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                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

               [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
                   SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 2001

               [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
                   SECURITIES EXCHANGE ACT OF 1934

          For the transition period from ____________ to ____________ .

                        Commission file number: 000-31593

                                BUSINESS BANCORP
                 (Name of small business issuer in its charter)

                California                                       33-0884369
(State or Other Jurisdiction of Incorporation                 (I.R.S. Employer
             or Organization)                                Identification No.)

                               1248 Fifth Avenue,
                          San Rafael, California 94901
                                 (415) 784-2315
          (Address and telephone number of principal executive offices)

             Securities registered pursuant to Section 12 (b) of the
              Act: None, Securities registered pursuant to Section
                               12 (g) of the Act:
                           Common Stock, no par value
                        Preferred Share Purchase Rights
                                (Title of class)

    Check  whether  the issuer  (1) filed all  reports  required  to be filed by
Section 13 or 15(d) of the  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 [ ].

    Check  if  disclosure  of  delinquent  filers  in  response  to Item  405 of
Regulation  S-B is not  contained  in  this  form,  and no  disclosure  will  be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ].

    The issuer's revenues for its most recent fiscal year were $29,165,314.

    At March 26, 2002,  the  aggregate  market value of the Common Stock held by
non-affiliates  of the issuer was approximately  $35,493,000.  The directors and
executive officers of the issuer are deemed to be affiliates.

    At March 26, 2002,  the issuer had  outstanding  3,690,367  shares of Common
Stock, no par value, which is the issuer's only class of common stock.
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                      Documents Incorporated by Reference:

    The information  required to be furnished  pursuant to Part III of this Form
10-KSB  will  be  set  forth  in,  and   incorporated  by  reference  from,  the
registrant's  definitive  proxy statement for the annual meeting of stockholders
to be held May 23, 2002,  which  definitive proxy statement will be filed by the
issuer with the Securities and Exchange Commission not later than 120 days after
the end of the fiscal year ended December 31, 2001.

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                                TABLE OF CONTENTS

PART I....................................................................... 1

          Item 1.  Description of Business................................... 1

          Item 2.  Description of Property................................... 13

          Item 3.  Legal Proceedings......................................... 14

          Item 4.  Submission of Matters to a Vote of Security Holders....... 14

PART II...................................................................... 14

          Item 5.  Market for Common Equity and Related Stockholder Matters.. 14

          Item 6.  Management's Discussion and Analysis of
                     Financial Condition and Results of Operation............ 16

          Item 7.  Financial Statements...................................... 39

          Item 8.  Changes in and Disagreements with Accountants on
                     Accounting and Financial Disclosure..................... 39

PART III..................................................................... 72

          Item 9.  Directors, Executive Officers, Promoters and
                     Control Persons; Compliance with Section 16(a)
                     of the Exchange Act..................................... 72

          Item 10. Executive Compensation.................................... 72

          Item 11. Stock Ownership by Certain Beneficial Owners and
                     Management.............................................. 72

          Item 12.  Certain Relationships and Related Transactions........... 72

          Item 13.  Exhibits and Reports on Form 8-K......................... 72

SIGNATURES................................................................... 73

INDEX TO EXHIBITS............................................................ 74

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                                     PART I

Discussions  of certain  matters  contained in this Annual Report on Form 10-KSB
may constitute  forward-looking statements within the meaning of the Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities and
Exchange Act of 1934, as amended (the "Exchange  Act"), and as such, may involve
risks and uncertainties. These forward-looking statements relate to, among other
things,  expectations  of the business  environment  in which  Business  Bancorp
(referred to as "we" or "our" when such reference  includes Business Bancorp and
its subsidiaries,  collectively,  "BB" when referring only to the parent company
and the "Bank" when referring only to BB's banking subsidiary,  Business Bank of
California) operates, projections of future performance, perceived opportunities
in the market and  statements  regarding  our  mission  and  vision.  Our actual
results,  performance and achievements  may differ  materially from the results,
performance  and  achievements  expressed  or  implied  in such  forward-looking
statements.  For a  discussion  of some of the  factors  that might cause such a
difference, see "Item 1. Description of Business--Factors That May Affect Future
Results of Operations".

Item 1. Description of Business

Business Bancorp

Business  Bancorp  ("BB",  on a  parent-only  basis,  and  "we" or  "our",  on a
consolidated basis) is a bank holding company with one bank subsidiary, Business
Bank of California (the "Bank").

We provide a wide range of commercial banking services to small and medium-sized
businesses,  real estate  developers,  property managers,  business  executives,
professionals and other individuals. We operate throughout the San Francisco Bay
Area and Southern  California's  Inland Empire with sixteen  offices  located in
Corona,  Hayward,  Hemet,  Hesperia,   Ontario,   Petaluma,   Phelan,  Redlands,
Riverside,  San Bernardino,  San Francisco,  San Rafael, South San Francisco and
Upland.

At December 31, 2001, we had total assets of $631.2 million,  total loans,  net,
of $383.9 million and total deposits of $518.1 million.

History

BB is a California  corporation  registered as a bank holding  company under the
Bank  Holding  Company  Act  of  1956,  as  amended  (the  "BHC  Act"),  and  is
headquartered  in San  Rafael,  CA. BB was  incorporated  in  October,  1999 and
acquired all of the outstanding shares of the Bank in January, 2000.

On December  31,  2001,  we  completed  our merger of equals with MCB  Financial
Corporation ("MCB").  Under the terms of the merger agreement,  MCB shareholders
received 1.1763 shares of our stock in exchange for each share of MCB stock they
owned. The merger with MCB increased our assets by approximately 63.4%.

The Bank is a California  state-chartered commercial bank which was incorporated
under the laws of the State of  California  on June 15,  1983,  and  opened  for
business in April, 1984. The Bank's  administrative  office is located at 321 E.
Sixth Street,  Corona, CA 92879. The Bank was originally  incorporated under the
name Bank of San  Bernardino and changed its name to Business Bank of California
in August, 1996.

On August 31, 2000, the Bank completed the acquisition of Valley Merchants Bank,
N.A. ("VMB"),  for an aggregate  purchase price of $12.2 million,  pursuant to a
two-step  transaction in which VMB was ultimately merged with and into the Bank.
VMB's sole office, in Hemet, became the Hemet Office of the Bank.

Both the VMB and MCB  transactions  were accounted for using the purchase method
of accounting.

Corporate Growth Strategy

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Our primary goal is to build a first-class,  state-wide,  middle-market business
bank.  Our primary  strategy is to focus on increasing  our market share through
continued  internal growth, the opening of de novo branches and the acquisitions
of other emerging business banks in California.

Banking Services

The Bank is a community bank conducting a general  commercial  banking business.
Each of its branch  offices is a full  service  office  offering a wide range of
commercial  banking  services.  The Bank  provides  numerous  deposit  products,
including demand deposit  accounts,  money market accounts,  savings,  super now
accounts  and time  certificates  of deposit.  The Bank makes  various  types of
commercial,  installment  and real estate loans,  including the  origination  of
government-guaranteed  Small Business  Administration  Loans ("SBA  Loans").  In
addition, the Bank provides safe deposit,  collection,  travelers checks, notary
public and other customary  non-deposit  banking services.  The Bank also offers
electronic  "home  banking"  through its "EZ Banker"  program and  maintains  an
Internet  web site  (www.businessbank.com)  for its  customers.  Other  services
offered include ATM machines  located at branch  offices,  customer access to an
ATM network,  and armored carrier and courier services.  The Bank does not offer
trust services,  however,  it has arranged with a  correspondent  institution to
offer trust services to the Bank's  customers  upon request.  The Bank also does
not offer  international  banking  services  although  such services are offered
indirectly through correspondent institutions.

