Statements Regarding Forward-Looking Information

Except for historical information contained herein, the matters discussed or incorporated by reference in this report contain forward-looking statements within the meaning of 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 this report, or in the documents incorporated by reference herein, the words "anticipate," "believe," "estimate," "may," "intend," "expect," and similar expressions identify certain of such forward-looking statements. Actual results of

Monterey County Bank could differ materially from such forward-looking statements contained herein. Factors that could cause future results to vary from current expectations include, but are not limited to, the following:
changes in economic conditions (both generally and more specifically in the markets in which the Bank operates); changes in interest rates, deposit flows, loan demand, real estate values and competition; changes in accounting principles, policies or guidelines and in government legislation and regulation (which change from time to time and over which the Bank has no control); other factors affecting the Bank's operations, markets, products and services; and other risks detailed in this Form 10-QSB and in the Bank's other reports filed with the Federal Deposit Insurance Corporation and pursuant to the rules and regulations of the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Corporation undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date thereof.

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 March 31, 2008.

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 March 31, 2008 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 three months ended March 31, 2008 net income was $919,000, compared to $809,000 for the same period in 2007. For the three months ended March 31, 2008 net interest income after provision for loan losses decreased $55,000, total non-interest income increased

$463,000, non-interest expense increased $23,000 and the income tax provision increased $275,000.

The following table sets forth certain selected financial ratios of the Corporation for the three months ended March 31, 2008 and 2007.

                                                    Three Months Ended March 31
                                                      2008               2007
Summary of Operating Results:

Total interest income                            $         4,621    $         3,827
Total interest expense                                     2,489              1,640
Net interest income                                        2,132              2,187

Provision for possible loan losses                             -                  -
Net interest income after provision for loan
losses                                                     2,132              2,187

Total non-interest income                                  1,789              1,326
Total non-interest expense                                 2,226              2,203

Income before taxes                                        1,695              1,310
Provision for income taxes                                   776                501

Net income                                       $           919    $           809

Per Common Share Data:

Net income - Primary (1)                         $         0.498    $         0.468
Net income - Diluted (2)                                   0.496              0.435
Book value, end of period                                   7.97               7.53
Avg shares outstanding (3)                             1,846,885          1,728,657
Balance Sheet Data:
Total loans, net of unearned income (4)          $       167,573    $       132,742
Total assets                                             270,982            193,671
Total deposits                                           183,913            133,287
Stockholders' equity                                      14,747             13,502

                                                   Three Months Ended March 31
                                                     2008               2007
Selected Financial Ratios:

Return on average assets (5) (6)                          1.41 %             1.73 %
Return on average stockholders' equity
(5) (6)                                                  24.83 %            25.09 %
Net interest spread                                       2.94 %             4.47 %
Net yield on interest earning assets (5)                  3.51 %             5.14 %
Avg shareholders' equity to average assets
(5)                                                       5.67 %             6.88 %
Risked-Based capital ratios
Tier 1                                                    9.68 %            10.76 %
Total                                                    13.14 %            14.71 %
Total loans to total deposits at end of
period (4)                                               91.11 %            99.59 %
Allowance for loan losses to total loans at
end of period (4)                                         1.19 %             1.05 %
Nonperforming loans to total loans at end of
period (4)                                                2.08 %             0.12 %
Net charge-offs to average loans (4)                      0.00 %             0.00 %

(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 1,852,004 and 1,862,143 for March 31, 2008 and 2007, respectively.

(3) Weighted average common shares.

(4) Includes loans being held for sale.

(5) Averages are of daily balances.

(6) March 31, 2008 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 three months ended March 31, 2008 was $2,132,000 compared to $2,187,000 for the same period in 2007. The decrease of $55,000 resulted

primarily from the decline in loan rates as shown on page 16 in the rate and volume analysis table.

The following tables show the components of the Bank's net interest income, setting forth, for each of the three months ended March 31, 2008 and 2007,
(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 $59,000 and $37,000 for the three months ended March 31, 2008 and 2007, respectively. Non-accrual loans and overdrafts are included in average loan balances. Average loans are presented net of unearned income.

