loans as apercentage of total loans were 0.11 percent at June30, 2007 compared with 0.02 percent for the same period in 2006.

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

**Non-InterestIncome**

Total non-interest income for the six months ended June 30, 2007 was $2,354,000 comparedwith $4,145,000 for the same period in 2006. The decrease of $1,791,000 resulted from the first quarter 2006 gain of$1,313,000 on the sale of the Bank’s investment in Pacific Coast Bankers’Bancshares, mark to market loss of $135,000 in the trading assets compared witha $57,000 gain during the same period in 2006, decreases of $165,000 creditcard program revenues, $104,000 commercial banking origination fees, $95,000 inmerchant credit card income, $82,000 in income from sales and servicing ofSmall Business Administration Loans and an increase of $27,000 in servicecharges on deposit accounts.

The sale of SmallBusiness Administration (SBA) guaranteed loans is a significant contributor tothe Bank’s income.  SBA guaranteed loansyield up to 3 3/4% over the New York prime rate, and the guaranteed portionscan be sold at premiums, which vary with market conditions.  SBA loans are guaranteed by the full faith ofthe United States Government from 75 to 85 percent of the principal amount.

There can be noassurance 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.

**Non-InterestExpense**

Salary andbenefits expense for the six months ended June 30, 2007 increased $206,000 compared with the same periodin 2006.  The increase was due to the addition of a Marketing Officer, CreditAnalyst, and merit pay increases.

Total occupancyand equipment expense for the six months ended June 30, 2007 was $427,000 compared to$381,000 for the same period in 2006. The increase was primarily due to increases in depreciation expense of$13,000, janitorial services of $7,000 and storage rental of $6,000.

Professional feesfor the six months ended June30, 2007 was $88,000 compared to $83,000 for the same period in 2006.

20

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Data processingexpense for the six months ended June 30, 2007 was $178,000 compared to $166,000 for the sameperiod in 2006.  

Othergeneral and administrative expenses for the six months ended June 30, 2007 totaled $1,709,000compared with $1,717,000 for the same period in 2006, which is a decrease of$8,000.  Significant changes occurred inthe following categories; no provisionfor possible losses on debt securities was made during 2007 while the provisionwas decreased $39,000 during the same period in 2006; no provision for possible losses on unfundedloan commitments was made during 2007 while the provision was decreased $31,000during the same period in 2006; increases occurred in business development of$37,000, director fees of $35,000 and entertainment and meals of$15,000; while decreases occurred in merchant credit card processing expense of$66,000, other operating losses of $64,000, advertising expense of $29,000,donations of $17,000 and bank fees of $12,000.

The income taxprovision for the six months ended June 30, 2007 totaled $865,000 at an effective tax rate of43.55%.   The income tax provision forthe six months ended June 30,2006 totaled $1,650,000 at an effective tax rate of 43.98%. The decrease of$785,000 was due to a $591,000 provision in 2006 related to the gain on sale ofan investment and decreased other income.

The income tax rates used in determining the Bank’sincome tax provision or benefit, if any, were 34% for federal income taxpurposes and 7.20% for state income taxes, net of federal tax benefit.  Generally, the current tax expense is theresult of applying the current tax rate to taxable income.  The deferred portion is intended to accountfor the fact that income on which taxes are paid differs from financialstatement pre-tax income because some items of income and expense are recognizedin different years for income tax purposes than in the financialstatements.  These recognition anomaliescause “temporary differences”; eventually, all taxes are paid.

**LOANS**

Loans represented 76.23% of average earning assets,and 69.95% of average total assets for the six months ended June 30, 2007 compared with 74.78% and69.23%, respectively during 2006. For the six months ended June 30, 2007, average loans increased19.55% from $112,837,000 for the same period in 2006 to $134,895,000.  Average real estate loans increased$12,607,000 (16.67%), average construction loans increased $8,448,000 (77.66%),average commercial loans increased $1,327,000 (5.23%), and average installmentloans decreased $323,000 (33.34%).