Market Area

The Bank  concentrates  on  marketing  its  services  to small and  medium-sized
businesses,  professionals and individuals primarily in the counties of Alameda,
Marin, Riverside, San Bernardino, San Francisco, San Mateo, and Sonoma.

Competition

The banking  business in California  generally,  and  specifically in the Bank's
market areas, is highly  competitive  with respect to virtually all products and
services and has become  increasingly so in recent years. The industry continues
to consolidate, and strong, unregulated competitors have entered banking markets
with focused products  targeted at highly  profitable  customer  segments.  Many
largely unregulated competitors are able to compete across geographic boundaries
and provide customers  increasing  access to meaningful  alternatives to banking
services in nearly all significant products. These competitive trends are likely
to continue.

With respect to commercial bank  competitors,  the business is largely dominated
by a relatively  small number of major banks with many offices  operating over a
wide geographical area, which banks have, among other advantages, the ability to
finance wide-ranging and effective  advertising  campaigns and to allocate their
investment  resources to regions of highest yield and demand.  Many of the major
banks operating in the area offer certain services which the Bank does not offer
directly (but some of which the Bank offers through correspondent institutions).
By  virtue  of  their  greater  total  capitalization,   such  banks  also  have
substantially higher lending limits than does the Bank.

In addition to other banks,  competitors  include savings  institutions,  credit
unions,  and  numerous  non-banking  institutions,  such as  finance  companies,
leasing companies,  insurance companies, brokerage firms, and investment banking
firms.  In  recent  years,   increased   competition  has  also  developed  from
specialized finance and non-finance companies that offer money market and mutual
funds,  wholesale  finance,  credit card, and other consumer  finance  services,
including  on-line  banking  services  and  personal  finance  software.  Strong
competition for deposit and loan products affects the rates of those products as
well as the  terms on which  they are  offered  to  customers.  Mergers  between
financial  institutions  have placed  additional  pressure  on banks  within the
industry to streamline their operations,  reduce expenses, and increase revenues
to remain competitive. Competition has also intensified due to federal and state
interstate   banking  laws,   which  permit  banking   organizations  to  expand
geographically,  and the California market has been  particularly  attractive to
out-of-state institutions.

Technological  innovations  have also resulted in increased  competition  in the
financial services market. Such innovations have, for example,  made it possible
for  non-depository  institutions to offer customers  automated transfer payment
services that previously have been considered  traditional banking products.  In
addition,  many  customers now expect a choice of several  delivery  systems and
channels,   including  telephone,   mail,  home  computer,  ATM's,  self-service
branches,  and/or in-store branches.  In addition to other

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banks,   the  sources  of  competition   for  such  products   include   savings
associations,  credit  unions,  brokerage  firms,  money market and other mutual
funds, asset management groups,  finance and insurance  companies,  and mortgage
banking firms.

In order to compete effectively, the Bank provides quality, personalized service
and fast,  local decision making which its major bank  competitors are generally
unable to offer.  For  customers  whose loan demands  exceed the Bank's  lending
limit, the Bank attempts to arrange for such loans on a participation basis with
other financial institutions. The Bank also assists customers requiring services
not offered by the Bank in obtaining such services from its correspondent banks.

Employees

As of December 31, 2001, we had a total of 231 full-time  equivalent  employees.
None of our  employees  are  currently  represented  by a union or  covered by a
collective  bargaining  agreement.  We believe that our employee  relations  are
satisfactory.

Supervision and Regulation

General

Bank holding  companies and banks are  extensively  regulated under both federal
and state law.  This  regulation  is intended  primarily  for the  protection of
depositors  and  the  deposit   insurance  fund  and  not  for  the  benefit  of
shareholders  of BB. Set forth below is a summary  description  of the  material
laws and  regulations  which relate to the  operations  of BB and the Bank.  The
description is qualified in its entirety by reference to the applicable laws and
regulations.

BB

Since BB is a registered  bank holding  company,  BB and its bank  subsidiary is
subject to the Federal Reserve Board's  supervision,  regulation and examination
under the BHC Act of 1956, as amended.

BB is required by the Federal Reserve to maintain certain levels of
capital. See "--Capital Standards, below."

Under Federal Reserve  regulations,  a bank holding company is required to serve
as a source of financial and managerial strength to its subsidiary banks and may
not conduct its operations in an unsafe or unsound  manner.  In addition,  it is
the  Federal  Reserve's  policy  that in serving as a source of  strength to its
subsidiary  banks,  a bank holding  company  should stand ready to use available
resources  to provide  adequate  capital  funds to its  subsidiary  banks during
periods of financial  stress or  adversity  and should  maintain  the  financial
flexibility  and  capital-raising  capacity to obtain  additional  resources for
assisting its  subsidiary  banks. A bank holding  company's  failure to meet its
obligations  to serve as a source  of  strength  to its  subsidiary  banks  will
generally  be  considered  by the  Federal  Reserve to be an unsafe and  unsound
banking practice or a violation of the Federal Reserve's regulations or both.

BB is also a bank  holding  company  within the  meaning of Section  3700 of the
California  Financial  Code. As such,  BB and its bank  subsidiary is subject to
examination  by,  and may be  required  to file  reports  with,  the  California
Department of Financial Institutions.

BB's securities are registered with the Securities and Exchange Commission under
the Securities  Exchange Act of 1934, as amended (the "Exchange  Act"). As such,
BB is subject to the information, proxy solicitation, insider trading, and other
requirements and restrictions of the Exchange Act.

The Bank

The Bank is a California chartered bank and a member of the Federal Reserve. The
Bank is subject to primary supervision,  periodic examination, and regulation by
the Department of Financial Institutions ("the DFI") and the Federal Reserve and
is also subject to regulations of the FDIC.

If, as a result of a bank examination, the Federal Reserve should determine that
the financial condition,  capital resources,  asset quality, earnings prospects,
management,   liquidity,   or  other  aspects  of  the  bank's   operations  are
unsatisfactory  or that the bank or its

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management is violating or has violated any law or regulation,  various remedies
are available to these regulatory  agencies.  Such remedies include the power to
enjoin "unsafe or unsound"  practices,  to require affirmative action to correct
any  conditions   resulting  from  any  violation  or  practice,   to  issue  an
administrative order that can be judicially  enforced,  to direct an increase in
capital, to restrict the growth of the bank, to assess civil monetary penalties,
to remove officers and directors, and ultimately to terminate the bank's deposit
insurance, which for a California chartered bank would result in a revocation of
the bank's charter. The DFI has many of the same remedial powers.

Various  requirements  and  restrictions  under the laws of  California  and the
United  States  affect the Bank's  operations.  State and federal  statutes  and
regulations relate to many aspects of the Bank's operations,  including reserves
against  deposits,  ownership of deposit  accounts,  interest  rates  payable on
deposits, loans, investments, mergers and acquisitions,  borrowings,  dividends,
locations of branch offices, capital requirements, and disclosure of obligations
to depositors and borrowers.  Further,  the Bank is required to maintain certain
levels of capital. See "--Capital Standards."