DISTRIBUTION, RATE AND YIELD ANALYSIS OF NET INTEREST INCOME:

The following table shows the consolidated average balances of earning assets, and interest-bearing liabilities; the amount of interest income and interest expense; the average yield or rate for each category of average interest-earning assets and average interest-bearing liabilities; and the net interest income and the net interest spread for the periods indicated:

                               Three Months Ended March 31,              Three Months Ended March 31,
                                           2008                                      2007
                            Average                      Yield/       Average                      Yield/
(dollars in thousands)      Balance        Interest       Rate        Balance        Interest       Rate
Assets:
Loans                     $    172,284    $    3,698        8.59 %  $    130,718    $    3,290       10.07 %
Time deposits - in
other banks                      1,478            12        3.34 %         1,144            14        4.79 %
Invest securities -
taxable                         45,867           626        5.46 %        23,118           295        5.10 %
Invest securities -
nontaxable                      11,060           189        6.84 %         7,011           118        6.72 %
Federal funds sold              12,879           104        3.23 %         9,190           123        5.37 %
Total interest-earning
assets                         243,568         4,629        7.60 %       171,181         3,840        8.97 %

Allowance for credit
losses                          (2,029 )                                  (1,409 )
Non-interest bearing
assets:
Cash and due from
banks                            7,374                                     6,491
Premises and equipment           4,897                                     4,728
Accrued interest
receivable                       1,174                                     1,016
Other assets                     5,970                                     5,560
Total average assets      $    260,954                              $    187,567

Liabilities and
Shareholders' Equity:
Interest-bearing
liabilities:
Interest-bearing
demand                    $     13,586    $        9        0.26 %  $     14,434    $        9        0.25 %
Money market savings             1,695             3        0.73 %         2,000             4        0.72 %
Savings deposits                 6,276            17        1.06 %         4,724            12        0.99 %
Time deposits >$100M            61,693           771        5.00 %        37,724           473        5.01 %
Time deposits <$100M            66,884           826        4.94 %        43,927           519        4.73 %
Other Borrowing                 63,737           864        5.43 %        42,998           624        5.81 %
Total interest-bearing
liabilities                    213,871         2,490        4.66 %       145,807         1,641        4.50 %

Non-interest bearing
liabilities:
Noninterest-bearing
checking                        26,197                                    25,273
Accrued interest
payable                          2,022                                     1,375
Other liabilities                4,059                                     2,211
Total Liabilities              246,149                                   174,666
Total shareholders
equity                          14,805                                    12,901
Total average
liabilities and
shareholders equity       $    260,954                              $    187,567
Net interest income                       $    2,139                                $    2,199
Interest income as a
percentage of average
earning assets                                              7.60 %                                    8.97 %
Interest expense as a
percentage of average
earning assets                                              4.09 %                                    3.83 %
Net yield on interest
earning assets                                              3.51 %                                    5.14 %

Net interest spread                                         2.94 %                                    4.47 %

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 and volumes,
for the three months ended March 31, 2008 compared with the same period in 2007.



                                                     Increase (decrease) in the three months ended
                                                      March 31, 2008 compared with March 31, 2007
                                                      Volume                Rate              Total
Increase (decrease) in interest income:
Loans                                           $            1,046     $          (638 )   $        408
Time deposits - in other banks                                   3                  (5 )             (2 )
Invest securities - taxable                                    289                  42              331
Invest securities - nontaxable                                  68                   3               71
Federal funds sold                                              50                 (69 )            (19 )
                                                             1,456                (667 )            789

Increase (decrease) in interest expense:
Money market savings                                            (1 )                 0               (1 )
Savings deposits                                                 4                   1                5
Time deposits >$100M                                           300                  (2 )            298
Time deposits <$100M                                           271                  36              307
Other Borrowing                                                301                 (61 )            240
                                                               875                 (26 )            849
Increase (decrease) in net interest income:     $              581     $          (641 )   $        (60 )

Provision and Allowance for Loan Losses

The provision for loan losses is an expense charged against operating income and added to the allowance for loan losses. The allowance for loan losses represents amounts set aside for the specific purpose of absorbing losses that may occur in the Bank's loan portfolio.

The allowance for loan losses reflects management's ongoing evaluation of the risks inherent in the loan portfolio both generally and with respect to specific loans, the state of the economy, and the level of net loan losses experienced in the past. Management and the Board of Directors review the results of the State Banking Department and FDIC examinations, independent accountants' observations, and the Bank's internal review as additional indicators to determine if the amount in the allowance for loan losses is adequate to protect against estimated future losses. It is the Bank's current practice, which could change in accordance with the factors mentioned above, to maintain an allowance which is at least equal to the sum of the following percentage of loan balances by loan category. Additionally, specific loss allocations are made for classified loans.

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 losses will not exceed the amount provided for in the allowance, Management believes that the allowance is adequate to provide for all estimated credit losses in light of all known relevant factors. At March 31, 2008 and 2007 the Bank's allowance stood at 1.19 percent and 1.05 percent, respectively.

No provisions were made to the allowance during the three months ended March 31, 2008 or 2007. No loans were charged off during the three months ended March 31, 2008 and March 31, 2007. Recoveries for the same periods were $1,000 and $0, respectively.