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 maturities of one year orlonger.  Short-term business loans aregenerally intended to finance current transactions and typically provide formonthly interest payments with principal being payable at maturity or at 90-dayintervals. Term loans (usually for a term of two to five years) normallyprovide for monthly installments of principal and interest.  The Bank from time to time utilizes accountsreceivable and inventory as security for loans.

The Bank is arecognized leader for Small Business Administration lending in Monterey County,and holds SBA’s coveted Preferred Lender Status.  Generally, SBA loans are 

21

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guaranteed, by theSBA, for 75 to 85 percent of their principal amount, which can be retained inportfolio or sold to investors.  Suchloans are made at floating interest rates, generally with longer terms (up to25 years) than are available on a conventional loan basis to smallbusinesses.  The unguaranteed portion of the loans, although generallysupported by collateral, is considered to be more risky than conventionalcommercial loans because they may be based upon credit standards the Bank wouldnot otherwise apply, such as lower cash flow coverage, or longer repaymentterms.

The Bank’s realestate loan portfolio consists both of real estate construction loans and realestate mortgage loans.  The Bank hasinitiated 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 is often higher than for other real estate loans, as principal is drawnon periodically as construction progresses.

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 mayexceed the actual amount that could be realized on foreclosure, or declines inmarket value subsequent to making the loan can impair the Bank’s security.

Consumerloans are made for the purpose of financing the purchase of various types ofconsumer goods, home improvement loans, auto loans and other personalloans.  Consumer installment loansgenerally provide for monthly payments of principal and interest, at a fixedrate.  Most of the Bank’s consumerinstallment loans are generally secured by the personal property beingpurchased.  The Bank generally makesconsumer loans to those customers with a prior banking relationship with theBank.

**Non-performingand Non-accrual Loans**

The Bank’s present policy is to cease accruinginterest on loans which are past due as to principal or interest 90 days ormore, except for loans which are well secured or when collection of interestand principal is deemed likely.  When aloan is placed on non-accrual, previously accrued and unpaid interest is generallyreversed out of income unless adequate collateral from which to collect theprincipal of, and interest on, 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”):

22

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|                                                               | ** ** | **Six months as of**  | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                    | ** ** | **June 30,**                    | ** ** |
| ** **                                                    | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| ** **                                                    | ** ** | **(Dollars in thousands)** | ** ** |
| Accruing,                                                     |       |                                 |       |   |   |
| past due 90 days  or more:                                    |       |                                 |       |   |   |
|                                                          |       |                                 |       |   |   |
| Real estate                                                   |       | $                                    | —     |   | $ | — |   |
| Commercial                                                    |       | —                               |       | — |   |
| Installment                                                   |       | —                               |       | — |   |
| Other                                                         |       | —                               |       | — |   |
| Total accruing                                                |       | —                               |       | — |   |
|                                                          |       |                                 |       |   |   |
| Non-accrual  Loans:                                           |       |                                 |       |   |   |
|                                                          |       |                                 |       |   |   |
| Real estate                                                   |       | —                               |       | — |   |
| Commercial                                                    |       | —                               |       | 18 |   |
| Installment                                                   |       | 155                                  |       | 155 |   |
| Other                                                         |       | —                               |       | — |   |
| Total non-accrual                                             |       | 155                                  |       | 173 |   |
|                                                          |       |                                 |       |   |   |
| Total nonperforming                                           |       | $                                    | 155        |   | $ | 173 |   |
|                                                          |       |                                 |       |   |   |
| Total loans end  of period                                    |       | 141,785                              |       | 118,529 |   |
|                                                          |       |                                 |       |   |   |
| Ratio of nonperforming  loans to total loans at end of period |       | 0.11%                                |       | 0.15% |   |

 

