U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2011

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

Commission File Number 0-27666

NORTHERN CALIFORNIA BANCORP, INC.

(Name of Small Business Issuer in its Charter)

Incorporated in the State of California

IRS Employer Identification Number 77-0421107

Address: 601 Munras Avenue, Monterey, CA 93940

Telephone: (831) 649-4600

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

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

Large accelerated filer o		Accelerated filer o

Non-accelerated filer o		Smaller reporting company x

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

As of November 10, 2011, the Corporation had 1,785,891 shares of common stock outstanding.

Table of Contents

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
	Notes to Consolidated Financial Statements	7-27
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28-56
Item 3	(Not Applicable)
Item 4	Controls and Procedures	57

PART II	Other Information
Item 1	Legal Proceedings	58-59
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	60
Item 3	Defaults Upon Senior Securities	60
Item 4	(Removed and Reserved)	60
Item 5	Other Information	60
Item 6	Exhibits	60
Signatures		61
Certifications		62-65

Table of Contents

PART I-FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

NORTHERN CALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

	SEPTEMBER 30		DECEMBER 31
(Dollars in thousands, except share data)	2011		2010
	(Unaudited)		(Audited)
ASSETS:
Cash and Due From Banks	$	30,461	$	16,400
Trading Assets	26		30
Investment Securities, available for sale (Note 6)	46,708		44,226
Other Investments (Note 6)	3,348		3,712
Loans Held for Sale, at lower of cost or market	2,659		3,937
Loans, net of allowance for loan losses of $3,406 in 2011; $3,159 in 2010 (Note 7)	145,166		147,612
Bank Premises and Equipment, Net	4,421		4,802
Cash Surrender Value of Life Insurance	4,322		4,226
Foreclosed assets	27,970		28,825
Interest Receivable and Other Assets	4,985		9,847
Total Assets	$	270,066	$	263,617

LIABILITIES AND SHAREHOLDERS’ EQUITY:

Non interest-bearing demand	$	31,717	$	35,361
Interest-bearing demand	18,094		18,404
Savings	13,967		9,660
Time less than $100,000	103,770		81,302
Time in denominations of $100,000 or more	53,334		63,271
Total Deposits	220,882		207,998

Federal Home Loan Bank borrowed funds	23,000		25,000
Revolving line of credit	2,700		2,700
Other borrowings	—		289
Junior Subordinated Debt Securities	8,248		8,248
Payble for Investment Securities Purchased	—		145
Interest Payable and Other Liabilities	4,158		4,930
Total Liabilities	258,988		249,310

Shareholders’ Equity:
Common Stock - No Par Value
Authorized 50,000,000 in 2011 and 10,000,000 in 2010
Outstanding:1,785,891 in 2011 and 2010	5,094		5,094
Retained Earnings	4,960		10,387
Accumulated Other Comprehensive Income (Loss)	1,024		(1,174		)
Total Shareholders’ Equity	11,078		14,307
Total Liabilities & Shareholders’ Equity	$	270,066	$	263,617

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

NORTHERN CALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

	THREE-MONTH						NINE-MONTH
	PERIOD ENDING						PERIOD ENDING
	September 30						September 30
(Dollars in thousands except share data)	2011			2010			2011			2010
INTEREST INCOME:
Loans	$	2,224		$	2,347		$	6,563		$	7,412
Time deposits with other financial institutions	15			21			33			41
Investment securities	600			630			1,832			2,179
Total Interest Income	2,839			2,998			8,428			9,632

INTEREST EXPENSE:
Interest-bearing transaction accounts	6			5			16			15
Savings and time deposit accounts	422			525			1,183			1,673
Time deposits in denominations of $100,000 or more	255			430			825			1,243
Notes payable and other	355			526			1,179			1,538
Total Interest Expense	1,038			1,486			3,203			4,469

Net Interest Income	1,801			1,512			5,225			5,163
Provision for loan losses	1,050			—			2,500			—
Net interest income, after provision for loan losses	751			1,512			2,725			5,163

NON-INTEREST INCOME:
Service charges on deposit accounts	78			99			244			337
Income from sales and servicing of SBA Loans	240			136			572			257
Gain on sales of investment securities	155			518			256			936
Other income	334			1,473			2,206			3,747
Total non-interest income	807			2,226			3,278			5,277

