NRLB Northern California Bancorp Inc (CE)

PART I-FINANCIAL INFORMATION

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See Note 9 for supplemental disclosures

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SUMMARY OF ACCOUNTING POLICIES

(NOTE 1) BASIS OF PRESENTATION

The interim condensed financial statements of Northern California Bancorp, Inc. and subsidiary (“Corporation”) are unaudited and reflect all adjustments (consisting only of normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation, in all material respects, of the financial position and operating results of the Corporation for the interim periods.  The results of operations for the six months ended June 30, 2007 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2007.  The year-end balance sheet data at December 31, 2006 was derived from the audited financial statements.

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

(NOTE 2)  RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes , an interpretation of FASB Statement No. 109, Accounting for Income Taxes ,” effective for the Company beginning after December 15, 2006 with earlier adoption encouraged. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Bank is currently assessing the impact of this guidance on its financial statements.

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

This statement establishes a fair value hierarchy that distinguishes between valuations obtained from sources independent of the entity and those from the entity’s own unobservable inputs that are not corroborated by observable market data. SFAS 157 expands disclosures about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. The disclosures focus on the inputs used to measure fair value and for recurring fair value measurements using significant unobservable inputs, the effect of the measurements on earnings or changes in net assets for the period. This statement encourages an entity to combine the fair value information disclosed under this statement with the fair value information disclosed under other accounting pronouncements, including SFAS 107, “Disclosures about Fair Value of Financial Instruments”, where practicable. The Bank is currently assessing the impact of this guidance on its financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115” which is effective for the Company as of the beginning of the first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the fiscal year that begins on or after November 15, 2006, provided that the Company also elects to apply the provisions of FASB Statement No. 157, “Fair Value Measurements”.  The Bank is currently evaluating the impact of adopting this Statement on the Company’s financial statements.

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(NOTE 3). STOCK BASED COMPENSATION

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

Under the Corporation’s Stock Option Plan, the Bank may grant incentive stock options and non-qualified stock options to directors, officers, and employees of the Corporation and its subsidiary, so long as the Corporation owns a majority of the equity interest of such subsidiary.  Incentive Stock Options are granted at fair value of the common stock on the date of grant.  However, an incentive stock option granted to an individual owning 10% or more of the Corporation’s stock after such grant must have an exercise price of at least 110% of such fair 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 the fair market value of the common stock on the date of grant.  The Board of Directors is authorized to determine when options become exercisable within a period not exceeding 10 years from the date of grant.

There were no options granted during the six months ended June 30, 2007 or 2006.

(NOTE 4). EARNINGS PER SHARE

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

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

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

(NOTE 8) COMPREHENSIVE INCOME (LOSS):

The components of other comprehensive income and related tax effects for the six month period ended June 30, 2007 and the year ended December 31, 2006 are as follows:

The components of accumulated other comprehensive income and related tax effects are as follows:

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(NOTE 9) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

and assumptions inherent in this policy, and the sensitivity of the Bank’s financial statements to those judgments, estimates and assumptions, is critical to an understanding of the Bank’s financial statements. This policy relates to the methodology that determines the Bank’s allowance for loan losses. Management has discussed the development and selection of this critical accounting policy with the Bank’s Audit Committee of the Board of Directors. Although Management believes the level of the allowance at June 30, 2007 is adequate to absorb losses inherent in the loan portfolio, a decline in the regional economy may result in increasing losses that cannot reasonably be predicted at this time. For further information regarding the allowance for loan losses see “Provision and Allowance for Loan Losses” included elsewhere herein.

OVERVIEW

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

For the six months ended June 30, 2007 net income was $1,121,000, compared to $2,103,000 for the same period in 2006. For the six months ended June 30, 2007 net interest income after provision for loan losses increased $287,000, total non-interest income decreased $1,791,000, while non-interest expense increased $263,000 and income tax provision decreased $785,000. The decrease in non-interest income was attributable primarily to the recording of a $1,313,000 gain on the sale of an investment during the first quarter of 2006, decreased credit card program revenues and a trading asset mark to market loss.

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The following table sets forth certain selected financial ratios of the Corporation at and for the six months ended, June 30, 2007 and 2006.

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

(2)    Diluted earnings per share amounts were computed on the basis of the weighted average number of shares of common stock and common stock equivalents outstanding during the year. Common stock equivalents include director/employee stock options. The weighted average number of shares used for this computation was 1,801,048 and 1,807,885 for June 30, 2007 and 2006, respectively.

(3)    Weighted average common shares.

(4)    Includes loans being held for sale.

(5)    Averages are of daily balances.

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

NET INTEREST INCOME

Net interest income, the difference between (a) interest and fees earned on interest-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 to period result from increases or decreases in the average balances of interest-earning assets, the availability of particular sources of funds and changes in prevailing interest rates.

Net interest income for the six months ended June 30, 2007 was $4,369,000 compared to $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

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interest earning assets increased $26,062,000 (17.27%), while the average rate earned increased 54 basis points. Average interest bearing liabilities increased $27,237,000 (22.13%), while the average rate paid increased 81 basis points.

The following tables show the components of the Bank’s net interest income, setting forth, for each of the three months ended and six months ended June 30, 2007 and 2006, (i) average assets, liabilities and investments, (ii) interest income earned on interest-earning assets and interest expense paid on interest-bearing liabilities, (iii) average yields earned on interest-earning assets and average rates paid on interest-bearing liabilities, (iv) the net interest spread (i.e., the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities) and (v) the net interest yield on average interest-earning assets (i.e., net interest income divided by average interest-earning assets). Yields are computed on a tax-equivalent basis, resulting in adjustments to interest earned on 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 ended June 30, 2007 and 2006, respectively. Non-accrual loans and overdrafts are included in average loan balances. Average loans are presented net of unearned income.

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