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

23

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## **Summaryof Loan Loss Experience**

| ** **                                                                     | ** ** | ** **           | ** ** | ** **                  | ** ** | **As of the** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------|------------|-----------------------------|------------|---------------|------------|
| ** **                                                                     | ** ** | **As of the period** | ** ** | **Year ended**              | ** ** |
| ** **                                                                     | ** ** | **Ended June 30,**   | ** ** | **December 31,**            | ** ** |
| ** **                                                                     | ** ** | **2007**             | ** ** | **2006**                    | ** ** | **2006**      | ** ** |
| ** **                                                                     | ** ** | ** **           | ** ** | **(Dollars in  thousands)** | ** ** | ** **    | ** ** |
| Average loans outstanding                                                      |       | $                    | 134,895    |                        | $          | 112,837       |       | $ | 118,699 |   |
|                                                                           |       |                 |       |                        |       |          |       |
| Allowance, beginning of period                                                 |       | 1,409                |       | 1,101                       |       | 1,101         |       |
|                                                                           |       |                 |       |                        |       |          |       |
| Loans charged off during period:                                               |       |                 |       |                        |       |          |       |
|                                                                           |       |                 |       |                        |       |          |       |
| Commercial                                                                     |       | 245                  |       | —                      |       | —        |       |
| Installment                                                                    |       | 1                    |       | —                      |       | 109           |       |
| Real Estate                                                                    |       | —               |       | —                      |       | —        |       |
| Other                                                                          |       | —               |       | —                      |       | —        |       |
| Total charge offs                                                              |       | 246                  |       | —                      |       | 109           |       |
|                                                                           |       |                 |       |                        |       |          |       |
| Recoveries during period:                                                      |       |                 |       |                        |       |          |       |
| Commercial                                                                     |       | 1                    |       | 1                           |       | —        |       |
| Installment                                                                    |       | —               |       | —                      |       | 7             |       |
| Real Estate                                                                    |       | —               |       | —                      |       | —        |       |
| Other                                                                          |       | —               |       | 1                           |       | —        |       |
| Total recoveries                                                               |       | 1                    |       | 7                           |       |          |       |
|                                                                           |       |                 |       |                        |       |          |       |
| Net Loans charged off during the period                                        |       | 245                  |       | (1                          | )          | 102           |       |
|                                                                           |       |                 |       |                        |       |          |       |
| Additions to allowance for possible loan losses                                |       | 275                  |       | 95                          |       | 410           |       |
|                                                                           |       |                 |       |                        |       |          |       |
| Allowance, end of period                                                       |       | $                    | 1,439      |                        | $          | 1,197         |       | $ | 1,409 |   |
| Ratio of net loans charged off to average loans outstanding during  the period |       | 0.18                 | %          | 0.00                        | %          | 0.09          | %          |
| Ratio of allowance to total loans at end ofperiod                              |       | 1.00                 | %          | 1.00                        | %          | 1.07          | %          |

 

**Deposits**

Average deposits for the six months ended June 30, 2007 were $133,076,000 anincrease of 14.70% compared with the same period in 2006.  Average certificates of deposit represented64.78% of average deposits for the six months ended June 30, 2007.  Averageinterest bearing checking, money market and savings accounts as a group were15.84% of average deposits for the six months ended June 30, 2007.  Averagedemand deposits represented 19.38% of average deposits for the six months endedJune 30, 2007.

24

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The following table sets forth the scheduledmaturities of the Company’s time deposits in denominations of $100,000 orgreater at June 30, 2007:

Maturities of TimeDeposits of$100,000 or More

(Dollars inThousands)
| Three months or less                   |   | $      | 15,724 |   |
|----------------------------------------|--------|--------|--------|--------|
| Over three  months through six months  |   | 8,497  |   |
| Over six months  through twelve months |   | 17,217 |   |
| Over twelve  months                    |   | 8,262  |   |
| Total                                  |   | $      | 49,700 |   |

 