NON-INTEREST EXPENSE:
Salaries and Employee Benefits	754			882			2,435			2,678
Occupancy and Equipment Expense	264			259			772			777
Foreclosed assets, net	(184		)	916			407			1,997
Professional Fees	515			403			1,583			1,239
Data Processing	64			56			179			192
FDIC Settlement - Card Programs	—			1,800			—			1,800
Litigation Settlement	—			158			2,374			1,038
Other general and administrative	620			1,310			2,653			3,523
Total non-interest expenses	2,033			5,784			10,403			13,244

Loss before tax provision (benefit)	(475		)	(2,046		)	(4,400		)	(2,804		)
Income tax provision (benefit)	239			(1,031		)	1,027			(1,452		)
Net loss	$	(714	)	$	(1,015	)	$	(5,427	)	$	(1,352	)

Loss per common share
Basic	$	(0.40	)	$	(0.57	)	$	(3.04	)	$	(0.76	)
Diluted	$	(0.40	)	$	(0.57	)	$	(3.04	)	$	(0.76	)

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

NORTHERN CALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

									Accumulated
									Other Comprehensive
	Number of		Common			Retained			Income
(in thousands except share data)	Shares		Stock			Earnings			(Loss)			Total

Balance at December 31, 2008	1,803,908		$	5,173		$	9,482		$	(302	)	$	14,353

Comprehensive income:
Net income for the year	—		—			1,611			—			1,611
Change in net unrealized loss on AFS securities and other assets net of tax recalssification adjustment and tax effect	—		—			—			272			272
Total comprehensive income												1,883

Stock repurchase	(20,678	)	(85		)	—			—			(85		)

Balance at December 31, 2009	1,783,230		$	5,088		$	11,092		$	(30	)	$	16,151

Comprehensive loss
Net loss for the year	—		—			(706		)	—			(706		)
Change in net unrealized loss on AFS securities and other assets net of tax recalssification adjustment and tax effect	—		—			—			(1,144		)	(1,144		)
Total comprehensive loss												(1,850		)
Exercise of stock options including tax benefit	2,661		6			—			—			6

Balance at December 31, 2010	1,785,891		$	5,094		$	10,387		$	(1,174	)	$	14,307

Comprehensive loss:
Net loss for the year	—		—			(5,427		)	—			(5,427		)
Change in net unrealized loss on AFS securities and other assets net of tax recalssification adjustment and tax effect	—		—			—			2,198			2,198
Total comprehensive loss												(3,229		)

Balance at September 30, 2011 (Unaudited)	1,785,891		$	5,094		$	4,960		$	1,024		$	11,078

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

NORTHERN CALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	NINE MONTH PERIOD ENDED
	SEPTEMBER 30,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(5,427	)	$	(1,352	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization expense	244			278
Provision for loan losses	2,500			—
Provision for foreclosed asset losses	(230		)	1,050
Realized gain on sales of available-for-sale securities, net	(256		)	(936		)
Amortization of deferred loan (fees), net	44			28
Net amortization (accretion) of discounts and premiums on investment securities, net	(57		)	(58		)
Deferred income tax provision (benefit)	1,025			(1,453		)
Loss on sale of foreclosed assets	172			136
Increase in cash surrender value of life insurance	(96		)	(95		)
(Increase) decrease in assets:
Trading assets	4			47
Loans held for sale	1,278			618
Interest receivable	336			339
Other assets	3,485			132
Increase (decrease) in liabilities
Interest payable	(278		)	334
Other liabilities	(595		)	3,488
Net cash provided by operating activities	2,149			2,556

CASH FLOWS FROM INVESTING ACTIVITIES
Net change in time deposits with other financial institutions	—			(5,000		)
Activity in available-for sale securities
Sales	7,097			24,235
Maturities, prepayments, and calls	2,076			1,604
Purchases	(9,129		)	(4,554		)
Redemption of stock investments, restricted	364			—
Net increase in loans	(425		)	(4,919		)
Proceeds from loan sales	—			1,830
Proceeds from sale of other real estate owned	3,064			2,566
Investment in other real estate owned	(1,867		)	(6,942		)
Proceeds from sale of equipment	139			34
Additions to bank premises and equipment	(2		)	(291		)
Net cash provided by investing activities	1,317			8,563