USA Patriot Act of 2001

On October 26, 2001,  President Bush signed the USA Patriot Act of 2001. Enacted
in response to the terrorist  attacks in New York,  Pennsylvania and Washington,
D.C. on September 11, 2001,  the Patriot Act is intended to strengthen  U.S. law
enforcement's  and the intelligence  communities'  ability to work cohesively to
combat  terrorism  on a variety of fronts.  The  potential  impact of the Act on
financial  institutions  of all kinds is significant  and wide ranging.  The Act
contains  sweeping  anti-money  laundering and financial  transparency  laws and
requires various regulations, including:

    .  due diligence  requirements for financial  institutions  that administer,
       maintain,  or manage private bank accounts or correspondent  accounts for
       non-U.S. persons;

    .  standards for verifying customer identification at account opening;

    .  rules to promote  cooperation among financial  institutions,  regulators,
       and law enforcement  entities in identifying parties that may be involved
       in terrorism or money laundering;

    .  reports by  nonfinancial  trades  and  business  filed with the  Treasury
       Department's   Financial  Crimes  Enforcement  Network  for  transactions
       exceeding $10,000 and;

    .  filing of suspicious activities reports by securities brokers and dealers
       if they believe a customer may be violating U.S. laws and regulations.

BB is not able to predict the impact of such law on its  financial  condition or
results of operations at this time.

Financial Services Modernization Legislation

General.   On  November  12,  1999,   President  Clinton  signed  into  law  the
Gramm-Leach-Bliley Act of 1999 (the "Financial Services Modernization Act"). The
Financial Services  Modernization Act repealed the two affiliation provisions of
the Glass-Steagall  Act: Section 20, which restricted the affiliation of Federal
Reserve Member Banks with firms "engaged  principally"  in specified  securities
activities;  and Section 32, which  restricted  officer,  director,  or employee
interlocks  between a member bank and any company or person "primarily  engaged"
in  specified  securities  activities.   In  addition,  the  Financial  Services
Modernization Act also contains  provisions that expressly preempt any state law
restricting the  establishment of financial  affiliations,  primarily related to
insurance.  The  general  effect  of the  law is to  establish  a  comprehensive
framework to permit  affiliations among commercial banks,  insurance  companies,
securities  firms,  and  other  financial  service  providers  by  revising  and
expanding the BHC Act framework to permit a holding  company system to engage in
a full range of financial  activities  through a new entity known as a financial
holding company.

The law also:

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    .  broadens the activities that may be conducted by national banks,  banking
       subsidiaries of bank holding companies, and their financial subsidiaries;

    .  provides an enhanced  framework  for  protecting  the privacy of consumer
       information;

    .  adopts a number of provisions related to the capitalization,  membership,
       corporate  governance,  and other  measures  designed  to  modernize  the
       Federal Home Loan Bank system;

    .  modifies  the  laws  governing  the   implementation   of  the  Community
       Reinvestment Act, and

    .  addresses a variety of other legal and regulatory  issues  affecting both
       day-to-day operations and long-term activities of financial institutions.

BB and the Bank do not believe that the  Financial  Services  Modernization  Act
will have a material adverse effect on our operations in the near-term. However,
to the extent that it permits banks,  securities firms, and insurance  companies
to  affiliate,   the  financial   services   industry  may  experience   further
consolidation.  The Financial Services Modernization Act is intended to grant to
community  banks  certain  powers as a matter of right that larger  institutions
have accumulated on an ad hoc basis. Nevertheless,  this act may have the result
of increasing  the amount of  competition  that BB and the Bank face from larger
institutions and other types of companies offering financial  products,  many of
which may have substantially more financial resources than BB and the Bank.

Financial  Holding  Companies.  Bank  holding  companies  that elect to become a
financial  holding  company may affiliate  with  securities  firms and insurance
companies  and engage in other  activities  that are  financial in nature or are
incidental  or  complementary  to  activities  that  are  financial  in  nature.
Activities that are financial in nature include:

    .  securities underwriting,

    .  dealing and market making,

    .  sponsoring mutual funds and investment companies,

    .  insurance underwriting and agency,

    .  merchant banking, and

    .  activities that the Federal Reserve,  in consultation  with the Secretary
       of the Treasury,  determines  from time to time to be financial in nature
       or  incidental to such  financial  activity or to be  complimentary  to a
       financial activity without posing a safety or soundness risk.

Prior  to  electing  to  become a  financial  holding  company,  and in order to
maintain that status,  all of a bank holding  company's  depository  institution
subsidiaries  must be well  capitalized,  well  managed  and,  except in limited
circumstances, in compliance with the Community Reinvestment Act.

Failure to comply with the financial holding company  requirements could lead to
divestiture  of subsidiary  banks or require all  activities to conform to those
permissible for a bank holding company.  No Federal Reserve approval is required
for a financial  holding company to acquire a company (other than a bank holding
company,  bank or savings  association) engaged in activities that are financial
in  nature  or  incidental  to  activities  that are  financial  in  nature,  as
determined by the Federal Reserve.

A bank holding  company that is not also a financial  holding company is limited
to engaging in banking and such other  activities  as  determined by the Federal
Reserve to be so closely related to banking or managing or controlling  banks as
to be a proper incident thereto.

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Merchant  Banking  Restrictions.  While  the BHC Act  generally  prohibits  bank
holding  companies  from  owning  more than 5  percent  of the  voting  stock of
non-financial  companies,  with  limited  exceptions,   the  Financial  Services
Modernization Act authorizes merchant banking activities.  Permissible  merchant
banking   investments  are  defined  as  investments  that  meet  two  important
requirements:

    .  the investment may only be held for a period of time sufficient to enable
       the resale of the investment (generally,  current regulations allow for a
       10-year  holding  period for  direct  investments  and a 15-year  holding
       period for investments in private equity funds), and

    .  while  the  investment  is held by the  financial  holding  company,  the
       financial  holding  company  may not  routinely  manage  or  operate  the
       commercial  firm except as  necessary  or required to obtain a reasonable
       return on the investment on resale (the regulation  presumes that officer
       or director interlocks involve routine management).

In addition,  there are limits on bank funding of portfolio  companies  owned by
the bank's parent holding company,  transactions  between the bank and portfolio
companies,  and  on  cross-marketing  activities  between  banks  and  portfolio
companies owned by the same financial holding company. However, current rules do
not prevent a depository institution from marketing the shares of private equity
funds controlled by an affiliated financial holding company, and do not apply to
situations  in which the financial  holding  company owns less than 5 percent of
the voting shares of the portfolio company.

Furthermore,   in  December  2001,   federal   regulators  adopted  new  capital
requirements for merchant banking  activities.  The rule employs a sliding scale
based  on  each  banking   organization's   aggregate   equity   investment   in
non-financial entities and Tier I capital,  requiring banks or holding companies
to hold regulatory capital equal to

    .  8 cents for every $1 of equity investment up to 15% of Tier 1 capital;

    .  12 cents for every $1 of investments  for the next 10% of Tier 1 capital;
       and

    .  25 cents for every $1 exceeding 25% of Tier 1 capital.