**Borrowing**

**The Bank has lines of credit from the Federal Home LoanBank (FHLB) of San Francisco, Bank of the West, Pacific Coast Bankers’ Bank andThe Independent Bank with remaining available borrowing capacity on**June 30, 2007 of $7,775,000 (based on pledged collateral),$4,500,000, $6,000,000 and $5,000,000, respectively.  The Federal Home Loan Bank line of credit hasa maximum borrowing capacity of twenty five percent (25%) of the Bank’s totalassets, adjusted quarterly.  The FederalHome Loan Bank line of credit is secured by a portion of the Bank’s real estatesecured loans and securities at June 30, 2007. The total principal balance of pledged loans was $36,673,000 andsecurities of $25,441,000.  The followingtable provides information on fourteen FHLB advances totaling $39,750,000 andoutstanding at June 30,2007.

|            | ** ** | ** ** | ** ** | **Funding** | ** ** | **Maturity** | ** ** |
|------------|------------|------------|------------|-------------|------------|--------------|------------|
| **Amount** | ** ** | **Rate**   | ** ** | **Date**    | ** ** | **Date**     | ** ** |
| $          | 2,750      |       | 3.44       | %           | 9/27/02    |         | 9/27/07    |   |
| 3,000      |       | 4.30       | %          | 6/17/05     |       | 6/17/10      |       |
| 5,000      |       | 4.96       | %          | 11/14/05    |       | 11/15/10     |       |
| 2,250      |       | 4.75       | %          | 1/26/06     |       | 1/26/11      |       |
| 1,750      |       | 4.72       | %          | 1/26/06     |       | 1/26/11      |       |
| 1,500      |       | 5.52       | %          | 7/17/06     |       | 7/18/11      |       |
| 3,500      |       | 5.49       | %          | 7/17/06     |       | 7/18/11      |       |
| 1,000      |       | 5.22       | %          | 8/25/06     |       | 8/25/11      |       |
| 1,000      |       | 7.72       | %          | 6/1/00      |       | 6/3/30       |       |
| 4,000      |       | 5.96       | %          | 8/2/04      |       | 7/28/34      |       |
| 5,000      |       | 5.63       | %          | 12/24/04    |       | 12/22/34     |       |
| 2,000      |       | 5.13       | %          | 5/4/05      |       | 5/1/35       |       |
| 2,000      |       | 5.31       | %          | 11/17/06    |       | 11/17/36     |       |
| 5,000      |       | 5.88       | %          | 6/29/07     |       | 6/29/37      |       |
| $          | 39,750     |       |       |        |       |         |       |   |
|            |            |            |            |             |            |              |            |  |  |

 

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

**The Bank has a letter of creditin the amount of $330,000, expiring April 17, 2011, issued by Federal Home LoanBank of San Francisco, which is used to secure local agency**

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**deposits.  Thebeneficiary of the letter of credit is the Administrator of Local AgencySecurity, Department of Financial Institutions.**

**Capital Resources**

The Corporationmaintains capital to comply with legal requirements, to provide a margin ofsafety for its depositors and stockholders, and to provide for future growthand the ability to pay dividends.  At June30, 2007, stockholders’ equity was $13,665,000 versus $12,402,000 at December31, 2006.  The Corporation paid no cashdividends during the six months ended June30, 2007 and $0.35 for the year ended December 31, 2006.  The Bank paid the Corporation a $100,000 cashdividend during the six months ended June30, 2007 and $625,000 during the year ended December 31, 2006.

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 current rules, all banks are required tomaintain Tier 1 capital of at least 4 percent and total capital of 8.0% ofrisk-adjusted assets. The Bank had Tier 1 risk-based capital ratios of 11.83%and 12.48% at June30, 2007 and 2006, respectively.  TheBank’s Tier 1 capital exceeds the minimum regulatory requirement by$12,831,000.  The Bank had Totalrisk-based capital ratios of 12.73% and 13.38% at June 30, 2007 and 2006, respectively.  The Bank’s Total Risk-Based capital exceedsthe minimum regulatory requirement by $4,474,000. These ratios are well abovethe minimum regulatory requirements.  TheCorporation had Tier 1 risk-based capital ratios of 10.29% and 9.85% at June 30, 2007 and 2006,respectively.  The Corporation had Totalrisk-based capital ratios of 14.04% and 14.66% at June 30, 2007 and 2006, respectively.