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits	12,884			16,393
Proceeds from borrowings	4,000			5,000
Repayments on borrowing, net	(6,289		)	(10,000		)
Proceeds from exercise of stock options	—			6
Net cash provided by financing activities	10,595			11,399

Net increase in cash and cash equivalents	14,061			22,518

CASH AND CASH EQUIVALENTS, BEGINNING	16,400			12,251

CASH AND CASH EQUIVALENTS, ENDING	$	30,461		$	34,769

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(NOTE 1) NATURE OF BUSINESS AND BASIS OF PRESENTATION

Nature of Business

Northern California Bancorp, Inc. (the “Corporation”) was incorporated on August 29, 1995, as a for-profit corporation under the California Corporate laws for the principal purpose of engaging in banking and non-banking activities as allowed for a bank holding company. The Corporation’s sources of revenues at this time are dividends on investments, gains on securities transactions and potential dividends, management fees and tax equalization payments, if any, from its wholly-owned bank subsidiary, Monterey County Bank (the “Bank”).

The Corporation owns 100% of the Bank which operates five full service branches in Monterey County, California. The Corporation owns 100% of the common stock of two unconsolidated special purpose business trusts, “Northern California Bancorp, Inc. Trust I” and “Northern California Bancorp, Inc. Trust II.”

Basis of Presentation

The interim condensed consolidated financial statements of the Corporation and the Bank 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 consolidated financial position and operating results of the Corporation for the interim periods. The results of operations for the nine months ended September 30, 2011 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2011. The year-end consolidated balance sheet data at December 31, 2010 was derived from the Corporation’s consolidated audited financial statements. All material intercompany balances and transactions have been eliminated in consolidation.

This financial information should be read in conjunction with the consolidated audited financial statements and the notes thereto included in the Corporation’s Form 10-K for the fiscal year ended December 31, 2010.

(NOTE 2) CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires Management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in the Corporation’s financial statements and accompanying notes. Management believes that the judgments, estimates and assumptions used in preparation of the Corporation’s financial statements are appropriate given the factual circumstances as of September 30, 2011.

Various elements of the Corporation’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. Critical accounting policies are those that involve the most complex and subjective decisions and assessments and have the greatest potential impact on the Corporation’s results of operation. In particular, Management has identified one accounting policy that, due to judgments, estimates and assumptions inherent in this policy and the sensitivity of the Corporation’s financial statements to those judgments, estimates and assumptions, is critical to an understanding of the Corporation’s financial statements. This policy relates to the methodology that determines the Corporation’s allowance for loan losses. Management has discussed the development and selection of this critical accounting policy with the Corporation’s Audit Committee of the Board of Directors. Although Management believes the level of the allowance at September 30, 2011 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.

Table of Contents

Another critical accounting policy relates to the valuation of other real estate owned (OREO). Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by Management and the assets are carried at the lower of carrying amount or fair value less estimated cost to sell. Any write-down to fair value at the time of transfer to OREO is charged to the allowance for loan losses. Property is evaluated regularly to ensure that the recorded amount is supported by its current fair value and that valuation allowances to reduce the carrying amount to fair value less estimated costs to dispose are recorded as necessary. Revenue and expenses from operations of OREO and changes in the valuation allowance are included in net expenses from OREO.

A third critical accounting policy relates to the valuation of deferred tax assets. The Corporation is permitted to recognize deferred tax assets only to the extent that they are expected to be used to reduce amounts that have been paid or will be paid to tax authorities. Management reviews this each quarter by comparing the amount of the deferred tax assets with amounts paid in the past that might be recovered by carryback provisions in the tax code and with anticipated taxable income expected to be generated from operations in the future. If it does not appear that the deferred tax assets are usable, a valuation allowance would be established to acknowledge their uncertain benefit.

(NOTE 3) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In April 2011, the Financial Accounting Standard Board (“FASB”) amended existing guidance for assisting a creditor in determining whether a loan restructuring is a troubled debt restructuring (“TDR”). The amendments clarify the guidance for a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. This guidance is effective for interim and annual reporting periods beginning after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. For purposes of measuring impairment on newly identified troubled debt restructurings, the amendments should be applied prospectively for the first interim or annual period beginning on or after June 15, 2011. The adoption of this new guidance during the quarter ended September 30, 2011 did not have an impact on the consolidated financial statements. Management has determined that there were no troubled debt restructurings during the periods covered in this Form 10-Q under the pre-existing guidance or under the new guidance.