Although  the first 15% of  investments  that  banking  companies  make  through
small-business investment companies (SBICs) is exempt, the sliding scale applies
for any such investment over 15%.

Expanded Bank Activities.  The Financial Services Modernization Act also permits
national  banks to  engage in  expanded  activities  through  the  formation  of
financial  subsidiaries.  A national  bank may have a subsidiary  engaged in any
activity  authorized  for national  banks  directly or any  financial  activity,
except for insurance underwriting, insurance investments, real estate investment
or  development,  or merchant  banking,  which may only be  conducted  through a
subsidiary of a financial  holding  company.  Financial  activities  include all
activities  permitted  under  new  sections  of  the  BHC  Act or  permitted  by
regulation.

A  national  bank  seeking  to  have a  financial  subsidiary,  and  each of its
depository institution  affiliates,  must be "well-capitalized,"  "well-managed"
and in compliance with the Community  Reinvestment  Act. The total assets of all
financial  subsidiaries  may not  exceed  the  lesser  of 45% of a bank's  total
assets, or $50 billion.  A national bank must exclude from its assets and equity
all equity investments,  including retained earnings, in a financial subsidiary.
The assets of the subsidiary may not be consolidated with the bank's assets. The
bank must also have policies and procedures to assess financial  subsidiary risk
and protect the bank from such risks and potential liabilities.

The  Financial  Services  Modernization  Act also  includes a new section of the
Federal Deposit Insurance Act governing  subsidiaries of state banks that engage
in "activities as principal that would only be permissible"  for a national bank
to conduct in a financial  subsidiary.  It expressly  preserves the ability of a
state bank to retain  all  existing  subsidiaries.  Because  California  permits
commercial  banks  chartered by the state to engage in any activity  permissible
for national banks, the Bank will be permitted to form subsidiaries to engage in
the activities  authorized by The Financial  Services  Modernization Act, to the
same extent as a national  bank.  In order to form a financial  subsidiary,  the
bank must be well-capitalized, and the bank would be subject to the same capital
deduction,  risk  management  and  affiliate  transaction  rule as applicable to
national banks.

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Privacy.  Under  the  Financial  Services  Modernization  Act,  federal  banking
regulators  adopted  rules that limit the  ability of banks and other  financial
institutions to disclose non-public information about consumers to nonaffiliated
third parties. Pursuant to the rules, financial institutions must provide:

    .  initial notices to customers about their privacy policies, describing the
       conditions under which they may disclose nonpublic  personal  information
       to nonaffiliated third parties and affiliates;

    .  annual notices of their privacy policies to current customers; and

    .  a  reasonable  method  for  customers  to  "opt  out" of  disclosures  to
       nonaffiliated third parties.

These privacy  provisions  will affect how consumer  information  is transmitted
through  diversified  financial companies and conveyed to outside vendors. It is
not possible at this time to assess the impact of the privacy provisions on BB's
financial condition or results of operations.

Dividends and Other Transfers of Funds

Dividends from the Bank constitute the principal source of income to BB. BB is a
legal entity separate and distinct from the Bank. The Bank is subject to various
statutory  and  regulatory  restrictions  on its ability to pay dividends to BB.
Under such restrictions,  the amount available for payment of dividends to BB by
the Bank totaled $7.8 million at December 31, 2001. In addition,  the California
Department of Financial  Institutions and the Federal Reserve have the authority
to prohibit the Bank from paying dividends,  depending upon the Bank's financial
condition,  if such  payment  is deemed  to  constitute  an  unsafe  or  unsound
practice.

The bank  regulatory  agencies  also have  authority  to prohibit  the Bank from
engaging in activities  that, in the opinion of the applicable  bank  regulatory
authority, constitute unsafe or unsound practices in conducting its business. It
is  possible,  depending  upon the  financial  condition  of the bank and  other
factors,  that the applicable  bank  regulatory  authority could assert that the
payment of dividends or other payments might, under some circumstances,  be such
an unsafe or unsound  practice.  Further,  the FDIC and the Federal Reserve have
established  guidelines with respect to the maintenance of appropriate levels of
capital by banks or bank holding companies under their jurisdiction.  Compliance
with the standards set forth in such guidelines and the restrictions that are or
may be imposed  under the prompt  corrective  action  provisions  of federal law
could  limit the amount of  dividends  which the Bank or BB may pay.  An insured
depository  institution  is  prohibited  from  paying  management  fees  to  any
controlling  persons  or,  with  certain  limited  exceptions,   making  capital
distributions   if   after   such   transaction   the   institution   would   be
undercapitalized.   See  "--Prompt   Corrective  Action  and  Other  Enforcement
Mechanisms"  and  "--Capital  Standards"  for a discussion  of these  additional
restrictions on capital distributions.

The Bank is  subject  to certain  restrictions  imposed  by  federal  law on any
extensions  of credit to, or the  issuance of a guarantee or letter of credit on
behalf of, BB or other affiliates,  the purchase of, or investments in, stock or
other securities thereof, the taking of such securities as collateral for loans,
and the purchase of assets of BB or other affiliates.  Such restrictions prevent
BB and such other  affiliates  from borrowing from the Bank unless the loans are
secured by marketable  obligations of designated amounts.  Further, such secured
loans and  investments  by the Bank to or in BB or to or in any other  affiliate
are limited, individually, to 10.0% of the respective bank's capital and surplus
(as defined by federal regulations),  and such secured loans and investments are
limited,  in the aggregate,  to 20% of the respective bank's capital and surplus
(as  defined  by  federal  regulations).  California  law also  imposes  certain
restrictions  with respect to  transactions  involving BB and other  controlling
persons of the Bank. Additional restrictions on transactions with affiliates may
be imposed on the Bank under the prompt  corrective action provisions of federal
law. See "--Prompt Corrective Action and Other Enforcement Mechanisms."

Capital Standards

The federal banking agencies have adopted  risk-based minimum capital guidelines
intended  to  provide a measure  of  capital  that  reflects  the degree of risk
associated  with a  banking  organization's  operations  for  both  transactions
reported on the  balance  sheet as assets and  transactions,  such as letters of
credit and recourse arrangements, which are recorded as off balance sheet items.
Under these  guidelines,  nominal dollar amounts of assets and credit equivalent
amounts  of off  balance  sheet  items are  multiplied  by one of  several

                                       7
<PAGE>

risk  adjustment  percentages,  which  range from 0% for assets  with low credit
risk,  such as  certain  U.S.  Treasury  securities,  to 100%  for  assets  with
relatively high credit risk, such as commercial loans.

The  guidelines   require  a  minimum  ratio  of  qualifying  total  capital  to
risk-adjusted   assets  of  8%  and  a  minimum  ratio  of  Tier  1  capital  to
risk-adjusted  assets of 4%. In addition to the risk-based  guidelines,  federal
banking regulators require banking organizations to maintain a minimum amount of
Tier 1 capital to total assets, referred to as the leverage ratio. For a banking
organization  rated in the highest of the five  categories used by regulators to
rate  banking  organizations,  the minimum  leverage  ratio of Tier 1 capital to
total  assets  must be 3%.  In  addition  to these  uniform  risk-based  capital
guidelines  and leverage  ratios that apply across the industry,  the regulators
have the discretion to set individual minimum capital  requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.