The leverage capital ratio guidelines require aminimum leverage capital ratio of 3% of Tier 1 capital to total assets lessgoodwill.  The Company had leveragecapital ratios of 8.40% and 7.72% at June 30, 2007 and 2006, respectively; while the Bank’s leveragecapital ratios were 9.87% and 10.33% at June30, 2007 and 2006.  The Bank’s Tier 1leverage capital exceeds the minimum regulatory requirement by $13,496,000.

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

## **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 of theBank’s business, funds are generated from the repayment of loans, maturitieswithin the investment securities portfolio and the acquisition of depositbalances and short-term borrowings.  Inaddition, the Bank has a secured borrowing arrangement with the Federal HomeLoan Bank of

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San Francisco ofapproximately $46,174,000of which $40,080,000 had been advanced at June30, 2007****and unsecured federalfunds lines of credit with Bank of theWest, Pacific Coast Bankers’ Bank and The Independent Bank of $4,500,000,$6,000,000 and $5,000,000, respectively; to meet temporary liquidityrequirements.

As a matter of policy,the Bank seeks to maintain a level of liquid assets, including marketableinvestment securities, equal to a least 15 percent of total assets (“totalliquidity”). Additionally the Bank maintains secondary sources of liquidity(borrowing lines from other institutions) equal to at least an additional 10percent of assets.  Within these ratios,the Bank generally has excess funds available to sell as federal funds on a dailybasis, and is able to fund its own liquidity needs without the need ofshort-term borrowing.  The Bank’s totalliquidity at June30, 2007 and 2006 was 28.10% and 23.32%, respectively, while its average loanto deposit ratio for such years was 95.75% and 97.54%, respectively.

Brokered deposits are deposit instruments, such ascertificates of deposit, deposit notes, bank investment contracts and certainmunicipal investment contracts that are issued through brokers and dealers whothen offer and/or sell these deposit instruments to one or more investors.  Additionally, deposits on which a financialinstitution pays an interest rate significantly higher than prevailing ratesare considered to be brokered deposits. Federal law and regulation restricts banks from soliciting or acceptingbrokered deposits, unless the bank is well capitalized under Federalguidelines.  The Bank had no brokereddeposits at June 30, 2007 compared with approximately $5,341,000 or 4.35% of totaldeposits at June30, 2006.  None of the Bank’s brokereddeposits paid an interest rate significantly higher than prevailing rates.

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

**Interest Rate Risk**

Managementof interest rate sensitivity (asset/liability management) involves matching andrepricing rates of interest-earning assets with interest-bearing liabilities ina manner designed to optimize net interest income within the constraintsimposed by regulatory authorities, liquidity determinations and capitalconsiderations.  The Bank institutedformal asset/liability policies at the end of 1989.

The purpose forasset/liability management is to provide stable net interest income growth byprotecting the Bank’s earnings from undue interest rate risk.  The Bank expects to generate earnings fromincreasing loan volume, appropriate loan pricing and expense control and notfrom trying to accurately forecast interest rates.  Another important function of asset/liabilitymanagement is managing the risk/return relationships between interest raterisk, liquidity, market risk and capital adequacy.  The Bank gives priority to liquidity concernsfollowed by capital adequacy, then interest rate risk and market risk in theinvestment portfolio.  The policy of theBank will be to control the exposure of the Bank’s earnings to changinginterest rates by generally maintaining a position within a narrow range aroundan “earnings neutral position.” An earnings neutral position is defined as themix of assets and liabilities that generate a net interest margin that is notaffected by interest rate changes. However, Management does not believe that the Bank can maintain atotally earnings neutral position.