In May, 2011, the FASB issued an amendment to achieve common fair value measurement and disclosure requirements between U.S. and international accounting principles. Overall, the guidance is consistent with existing U.S. accounting principles; however, there are some amendments that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this guidance are effective during interim and annual periods beginning after December 15, 2011. The Corporation is currently evaluating the impact of this amendment on the consolidated financial statements.

Table of Contents

(NOTE 4) STOCK BASED COMPENSATION

The Corporation’s compensation cost relating to share-based payment transactions is recognized in the financial statements based upon the fair value of the equity or liability instruments issued. Based on the stock-based compensation awards outstanding for the nine months ended September 30, 2011 and 2010, there was no stock-based compensation expense.

Under the Corporation’s 1998 Stock Option Plan, the Corporation 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 (the “Board”) is authorized to determine when options become exercisable within a period not exceeding 10 years from the date of grant. Under the 1998 Stock Option Plan, 23,500 shares of common stock have been reserved for the granting of these options. At September 30, 2011, 23,500 options were outstanding. During 2011, no options were granted and no options were exercised by officers, employees, or Board members. As of September 30, 2011, all options have vested.

No further options may be granted under the 1998 Stock Option Plan. The plan provided that options could be granted for a period of ten years from the date the Plan was adopted by the Board. The Board adopted the Plan on April 16, 1998. The Plan remains in effect until all options granted under the Plan have been exercised or have expired.

Under the Corporation’s 2007 Stock Option Plan, the Corporation 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. The Board is authorized to determine when options become exercisable within a period not exceeding 10 years from the date of grant. Under the Plan, 300,000 shares of common stock have been reserved for the granting of these options. As of September 30, 2011, no options have been granted under the 2007 Stock Option Plan.

(NOTE 5) EARNINGS PER SHARE

Basic earnings (loss) per share represents income (loss) available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) 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 Corporation relate to outstanding stock options and are determined using the treasury stock method.

Table of Contents

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

	Loss per share Calculation
	For the three months ended September 30
	2011							2010
				Weighted							Weighted
	Net			Average	Per Share			Net			Average	Per Share
	Loss			Shares	Amount			Loss			Shares	Amount
Basic loss per share	$	(714	)	1,785,891	$	(0.40	)	$	(1,015	)	1,785,891	$	(0.57	)

Effect of dilutive shares assumed exercise of outstanding options	—			—	—			—			—	—

Diluted loss per share	$	(714	)	1,785,891	$	(0.40	)	$	(1,015	)	1,785,891	$	(0.57	)

	Loss per share Calculation
	For the nine months ended September 30
	2011							2010
				Weighted							Weighted
	Net			Average	Per Share			Net			Average	Per Share
	Loss			Shares	Amount			Loss			Shares	Amount
Basic loss per share	$	(5,427	)	1,785,891	$	(3.04	)	$	(1,352	)	1,785,179	$	(0.76	)

Effect of dilutive shares assumed exercise of outstanding options	—			—	—			—			—	—

Diluted losss per share	$	(5,427	)	1,785,891	$	(3.04	)	$	(1,352	)	1,785,179	$	(0.76	)

(NOTE 6) INVESTMENT SECURITIES

The following table presents investment securities available for sale at September 30, 2011 and December 31, 2010:

	September 30, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Loss			Fair Value
	(Dollars in thousands)
Securities Available for Sale
Mortgage Backed Securities	$	554	$	—	$	—		$	554
State/Local Agency Securities	44,328		1,938		(112		)	46,154

Total securities available for sale	$	44,882	$	1,938	$	(112	)	$	46,708

Table of Contents

	December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Loss			Fair Value
	(Dollars in thousands)
Securities Available for Sale
Mortgage Backed Securities	$	625	$	28	$	—		$	653
State/Local Agency Securities	43,788		60		(2,277		)	41,571
Government Agency Securities	2,000		2		—			2,002

Total securities available for sale	$	46,413	$	90	$	(2,277	)	$	44,226

In addition, the Corporation maintains a trading account, at fair value, consisting of marketable securities. At September 30, 2011 and December 31, 2010 the account value was $26,000 and $30,000, respectively.