The Bank's non-performing (delinquent 90 days or more and on non-accrual) loans as a percentage of total loans were 2.01 percent and 0.12 percent as of the end of March 31, 2008 2007, respectively. The significant increase in non-accrual loans consisted of a single $3,200,000 real estate loan participation purchased. The property securing the loan was acquired through a foreclosure sale April 29, 2008. We do not at this time anticipate any material loss due to expressions of interest by two entities in purchasing the property.

Non-Interest Income

Total non-interest income for the three months ended March 31, 2008 was $1,789,000 compared with $1,326,000 for the same period in 2007. The increase of $463,000 primarily resulted from income of $694,000 related to the Visa, Inc. initial public stock offering and increases in merchant credit card income of $26,000, sales and servicing of Small Business Administration Loans of $66,000 and gains on sale of securities of $229,000; partially offset by a mark to market loss of $294,000 in the trading assets compared with a $110,000 gain during the same period in 2007 and a decrease in discount accretion on Small Business Administration loans sold of $106,000.

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

There can be no assurance that the gains on sale will continue at, or above, the levels realized in the past three years. In addition, increasing competition among lenders for qualified SBA borrowers makes 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-Interest Expense

Salary and benefits expense for the three months ended March 31, 2008 increased $28,000 compared with the same period in 2007. The increase was due to merit pay increases and the addition, in March, of four employees to staff the Salinas branch office scheduled to open during the second quarter.

Total occupancy and equipment expense for the three months ended March 31, 2008 was $238,000 compared to $206,000 for the same period in 2007. The increase was primarily due to rental expense for the Salinas branch office.

Professional fees for the three months ended March 31, 2008 were $44,000 compared to $38,000 for the same period in 2007.

Data processing expense for the three months ended March 31, 2008 was $101,000 compared to $88,000 for the same period in 2007. The increase of $23,000 was due to one time charges for the implementation of branch image capture of items, image cash letter processing and communication network design for the Salinas branch office.

Other general and administrative expenses for the three months ended March 31, 2008 totaled $738,000 compared with $794,000 for the same period in 2007, which is a decrease of $56,000. Significant changes occurred in the following categories; increases occurred in merchant credit card processing expense of $45,000, FDIC insurance premiums of $26,000 and business development of $11,000; while decreases occurred in director fees of $17,000, advertising expense of $15,000, donations of $25,000 and other losses of $11,000. Included in the Visa, Inc. initial public offering transaction was the reversal of a litigation reserve, established in 2007, of $110,000 representing the Bank's share of the liability associated with the settlement by VISA of litigation brought by American Express and Discover.

Provision for Income Taxes

The tax provision was $776,000 for the first quarter ended March 31, 2008 compared to tax provision of $501,000 for the first quarter ended March 31, 2007, representing 45.78% and 38.21% of pre-tax income for those periods. The amount of the tax provision is determined by applying the Corporation's statutory income tax rates to pre-tax book income, adjusted for permanent differences between pre-tax book income and actual taxable income. Such permanent differences include but are not limited to tax-exempt interest income; increases in the cash surrender value of bank-owned life insurance, certain other expenses that are not allowed as tax deductions, and tax credits.

LOANS

Loans represented 70.73% of average earning assets, and 66.02% of average total assets for the three months ended March 31, 2008 compared with 76.36% and 69.69%, respectively during 2007. For the three months ended March 31, 2008, average loans increased 31.80% from $130,718,000 for the same period in 2007 to $172,284,000. Average real estate loans increased $28,680,000 (33.47%), average construction loans increased $5,444,000 (30.01%), average commercial loans increased $7,132,000 (27.11%), and average installment loans increased $310,000 (54.11%).

The Bank's commercial and industrial loans are generally made for the purpose of providing working capital, financing the purchase of equipment or inventory, and other business purposes. Such loans generally have maturities of one year or longer. Short-term business loans are generally intended to finance current transactions and typically provide for monthly interest payments with principal being payable at maturity or at 90-day intervals. Term loans (usually for a term of two to five years) normally provide for monthly installments of principal and interest. The Bank from time to time utilizes accounts receivable and inventory as security for loans.

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

The Bank's real estate loan portfolio consists both of real estate construction loans and real estate mortgage loans. The Bank has initiated a program to generate more commercial and industrial real estate loans, which generally yield higher returns than normal commercial loans. The Bank has also developed a broker program for generating residential real estate loans. The Bank does not make real estate development loans. Real estate construction loans are made for a much shorter term, and often at higher interest rates, than conventional single-family residential real estate loans. The cost of administering such loans is often higher than for other real estate loans, as principal is drawn on periodically as construction progresses.

The Bank also makes real estate loans secured by a first deed of trust on single family residential 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 the fair market value of real property (or more if the loan is insured either by private mortgage insurers or governmental . . .