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Further, theactual timing of repricing of assets and liabilities does not always correspondto the timing assumed by the Bank for analytical purposes.  Therefore, changes in market rates ofinterest will generally impact on the Bank’s net interest income and netinterest margin for long or short periods of time.

The Bank monitors itsinterest rate risk on a quarterly basis through the use of a model whichcalculates the effect on earnings of changes in the fed funds rate.  The model converts a fed funds rate changeinto rate changes for each major class of asset and liability, then simulatesthe bank’s net interest margin based on the bank’s actual repricing over a oneyear period, assuming that maturities are reinvested in instruments identicalto those maturing during the period.  Thefollowing table shows the affect on net interest income of an upward ordownward 100 and a 200 basis point rate shocks at June 30, 2007.
| Rate Shock  Increase(Decrease) in Basis Points | ** ** | **Percent  Increase(Decrease) in Net  Interest Income** | ** ** | **Asset/Liability Policy Limits  for Increase(Decrease) in Net  Interest Income** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|
| 100                                                                |       | 5.5                                                                    | %          | 10.0                                                                                                            | %          |
| (100)                                                              |       | (5.7                                                                   | %)         | (10.0                                                                                                           | %)         |
| 200                                                                |       | 11.0                                                                   | %          | 20.0                                                                                                            | %          |
| (200)                                                              |       | (11.4                                                                  | %)         | (20.0                                                                                                           | %)         |

 

**InvestmentSecurities**

The Corporation maintains a trading account, at fair value, consisting of marketable securities.  At June 30, 2007 and 2006 the account value was $1,708,000 and $1,404,000, respectively.  The Corporation has investments of $20,000 in AT Service LLC, which provides title insurance services for commercial, industrial and residential properties, as well as other real estate related financial and informational services, including escrow, real estate information, trustee sale guarantees and real estate tax exchanges, and $10,000 in Metrocities Mortgage, LLC.  In addition the Corporation has investments in Northern California Bancorp Trust I of $93,000 and Northern California Bancorp Trust II of $155,000, these are special-purpose trust subsidiaries which were formed to facilitate the issuance of trust preferred securities.

The following table setsforth the book and market value of the Bank’s investment securities at June 30,2007:
|                                           | ** ** | **INVESTMENT PORTFOLIO MIX** | ** ** |
|-------------------------------------------|------------|----------------------------------------|------------|
| ** **                                | ** ** | **JUNE 30, 2007**            | ** ** |
| ** **                                | ** ** | **Book Value**                    | ** ** | **Market Value** | ** ** |
| Securities  Available for Sale            |       |                                   |       |   |   |
| Government  National Mortgage Association |       | $                                      | 482        |   | $ | 474 |   |
| U.S. Government  Agency Securities        |       | 27,245                                 |       | 26,961 |   |
| Total                                     |       | $                                      | 27,727     |   | $ | 27,435 |   |
|                                      |       |                                   |       |   |   |
| Held to Maturity                          |       |                                   |       |   |   |
| State/Local  Agency Bonds                 |       | $                                      | 7,006      |   | $ | 7,142 |   |

 

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|                                            | ** ** | **INVESTMENT PORTFOLIO MIX** | ** ** |
|--------------------------------------------|------------|----------------------------------------|------------|
| ** **                                 | ** ** | **JUNE 30, 2007**            | ** ** |
| ** **                                 | ** ** | **Book Value**                    | ** ** | **Market Value** | ** ** |
| Other Investments, at cost                 |       |                                   |       |   |   |
| AT Services LLC                            |       | $                                      | 20         |   | $ | 20 |   |
| Metrocities Mortgage, LLC                  |       | 10                                     |       | 10 |   |
| Federal Home Loan Bank stock, restricted   |       | 1,869                                  |       | 1,869 |   |
| Northern California Bancorp, Inc. Trust I  |       | 93                                     |       | 93 |   |
| Northern California Bancorp, Inc. Trust II |       | 155                                    |       | 155 |   |
| Independent Bankers Financial Corporation  |       | 51                                     |       | 51 |   |
| MasterCard, Inc. Class B Stock             |       | 5                                      |       | 5 |   |
|                                       |       | $                                      | 2,203      |   | $ | 2,203 |   |