The amortized cost and fair value of debt securities by contractual maturity date at September 30, 2011 are as follows:

	Available for Sale
	Amortized Cost		Fair Value
	(Dollars in thousands)

Due after ten years	$	44,882	$	46,708

Proceeds from calls, maturity, payments and sales of investment securities for the nine months ended September 30, 2011, and 2010 were $9,173,000, and $25,839,000, respectively. Realized gains for the nine months ended September 30, 2011, and 2010 were $256,000, and $936,000, respectively.

At September 30, 2011, mortgage-backed obligations with a carrying value of $554,000 were pledged to secure advances from the FHLB. At December 31, 2010, U.S. Government and mortgage-backed obligations with a carrying value of $2,655,000 were pledged to secure advances from the FHLB.

At September 30, 2011 and December 31, 2010, state/local agency obligations with a carrying value of $9,491,000 and $9,637,000, respectively, were pledged to secure a discount window line with the Federal Reserve Bank.

Information pertaining to securities with gross unrealized losses at September 30, 2011, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:

	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
	(Dollars in thousands)
Securities Available for sale:
State/Local Agency Securities	$	302	$	(8	)	$	2,841	$	(104	)	$	3,143	$	(112	)

Table of Contents

Information pertaining to securities with gross unrealized losses at December 31, 2010, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:

	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss
	(Dollars in thousands)
Securities Available for Sale:
State/Local Agency Securities	$	27,238	$	(1,367	)	$	5,854	$	(910	)	$	33,092	$	(2,277	)

At a minimum, Management evaluates securities for other-than-temporary impairment on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to: (1) the length of time and the extent to which the fair value has been less than cost; (2) the financial condition and near-term prospects of the issuer; (3) the Bank’s intention not to sell the security; and (4) the lack of any need to sell the security before recovery of its cost basis.

On September 30, 2011, 6 securities had an unrealized loss with aggregate depreciation of 3.58% from the Bank’s amortized cost basis. On December 31, 2010, 75 securities had an unrealized loss with aggregate depreciation of 6.56% from the Bank’s amortized cost basis. The unrealized losses relate to securities issued by state and local government agencies. All such securities are deemed to be investment grade as determined either by Moody or Standard and Poor’s or, for unrated securities, by an independent consultant. Based on this and the factors stated in the previous paragraph, no decline is deemed to be other-than-temporary.

(NOTE 7) LOANS AND ALLOWANCE FOR LOAN LOSSES

The following table presents information on loans and the allowance for loan losses at September 30, 2011 and December 31, 2010:

	SEPTEMBER			DECEMBER
	2011			2010
	(Dollars in thousands)

Commercial and industrial	$	17,799		$	22,217
Construction and land	11,511			14,788
Real Estate - commercial	62,948			62,854
Real Estate - residential	45,980			42,716
Consumer	4,644			489
SBA - unguaranteed portion held for investment	4,015			5,351
SBA - guaranteed portion	3,707			5,864
Other	744			590
Total	151,348			154,869
Allowance for loan losses	(3,406		)	(3,159		)
Deferred origination fees, net	(117		)	(161		)

Loans, net	$	147,825		$	151,549

Loans held for sale totaled $2,659,000 and $3,937,000 at September 30, 2011 and December 31, 2010, respectively, and are included in the SBA guaranteed portion above.

Table of Contents

The following tables present an analysis of credit quality indicators by loan class at September 30, 2011 and December 31, 2010. Information has been updated for each credit quality indicator as of these dates.

	September 30, 2011
	Grade
	Pass		Special Mention		Substandard		Doubtful		Total

Construction and land:
Land	$	7,150	$	2,857	$	1,504	$	—	$	11,511

One to four residential:
First liens	34,696		1,762		2,687		—		39,145
Junior liens	5,554		1,281		—		—		6,835

Commercial real estate:
Owner occupied	26,679		5,182		432		—		32,293
Non-owner occupied	25,779		3,530		1,346		—		30,655

Commercial and industrial:
Secured	9,746		889		2,000		648		13,283
Unsecured	2,548		—		1,968		—		4,516

Consumer	4,352		287		5		—		4,644

SBA:
SBA, unguaranteed portion held for investment	3,879		—		10		126		4,015
SBA, guaranteed portion	2,285		—		42		1,380		3,707