The federal  banking  regulators  may set capital  requirements  higher than the
minimums described above for holding companies whose  circumstances  warrant it.
For example, a financial  institution  experiencing or anticipating  significant
growth may be expected to maintain  capital  positions  substantially  above the
minimum  supervisory levels without  significant  reliance on intangible assets.
The Federal  Reserve has also indicated that it will consider a "tangible Tier 1
capital leverage ratio"  (deducting all  intangibles)  and other  indications of
capital strength in evaluating proposals for expansion or new activities.

Prompt Corrective Action and Other Enforcement Mechanisms

Federal  banking  agencies  possess  broad powers to take  corrective  and other
supervisory action to resolve the problems of insured  depository  institutions,
including  but not  limited  to those  institutions  that fall below one or more
prescribed  minimum capital ratios.  Each federal banking agency has promulgated
regulations   defining  the  following  five  categories  in  which  an  insured
depository  institution  will be  placed,  based  on its  capital  ratios:  well
capitalized,    adequately    capitalized,    undercapitalized,    significantly
undercapitalized,  and  critically  undercapitalized.  At December 31, 2001, the
Bank and BB exceeded the required ratios for classification as well capitalized.

An  institution  that,  based upon its capital  levels,  is  classified  as well
capitalized,  adequately  capitalized,  or  undercapitalized  may be  treated as
though it were in the next lower  capital  category if the  appropriate  federal
banking agency,  after notice and  opportunity  for hearing,  determines that an
unsafe or unsound  condition  or an unsafe or  unsound  practice  warrants  such
treatment.  At each successive  lower capital  category,  an insured  depository
institution  is subject to more  restrictions.  The  federal  banking  agencies,
however,  may  not  treat  a  significantly   undercapitalized   institution  as
critically  undercapitalized  unless its capital  ratio  actually  warrants such
treatment.

In addition to measures  taken under the prompt  corrective  action  provisions,
commercial banking organizations may be subject to potential enforcement actions
by the federal  regulators for unsafe or unsound  practices in conducting  their
businesses or for  violations  of any law,  rule,  regulation,  or any condition
imposed in writing by the agency or any written agreement with the agency.

Safety and Soundness Standards

The federal  banking  agencies  have adopted  guidelines  designed to assist the
federal  banking  agencies in identifying  and addressing  potential  safety and
soundness  concerns  before capital becomes  impaired.  The guidelines set forth
operational and managerial standards relating to:

    .  internal controls, information systems and internal audit systems;

    .  loan documentation;

    .  credit underwriting;

    .  asset growth;

    .  earnings; and

                                       8
<PAGE>

    .  compensation, fees and benefits.

In addition, the federal banking agencies have also adopted safety and soundness
guidelines  with  respect  to  asset  quality  and  earnings  standards.   These
guidelines  provide six standards for  establishing  and maintaining a system to
identify problem assets and prevent those assets from deteriorating. Under these
standards, an insured depository institution should:

    .  conduct periodic asset quality reviews to identify problem assets;

    .  estimate the inherent  losses in problem  assets and  establish  reserves
       that are sufficient to absorb estimated losses;

    .  compare problem asset totals to capital;

    .  take appropriate corrective action to resolve problem assets;

    .  consider the size and potential  risks of material asset  concentrations;
       and

    .  provide  periodic  asset quality  reports with adequate  information  for
       management and the board of directors to assess the level of asset risk.

These new  guidelines  also set forth  standards for  evaluating  and monitoring
earnings and for ensuring that earnings are  sufficient  for the  maintenance of
adequate capital and reserves.

Premiums for Deposit Insurance

Through the Bank Insurance  Fund ("BIF"),  the FDIC insures the deposits of BB's
depository  institution  subsidiary up to prescribed  limits for each depositor.
The amount of FDIC assessments  paid by each BIF member  institution is based on
its relative risk of default as measured by regulatory  capital ratios and other
factors.  Specifically,  the  assessment  rate  is  based  on the  institution's
capitalization risk category and supervisory subgroup category. An institution's
capitalization risk category is based on the FDIC's determination of whether the
institution is well capitalized,  adequately capitalized or less than adequately
capitalized.  An  institution's  supervisory  subgroup  category is based on the
FDIC's  assessment  of the  financial  condition  of  the  institution  and  the
probability that FDIC intervention or other corrective action will be required.

The assessment rate currently  ranges from zero to 27 cents per $100 of domestic
deposits.  The FDIC may increase or decrease the  assessment  rate schedule on a
semi-annual  basis.  An  increase in the  assessment  rate could have a material
adverse  effect on BB's earnings,  depending on the amount of the increase.  The
FDIC is authorized  to terminate a depository  institution's  deposit  insurance
upon a finding by the FDIC that the institution's  financial condition is unsafe
or unsound or that the institution has engaged in unsafe or unsound practices or
has violated any  applicable  rule,  regulation,  order or condition  enacted or
imposed by the  institution's  regulatory  agency.  The  termination  of deposit
insurance for the Bank could have a material adverse effect on BB's earnings.

All  FDIC-insured  depository  institutions  must pay an  annual  assessment  to
provide  funds for the  payment of  interest  on bonds  issued by the  Financing
Corporation,  a federal corporation chartered under the authority of the Federal
Housing  Finance  Board.  The bonds,  commonly  referred to as FICO bonds,  were
issued to capitalize  the Federal  Savings and Loan Insurance  Corporation.  The
FDIC  established the FICO assessment  rates effective for the fourth quarter of
2001 at approximately $.0184 per $100 annually for assessable deposits. The FICO
assessments are adjusted quarterly to reflect changes in the assessment bases of
the  FDIC's   insurance  funds  and  do  not  vary  depending  on  a  depository
institution's capitalization or supervisory evaluations.

Any  insured  depository  institution  owned by BB can be  assessed  for  losses
incurred by the FDIC in connection with  assistance  provided to, or the failure
of, any other depository institution owned by BB.

Audit Requirements

Like all California  state-chartered  commercial  banks, the Bank is required to
have an annual  independent  audit and to prepare all  financial  statements  in
accordance  with  generally  accepted  accounting  principles.  The Bank is also
required to have an independent  audit committee  comprised  entirely of outside
directors.


Interstate Banking and Branching

The BHC Act permits bank holding  companies  from any state to acquire banks and
bank  holding  companies  located  in  any  other  state,   subject  to  certain
conditions,   including  certain  nationwide-  and  state-imposed  concentration
limits. The Bank has the ability, subject to certain restrictions, to acquire by
acquisition or merger branches outside its home state. The  establishment of new
interstate  branches is

                                       9
<PAGE>

also  possible in those states with laws that  expressly  permit it.  Interstate
branches  are subject to certain  laws of the states in which they are  located.
Competition  may increase  further as banks branch  across state lines and enter
new markets.