 

The followingtable summarizes the maturity of the Bank’s investment securities at June 30, 2007:
|                                         | ** ** | **INVESTMENT PORTFOLIO MATURITIES** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------|------------|
| ** **                              | ** ** | **(Dollars in thousands)**          | ** ** |
| ** **                              | ** ** | **Amortized Cost**                       | ** ** | **Fair Value** | ** ** |
| Available for  Sale                     |       |                                          |       |   |   |
| Due within one  year                    |       | $                                             | 2,995      |   | $ | 2,974 |   |
| Due between one  and five years         |       | —                                        |       | — |   |
| Due between five  and ten years         |       | 12,000                                        |       | 11,896 |   |
| Due between ten  and fifteen years      |       | 12,250                                        |       | 12,091 |   |
| GNMA – Mortgage  Backed Securities |       | 482                                           |       | 474 |   |
|                                    |       | $                                             | 27,727     |   | $ | 27,435 |   |
| Held to Maturity                        |       |                                          |       |   |   |
| Due in over ten years                   |       | $                                             | 7,006      |   | $ | 7,142 |   |

 

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**Item 3. Controls and Procedures**

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

(b)  Changesin Internal Controls:  In the quarterended June30, 2007, 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.

**PARTII-OTHER INFORMATION**

**Item1.  Legal Proceedings.**

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

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

None

**Item3.  Default of Senior Securities**

None

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

The followingproposals were presented to shareholders at the Corporation’s annualshareholders’ meeting held on May 24, 2007.

**Proposal Number 1:        Election of Directors**
|                              | ** ** | **Number of  Affirmative Votes** | ** ** | **Number of  Votes Withheld** |
|------------------------------|------------|----------------------------------|------------|-------------------------------|
| David A.  Bernahl, II        |       | 1,490,335                        |       | 5,730                         |
| Mark A. Briant               |       | 1,492,335                        |       | 5,730                         |
| Charles T.  Chrietzberg, Jr. |       | 1,490,176                        |       | 7,889                         |
| Sandra G.  Chrietzberg       |       | 1,489,502                        |       | 8,563                         |
| Stephanie G.  Chrietzberg    |       | 1,490,176                        |       | 7,889                         |
| Peter J.  Coniglio           |       | 1,492,355                        |       | 5,730                         |
| Carla S. Hudson              |       | 1,492,355                        |       | 5,730                         |
| John M. Lotz                 |       | 1,492,355                        |       | 5,730                         |

 

**Proposal Number 2:        Ratification of the Company’s 2007 StockOption Plan**
| Number of  Affirmative Votes | ** ** | **Number of  Against** | ** ** | **Number of  Abstentions** |
|------------------------------|------------|------------------------|------------|----------------------------|
| 1,393,119                    |       | 28,729                 |       | 22,618                     |

 

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

None

#### **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.                                  Reportson Form 8-K

   None

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Inaccordance with the requirements of the Exchange Act, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.
|                   |   | NORTHERN CALIFORNIA BANCORP,  INC. |
|------------------------|--------|------------------------------------|
|                   |   |                               |
| Date: August 10,  2007 |   | By:                                | /s/ Charles T.  Chrietzberg, Jr. |   |
|                   |   |                               | Charles T.  Chrietzberg, Jr. |
|                   |   |                               | Chairman of the  Board & |
|                   |   |                               | Chief Executive  Officer |
|                   |   |                               |
|                   |   |                               |
| Date: August 10,  2007 |   | By:                                | /s/ Bruce N. Warner |   |
|                   |   |                               | Bruce N. Warner |
|                   |   |                               | Chief Financial  Officer and |
|                   |   |                               | Principal  Accounting Officer |
|                        |        |                                    |  |  |  |

 

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