Other	744		—		—		—		744

Total	$	123,412	$	15,788	$	9,994	$	2,154	$	151,348

Table of Contents

	December 31, 2010
	Grade
	Pass		Special Mention		Substandard		Doubtful		Total
	(Dollars in thousands)
Construction and land:
Commercial real estate	$	—	$	—	$	1,265	$	—	$	1,265
Land	8,837		—		4,686		—		13,523

One-to four-residential:
First liens	32,691		—		4,610		—		37,301
Junior liens	4,790		162		463		—		5,415

Commercial real estate:
Owner occupied	25,818		3,693		—		—		29,511
Non-owner occupied	31,947		500		896		—		33,343

Commercial and industrial:
Secured	13,071		658		3,339		—		17,068
Unsecured	5,149		—		—		—		5,149

Consumer	363		113		13		—		489

SBA:
SBA, unguaranteed portion held for investment	4,782		11		418		140		5,351
SBA, guaranteed portion	4,256		—		713		895		5,864

Other	590		—		—		—		590

Total	$	132,294	$	5,137	$	16,403	$	1,035	$	154,869

The Corporation’s policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those assets characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable or improbable, based on currently existing facts, conditions and values. Assets (or portions of assets) classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted. Assets that do not expose the Bank to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve close attention, are required to be designated as special mention.

When assets are classified as substandard or doubtful, the Corporation allocates a portion of the related general loss allowances to such assets as the Corporation deems prudent. Determinations as to the classification of assets and the amount of loss allowances are subject to review by regulatory agencies, who can require that we establish additional loss allowances. The Bank regularly reviews its asset portfolio to determine whether any assets require classification in accordance with applicable regulations.

Table of Contents

The following table sets forth an aging analysis of past due loans by loan class at September 30, 2011 and December 31, 2010:

	September 30, 2011
													Recorded
					Greater								Investment
	30-59 Days		60-89 Days		Than		Total				Total		90 Days or more
	Past Due		Past Due		90 Days		Past Due		Current		Loans		and Accruing

Construction and land:
Land	$	738	$	—	$	1,504	$	2,242	$	9,269	$	11,511	$	—

One to four residential:
First liens	358		77		—		435		38,710		39,145		—
Junior liens	96		437		—		533		6,302		6,835		—

Commercial real estate:
Owner occupied	—		—		1,513		1,513		30,780		32,293		1,513
Non-owner occupied	2,100		—		1,346		3,446		27,209		30,655		495

Commercial and industrial:
Secured	—		—		2,648		2,648		10,635		13,283		—
Unsecured	67		—		—		67		4,099		4,166		—

Consumer	—		—		—		—		4,994		4,994		—

SBA:
SBA, unguaranteed portion held for investment	10		—		126		136		3,879		4,015		—

SBA, guaranteed portion	—		—		1,422		1,422		2,285		3,707		—

Other	—		—		—		—		744		744		—

Total	$	3,369	$	514	$	8,559	$	12,442	$	138,906	$	151,348	$	2,008

Table of Contents

	December 31, 2010
					Greater								Recorded
					Than								Investment
	30-59 Days		60-89 Days		90 Days		Total				Total		90 Days or more
	Past Due		Past Due		Past Due		Past Due		Current		Loans		and Accruing
	(Dollars in thousands)
Construction and land:
Commercial real estate	$	—	$	—	$	1,265	$	1,265	$	—	$	1,265	$	—
Land	—		265		1,922		2,187		11,336		13,523		—

One-to four-residential:
First liens	1,924		—		2,763		4,687		32,614		37,301		—
Junior liens	97		162		25		284		5,131		5,415		—

Commercial real estate:
Owner occupied	—		—		—		—		29,511		29,511		—
Non-owner occupied	635		—		896		1,531		31,812		33,343		896

Commercial and industrial:
Secured	1,095		360		3,164		4,619		12,449		17,068		—
Unsecured	401		300		—		701		4,448		5,149		—

Consumer	—		100		13		113		376		489		—

SBA:
SBA, unguaranteed portion held for investment	228		43		459		730		4,621		5,351		11

SBA, guaranteed portion	51		—		1,608		1,659		4,205		5,864

Other	—		—		—		—		590		590		—

Total	$	4,431	$	1,230	$	12,115	$	17,776	$	137,093	$	154,869	$	907

Loans past due greater than 90 days totaled $8,559,000 and $12,115,000 at September 30, 2011 and December 31, 2010, respectively; compared to total nonaccrual loans of $6,551,000 and $11,473,000 at September 30, 2011 and December 31, 2010, respectively. The difference at September 30, 2011 of $2,008,000 was due to three loans which were well secured and in the process of collection and were not classified as nonaccrual. The difference at December 31, 2010 of $642,000 was due to two loans totaling $907,000 which were well secured and in the process of collection and were not classified as nonaccrual, and a $265,000 loan which was past due less than 90 days but was classified as nonaccrual.