Community Reinvestment Act and Fair Lending Developments

The  Bank  is  subject  to  certain  fair  lending  requirements  and  reporting
obligations   involving   home  mortgage   lending   operations   and  Community
Reinvestment Act activities.  The Community  Reinvestment Act generally requires
the federal banking  agencies to evaluate the record of a financial  institution
in  meeting  the  credit  needs of its  local  communities,  including  low- and
moderate-income  neighborhoods.  A bank may be subject to substantial  penalties
and  corrective  measures  for a violation of certain  fair  lending  laws.  The
federal  banking  agencies  may take  compliance  with such  laws and  Community
Reinvestment Act obligations into account when regulating and supervising  other
activities.  In December 2000, the federal banking agencies  established  annual
reporting and public disclosure requirements for certain written agreements that
are entered into between insured depository institutions or their affiliates and
nongovernmental  entities or persons that are made pursuant to, or in connection
with, the fulfillment of the Community Reinvestment Act.

A bank's compliance with its Community  Reinvestment Act obligations is based on
a  performance-based  evaluation  system which bases Community  Reinvestment Act
ratings on an institution's lending service and investment  performance.  When a
bank  holding  company  applies  for  approval  to  acquire a bank or other bank
holding  company,  the  Federal  Reserve  will  review  the  assessment  of each
subsidiary bank of the applicant bank holding  company,  and such records may be
the basis for denying the  application.  In  connection  with its  assessment of
Community  Reinvestment Act performance,  the appropriate bank regulatory agency
assigns  a rating  of  "outstanding",  "satisfactory",  "needs  to  improve"  or
"substantial  noncompliance".  The Bank was last examined for CRA  compliance in
October, 1999, and received an "outstanding" CRA Assessment Rating.

Other Consumer Protection Laws and Regulations

The bank regulatory  agencies closely monitor an  institution's  compliance with
consumer  protection  laws and  regulations.  The  examination  and  enforcement
activities  conducted by these agencies are intense, and banks have been advised
to focus on compliance  with  consumer  protection  laws and their  implementing
regulations.  The federal  Interagency  Task Force on Fair  Lending has issued a
policy  statement on  discrimination  in home mortgage  lending which  describes
three  methods that federal  agencies  will use to prove  discrimination:  overt
evidence of  discrimination,  evidence of disparate  treatment,  and evidence of
disparate  impact.  In addition to CRA and fair lending  requirements,  the Bank
will be subject to numerous  other  federal  consumer  protection  statutes  and
regulations.  Due to heightened  regulatory  concern  related to compliance with
consumer  protection  laws  and  regulations  generally,   the  Bank  may  incur
additional  compliance  costs or be  required  to  expend  additional  funds for
investments in the local communities it serves.

Factors That May Affect Future Results of Operations

In addition to the other  information  contained in this report,  the  following
risks may affect  us. If any of these  risks  occurs,  our  business,  financial
condition or operating results could be adversely affected.

Failure to  successfully  execute our growth strategy or to integrate our recent
merger with MCB could adversely affect our performance.

Our  financial  performance  and  profitability  will  depend on our  ability to
execute our corporate  growth strategy and manage our recent and possible future
growth.  Although  management  believes that it will successfully  integrate the
business and operations of MCB, there can be no assurance that unforeseen issues
relating to the  assimilation of MCB will not adversely  affect us. In addition,
any future acquisitions and our continued growth may present operating and other
problems that could have an adverse effect on our business,  financial condition
and results of operations.  Accordingly,  there can be no assurance that we will
be able to execute our growth  strategy or maintain  the level of  profitability
that we have recently experienced.

Changes in market interest rates may adversely affect our performance.

Banking is a business  that  depends  in large  part on rate  differentials.  In
general,  the  difference  between  the interest rate paid by us on our deposits
and our other  borrowings and the interest rate received by us on loans extended
to our customers and securities held in our portfolio comprise the major portion
of our  earnings.  These rates are highly  sensitive  to many  factors  that are
beyond our  control.  Accordingly,  our  earnings  and growth are subject to the
influence  of domestic and foreign  economic  conditions,  including  inflation,
recession and unemployment.

The  commercial  banking  business  is not only  affected  by  general  economic
conditions  but is also  influenced  by the monetary and fiscal  policies of the
federal  government and the policies of regulatory  agencies,  particularly  the
Federal  Reserve Board.  The FRB  implements  national  monetary  policies (with
objectives such as curbing inflation and combating recession) by its open-market
operations in United  States  government  securities,  by adjusting the required
level  of  reserves   for   financial   institutions   subject  to  its  reserve
requirements,  and by varying the discount  rates  applicable  to  borrowings by
depository  institutions.  The actions of the FRB in these areas  influence  the
growth of bank loans,  investments,  and deposits and also affect interest rates
charged  on loans and paid on  deposits.  The  nature  and  impact of any future
changes in monetary policies cannot be predicted.

From time to time, legislation is enacted which has the effect of increasing the
cost  of  doing  business,  limiting  or  expanding  permissible  activities  or
affecting  the   competitive   balance   between   banks  and  other   financial
institutions.  Proposals  to  change  the laws  and  regulations  governing  the
operations  and taxation of banks,  bank holding  companies and other  financial
institutions are frequently made in Congress, in the California  legislature and
before various bank regulatory and other professional  agencies.  The likelihood
of future  legislative  changes and the impact such changes might have on us are
impossible to predict.


Our geographic concentration may adversely affect our operations.

Our Northern and Southern  California  business focus and economic conditions in
those areas could adversely affect our operations.  A continued weakening in the
national economy might further exacerbate local economic conditions.  The extent
of the future impact of these events on economic and business  conditions cannot
be predicted.

We are  subject to  government  regulation  that  could  limit or  restrict  our
activities, which in turn could adversely impact our operations.

                                       10
<PAGE>

The  financial  services  industry is regulated  extensively.  Federal and state
regulation  is designed  primarily  to protect the deposit  insurance  funds and
consumers, and not to benefit our shareholders.  These regulations can sometimes
impose significant limitations on our operations. In addition, these regulations
are constantly evolving and may change significantly over time.  Significant new
laws or  changes  in  existing  laws or  repeal of  existing  laws may cause our
results to differ materially.  Further, federal monetary policy, particularly as
implemented  through the Federal  Reserve System,  significantly  affects credit
conditions for us.

Competition may adversely affect our performance.

The financial services business in our market areas is highly competitive. It is
becoming  increasingly  competitive due to changes in regulation,  technological
advances,  and the accelerating pace of consolidation  among financial  services
providers.  We face competition both in attracting deposits and in making loans.
We compete for loans  principally  through the  interest  rates and loan fees we
charge and the efficiency and quality of services we provide.  Increasing levels
of competition in the banking and financial  services  businesses may reduce our
market share or cause the prices we charge for our services to fall. Our results
may differ in future periods depending upon the nature or level of competition.

If a significant  number of borrowers,  guarantors  and related  parties fail to
perform as required by the terms of their loans, we will sustain losses.

A  significant  source of risk arises from the  possibility  that losses will be
sustained  if a  significant  number of our  borrowers,  guarantors  and related
parties fail to perform in  accordance  with the terms of their  loans.  We have
adopted  underwriting  and credit  monitoring  procedures  and credit  policies,
including the establishment and review of the allowance for credit losses,  that
management  believes are  appropriate  to minimize  this risk by  assessing  the
likelihood of  nonperformance,  tracking loan  performance and  diversifying our
credit  portfolio.  These  policies  and  procedures,  however,  may not prevent
unexpected  losses  that  could  materially  adversely  affect  our  results  of
operations.