Table of Contents

Loans by portfolio segment, and the related allowance for loan loss for each segment, are presented below as of September 30, 2011 and December 31, 2010. Loans and the allowance for loan losses are further segregated by impairment methodology.

	September 30, 2011
	Loan Balances						Allowance for Loan & Lease Losses:
	Individually evaluated for impairment		Collectively evaluated for impairment		Balance		Individually evaluated for impairment		Collectively evaluated for impairment		Balance

Construction and Land	$	1,504	$	10,007	$	11,511	$	—	$	200	$	200

One to Four Residential:

First lien	2,687		36,458		39,145		134		368		502

Junior lien	—		6,835		6,835		—		427		427

Commercial real estate	1,778		61,170		62,948		22		887		909

Commercial and Industrial	4,616		13,183		17,799		324		190		514

Consumer	5		4,639		4,644		1		124		125

SBA - unguaranteed portion	135		3,880		4,015		65		262		327

SBA - guaranteed portion	1,422		2,284		3,706		—		—		—

Other	—		744		744		—		11		11

Unallocated									391		391

Total	$	12,147	$	139,200	$	151,347	$	546	$	2,860	$	3,406

Table of Contents

	December 31, 2010
	Loan Balance						Allowance for Loan Losses:
	Individually evaluated for impairment		Collectively evaluated for impairment		Balance		Individually evaluated for impairment		Collectively evaluated for impairment		Balance
	(Dollars in thousands)
Construction and Land	$	3,453	$	11,335	$	14,788	$	93	$	278	$	371

One-to Four-Residential:

First lien	2,763		34,538		37,301		43		439		482

Junior lien	25		5,390		5,415		1		418		419

Commercial real estate	—		62,854		62,854		—		985		985

Commercial and Industrial	3,164		19,053		22,217		33		277		310

Consumer	13		476		489		3		3		6

SBA - unguaranteed portion	447		4,904		5,351		120		349		469

SBA - guaranteed portion	1,608		4,256		5,864		—		—		—

Other	—		590		590		—		8		8

Unallocated									109		109

Total	$	11,473	$	143,396	$	154,869	$	293	$	2,866	$	3,159

Management segregates the loan portfolio into portfolio segments for purposes of estimating the allowance for loan losses. A portfolio segment is defined as the level at which the Bank develops and documents a systematic method for determining its allowance for loan losses. The portfolio segments are segregated based on loan types and the underlying risk factors present in each loan type. Such risk factors are periodically reviewed by Management and revised as deemed appropriate.

The Bank’s loan portfolio is segregated into the following portfolio segments:

Construction and Land Loan. This portfolio segment consists of the origination of one-to-four residential construction loans, commercial real estate construction loans, loans for the development of building lots and loans secured by vacant land.

One-to Four-Family First Lien. This portfolio segment consists of the origination of first mortgage loans secured by one-to-four family owner occupied residential properties located in the Bank’s market area.

One-to Four-Family Junior Lien. This portfolio segment consists of loans secured by junior liens on one-to-four family properties. Such lending involves additional risks, since the lien position is junior to higher priority liens.

Commercial Real Estate Loans. This portfolio segment includes loans secured by commercial real estate, including multi-family dwellings. Loans secured by commercial real estate generally have larger loan balances and more credit risk than one-to-four family mortgage loans. The increased risk is the result of several factors, including the concentration of principal in a limited number of loans and borrowers, the impact of local and general economic conditions on the borrower’s ability to repay the loan, and the increased difficulty of evaluating and monitoring these types of loans.

Table of Contents

Commercial and Industrial Loans. This portfolio segment includes commercial business loans secured by assignments of corporate assets and personal guarantees of the business owners. Commercial business loans generally have higher interest rates and shorter terms than one- to four-family residential loans, but they also may involve higher average balances, increased difficulty of loan monitoring and a higher risk of default since their repayment generally depends on the successful operation of the borrower’s business.

Consumer Loans. This portfolio segment includes loans to individuals for personal lines of credit, life insurance premium financing, automobiles, and overdraft protection.

Small Business Administration (“SBA”) Guaranteed Loans. This portfolio segment includes loans to small businesses which qualify for the SBA’s loan guarantee program. Borrowers must meet certain SBA guidelines in order to qualify for the program. SBA loans generally have a higher risk factor than traditional commercial and industrial loans.

Loans evaluated individually for impairment have been classified as substandard or doubtful at September 30, 2011 and December 31, 2010, respectively. Loans evaluated collectively for impairment consist of all loans in the portfolio which are not impaired.

The following table summarizes the activity in the allowance for loan loss by loan class for the three and nine months ended September 30, 2011.

	Balance as of June 30, 2011		Charge Offs		Recoveries		Provision		Balance as of September 30, 2011

Construction and Land	$	300	$	357	$	—	$	257	$	200

One to Four Residential:

First lien	567		83		—		18		502

Junior lien	444		124		—		107		427

Commercial real estate	940		282		—		251		909

Commercial and Industrial	515		34		—		33		514

Consumer	104		—		—		21		125

SBA - unguaranteed portion	387		147		—		87		327

SBA - guaranteed portion	—		—		—		—		—

Other	10		5		—		6		11

Unallocated	121		—		—		270		391

Total	$	3,388	$	1,032	$	—	$	1,050	$	3,406

Table of Contents

	Balance as of December 31, 2010		Charge Offs		Recoveries		Provision		Balance as of September 30, 2011

Construction and Land	$	371	$	1,002	$	—	$	831	$	200

One to Four Residential:

First lien	482		83		—		103		502

Junior lien	419		286		—		294		427

Commercial real estate	985		321		—		245		909

Commercial and Industrial	310		103		1		306		514

Consumer	6		113		—		232		125

SBA - unguaranteed portion	469		342		1		199		327

SBA - guaranteed portion	—		—		—		—		—

Other	8		5		—		8		11

Unallocated	109		—		—		282		391

Total	$	3,159	$	2,255	$	2	$	2,500	$	3,406

The following table summarizes loans on nonaccrual status by loan class at September 30, 2011 and December 31, 2010:

	September 30, 2011		December 31, 2010
Construction and land:
Commercial real estate	$	—	$	1,265
Land	1,504		2,188

One to four residential:
First lien	—		2,763
Junior lien	—		25

Commercial real estate:
Non-owner occupied	851		—

Commercial and industrial:
Secured	2,648		3,164

Consumer	—		13

SBA:
SBA, unguaranteed portion held for investment	126		447

SBA guaranteed protion	1,422		1,608

Other	—		—

Total	$	6,551	$	11,473

Table of Contents

The following tables summarize the Bank’s investment in loans for which impairment has been recognized as of and for the three and nine months ended September 30, 2011 and as of and for the three and twelve months ended December 31, 2010. Impaired loans consist of the loans on non-accrual status.

							Nine Months Ended				Three Months Ended
	September 30, 2011						September 30, 2011				September 30, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Construction and land:
Commercial real estate	$	—	$	644	$	—	$	849	$	—	$	—	$	—
One to four residential:
First Liens	—		—		—		1,203		4		1,178		—
Junior Liens	—		—		—		—		—		—		—
Commercial and industrial:
Secured	2,000		2,034		—		2,688		—		2,319		—
Consumer	—		—		—		—		—		—		—
SBA:
SBA, unguaranteed portion held for investment	—		—		—		—		—		—		—
SBA. guaranteed portion	1,422		1,422		—		1,439		—		1,436		—

With an allowance recorded:
Construction and land:
Land	1,504		1,861		14		1,854		—		1,795		—
Commercial real estate	—		—		—		—		—		—		—
Commercial real estate
Owner occupied	1,513		1,513		15		1,515		38		1,513		—
Non-owner occupied	1,346		1,384		20		1,339		—		1,301		—
One to four residential:
First Liens	—		83		—		595		—		810

NORTHERN CALIFORNIA BANCORP INC 10-Q