Item 2. Description of Property

We own five of our  offices and lease  thirteen  additional  offices  throughout
Northern  and  Southern  California.  The leases  expire  under  various  dates,
including options to renew, through June 2024.

We believe  our  present  facilities  are  adequate  for our  present  needs but
anticipate the need for additional facilities as we continue to grow.

Item 3. Legal Proceedings

From time to time, we are involved in certain legal  proceedings  arising in the
normal course of our business. We believe that the outcome of these matters will
not have a material adverse effect on us.

Item 4. Submission of Matters to a Vote of Security Holders

         (a) We held a special meeting of shareholders on December 10, 2001.

         (b) Not applicable.

         (c) At the  special  meeting,  shareholders  voted to  approve  (1) the
merger  agreement  between  Business  Bancorp  and  MCB  Financial  Corporation,
including  the  resulting  issuance  of common  shares of  Business  Bancorp  in
connection with the merger,  (2) an amendment to Business  Bancorp's Articles of
Incorporation to increase the number of authorized  shares,  (3) an amendment to
Business  Bancorp's  Articles of  Incorporation  to increase the number of board
classes from two to three and an amendment to delete the reference to classes in
the Bylaws as no longer necessary, (4) an amendment to Business Bancorp's Bylaws
to eliminate cumulative voting and (5) an amendment to Business Bancorp's Bylaws
to change the maximum and minimum number of directors. The results of the voting
were as follows:
<TABLE>
<CAPTION>
                                                        Votes                 Broker
   Matter                                  Votes for   against   Abstentions  non-votes
   ------                                  ---------- ---------  -----------  ---------
<S>                                         <C>         <C>        <C>          <C>
Merger with MCB Financial Corp.             1,467,476   56,937     2,358        237,254
Increase the number of authorized shares    1,506,190   17,480     3,101        237,254
Increase the number of board classes        1,507,613   16,800     2,358        237,254
Eliminate cumulative voting                 1,263,004  260,666     3,101        237,254
Change maximum and minimum number
     of directors                           1,462,514   61,806     2,451        237,254
</TABLE>
         (d) Not applicable.

                                       11
<PAGE>

PART II

Item 5. Market for Common Equity and Related Stockholder Matters.

Our stock is traded on the Nasdaq  National Market  ("Nasdaq")  under the symbol
"BZBC".  Our stock began trading on Nasdaq on January 2, 2002. From February 27,
2001 until  December  31,  2001,  our stock was  trading on the Nasdaq  SmallCap
Market.  The quotations shown reflect the high and low bid prices for our common
stock as reported by ADP Quotation  Services,  Historical Data Base.  Quotations
reflect  interdealer prices,  without retail mark-up,  mark-down or commissions,
and may not reflect actual transactions.

<TABLE>
<CAPTION>
                                        2001                                    2000
                       --------------------------------------  ----------------------------------------
                                                   Cash                                    Cash
                                                 Dividend                                Dividend
                          High            Low    Declared         High           Low     Declared
-------------------------------------------------------------  ----------------------------------------
<S>                     <C>             <C>            <C>       <C>           <C>               <C>
First quarter           $12.00          $9.00          $0.00     $9.50         $8.62             $0.00
Second quarter           12.63          11.00           0.00      9.75          8.00              0.00
Third quarter            14.75          11.75           0.01     10.25          8.75              0.00
Fourth quarter           14.00          11.00           0.01     10.25          8.25              0.00
-------------------------------------------------------------  ----------------------------------------
</TABLE>

We estimate that there were approximately 616 shareholders of record at December
31, 2001.

Holders of common  stock of BB are  entitled  to receive  dividends  as and when
declared by the board of directors out of funds legally available therefor under
the laws of the State of California. California corporations such as BB may make
a distribution to their  shareholders  if the  corporation's  retained  earnings
equal at least the amount of the proposed distribution.  In the event sufficient
retained earnings are not available for the proposed distribution, a corporation
may nevertheless make a distribution to its shareholders if, after giving effect
to the distribution,  the corporation's assets equal at least 125 percent of its
liabilities  and certain other  conditions  are met. Since the 125 percent ratio
translates  into a  minimum  capital  ratio of 25  percent,  most  bank  holding
companies,  including BB based on its current capital ratios, are unable to meet
this  last  test  and so must  have  sufficient  retained  earnings  to fund the
proposed distribution.

The Federal  Reserve Board has advised bank holding  companies  that it believes
that payment of cash dividends in excess of current  earnings from operations is
inappropriate  and may be cause  for  supervisory  action.  As a result  of this
policy, banks and their holding companies may find it difficult to pay dividends
out of retained earnings from historical periods prior to the most recent fiscal
year or to take advantage of earnings  generated by extraordinary  items such as
sales of buildings or other large assets in order to generate  profits to enable
payment of future dividends.  Further, the Federal Reserve Board's position that
holding  companies are expected to provide a source of managerial  and financial
strength  to  their  subsidiary  banks  potentially  restricts  a  bank  holding
company's ability to pay dividends.

The Bank is a legal entity  which is separate  and distinct  from BB. Aside from
raising capital on its own, the exercise of stock options or borrowing funds for
operating capital,  BB receives  additional income through dividends paid by the
Bank.  Subject to the  regulatory  restrictions  described  below,  future  cash
dividends by the Bank will depend upon management's assessment of future capital
requirements, contractual restrictions and other factors.

The powers of the board of directors  of the Bank to declare a cash  dividend to
BB are subject to California law which  restricts the amount  available for cash
dividends  to the lesser of the  retained  earnings or the Bank's net income for
its last three fiscal years (less any  distributions to shareholders made during
such period). Where the above test is not met, cash dividends may still be paid,
with  the  prior  approval  of the  California  Commissioner  in an  amount  not
exceeding the greatest of (1) retained  earnings of the bank; (2) the net income
of the bank for its last fiscal year;  or (3) the net income of the bank for its
current fiscal year.

Under the Federal Deposit  Insurance Act, bank regulators also have authority to
prohibit a bank from engaging in business  practices  which are considered to be
unsafe or unsound. It is possible, depending upon the financial condition of the
banks and other factors,  that such regulators  could assert that the payment of
dividends or other payments might, under certain circumstances,  be an unsafe or
unsound practice, even if technically permissible.

Prior to 2001,  BB's  practice had been to retain  earnings to provide funds for
the operation and expansion of its business. During the third quarter of 2001 BB
began the  payment  of a regular  cash  dividend  of $0.01 per  share,  which it
anticipates paying quarterly in the future. The BB board of directors'  practice
is to review  periodically  the advisability of paying cash dividends based upon
BB's  earnings,  financial  position,  current and anticipated cash requirements
and other  factors  deemed  relevant by the board of directors at that time.  In
making any such assessment,  the board of directors of BB would have to consider
among  other  things  the  capital  requirements  of the Bank and other  factors
concerning the Bank,  including the dividend  guidelines  and  maintenance of an
adequate allowance for loan losses.

In  addition,  information  as  to  dividend  restrictions  is  incorporated  by
reference to the discussion under "Item 1.  Description of  Business-Supervision
and Regulation-Dividends and Other Transfers of Funds."


Item 6. Management's Discussion and Analysis.

Overview

BB is a bank  holding  company  with  one  bank  subsidiary,  Business  Bank  of
California  (the  "Bank").  BB also  wholly  owns  Business  Capital  Trust I, a
Delaware  statutory  business  trust and MCB  Statutory  Trust I, a  Connecticut
statutory  business trust. These trusts were formed for the exclusive purpose of
issuing and selling trust preferred securities.

The following  discussion and analysis is intended to provide greater details of
our results of operations  and  financial  condition.  The following  discussion
should be read in  conjunction  with our  consolidated  financial  data included
elsewhere in this document.  Certain  statements  under this caption  constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, which involve risks and uncertainties. Our actual results may differ
significantly  from the results  discussed in such  forward-looking  statements.
Factors  that  might  cause such a  difference  include  but are not  limited to
economic  conditions,  competition in the geographic and business areas in which
we conduct our  operations,  fluctuation in interest  rates,  credit quality and
government  regulation and other factors  discussed in the annual report on Form
10-KSB for the year  ended  December  31,  2001 under  "Item 1.  Description  of
Business--Factors That May Affect Future Results of Operations."

                                       12
<PAGE>

General

Throughout the reporting periods covered we experienced  steady growth in assets
and deposits and  accordingly  achieved  increased  net income.  Total net loans
increased to $383.9  million at December 31, 2001 from $178.5 million and $115.1
million, at December 31, 2000 and 1999, respectively.  Investments including Fed
Funds sold,  interest  bearing  deposits  at banks,  and  investment  securities
increased to $170.0 at December 31, 2001 from $95.5 million and $83.3 million at
December 31, 2000 and 1999, respectively.  The primary source of funds, deposits
from  customers,  were $518.1  million at December  31, 2001  compared to $264.9
million and $186.8 million at December 31, 2000 and 1999, respectively.

Net income was $2,506,923,  $2,270,000,  and $1,940,000 for 2001, 2000 and 1999,
respectively.

On December  31,  2001,  we  completed  our merger of equals with MCB. We issued
1.1763  shares of our  common  stock for each  share of MCB  outstanding  for an
aggregate  purchase price of $28.5 milliion.  The merger was accounted for using
the purchase method of accounting. Under this method of accounting, the purchase
price was allocated to the assets acquired and deposits and liabilities  assumed
based on their fair values as of the merger date. Since the merger was completed
on December 31, 2001, the results of MCB's  operations have not been included in
the  consolidated  statements of income.  Goodwill  arising from the transaction
totaled $13.5 million.

On August 31, 2000,  the Bank  consummated  its  acquisition of VMB. In order to
fund a substantial  portion of the approximately $12.2 million acquisition price
of VMB, on March 23, 2000,  Business  Capital  Trust I, a newly formed  Delaware
statutory  business  trust  and a  wholly-owned  subsidiary  of  BB,  issued  an
aggregate of $10,000,000 of principal amount of 10-7/8% Fixed Rate Capital Trust
Pass-through  Securities  which in turn were used to purchase the same principal
amount of  Subordinate  Debt  Securities  issued by BB. In the third  quarter of
2000, BB contributed to the Bank approximately $8.7 million of the approximately
$9.7 million in net proceeds which it received from the sale of the Subordinated
Debt  Securities  in order to fund the  acquisition  of VMB.  The balance of the
purchase price for the acquisition of VMB was paid out of the working capital of
the Bank.

Results of Operations

Net Interest Income

Our earnings  depend  significantly  upon the  difference or spread  between the
income  received  from our  loans  and  other  interest-earning  assets  and the
interest paid on interest-bearing  liabilities.  This computed difference is net
interest  income.  The net interest  income,  when  expressed as a percentage of
average  total  interest-earning  assets,  is  referred  to as the net  interest
margin.  The net interest  income is affected by the change in the level and the
mix of interest-earning assets and interest-bearing liabilities,  referred to as
volume changes. The net interest margin is also affected by changes in the yield
earned on assets and rates paid on  liabilities,  referred  to as rate  changes.
Interest rates charged on loans are affected  principally by the demand for such
loans,  the supply of money  available  for  lending  purposes  and  competitive
factors.  These factors are in turn affected by general economic  conditions and
other  factors  frequently  beyond our control,  such as  governmental  economic
policies,  money  supply,  governmental  tax policies and actions of the Federal
Reserve Board.

Net interest  income was $16.6 million for the year ended  December 31, 2001, an
increase  of $2.2  million  or 15.3%  over  2000.  Net  interest  income in 2000
increased  $3.2  million or 28.5% from $11.2  million for 1999.  The increase in
2001 was due to the $78.1 million  increase in average  interest-earning  assets
which was  partially  offset by a 79 basis  point  decrease  in our net yield on
interest-earning  assets.  The  increase  in 2000  was due to a  combination  of
internal growth through  operations and the VMB acquisition,  consummated August
31, 2000.

                                       13
<PAGE>

During 2001 average  interest-earning assets increased $78.1 million or 33.3% to
$312.6 million compared to 2000, while average interest-bearing  liabilities for
the same period increased $61.2 million or 37.8% to $223.0 million.  Said growth
is attributable to internal growth through operations and the acquisition of VMB
which was reflected  in the 2000  averages  for only four  months as compared to
twelve months in 2001.  Average loans, our highest yielding asset, grew by $45.0
million or 31.5% to $187.9  million for the same  period.  The average  yield on
interest-earning  assets was 8.23%,  down 106 basis  points  from 9.29% in 2000.
This  decrease was mainly due to the lower level of the national  prime rate, on
average,  in 2001 compared to 2000.  The average rates paid on  interest-bearing
liabilities   decreased   52  basis  points  from  4.34%  to  3.82%  during  the
aforementioned  period. This decrease was mainly attributable to the lower level
of the national prime rate, on average,  in 2001 compared to 2000.  Accordingly,
the net interest  spread (the difference  between the yield on  interest-earning
assets versus the rates paid on interest-bearing deposits) decreased to 4.41% in
2001 from 4.95% in 2000.

During 2000 average  interest-earning assets increased $63.3 million or 36.9% to
$234.5 million compared to 1999, while average interest-bearing  liabilities for
the same period  increased  $54.7  million or 51.0% to $161.8  million.  Average
loans grew by $37.0 million or 35.0% to $143.0 million for the same period.  The
average  yield on  interest-earning  assets was 9.29%,  up 56 basis  points from
8.73% in 1999.  This increase was mainly due to the higher level of the national
prime rate,  on average,  in 2000  compared to 1999.  The average  rates paid on
interest-bearing  liabilities  increased  100 basis  points  from 3.34% to 4.34%
during the  aforementioned  period.  Accordingly,  the net interest  spread (the
difference between the yield on interest-earning assets versus the rates paid on
interest-bearing deposits) decreased to 4.95% in 2000 from 5.39% in 1999.

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


                                       14
<PAGE>

Distribution, Yield and Rate Analysis of Net Interest Income

<TABLE>
<CAPTION>
                                                                       For the Years Ended December 31,
                                          ------------------------------------------------------------------------------------------
                                                       2001                          2000                          1999
                                          ------------------------------------------------------------------------------------------
                                          Average                         Average                     Average
                                          Balance    Interest    Rate     Balance  Interest    Rate   Balance    Interest    Rate
                                          ------------------------------------------------------------------------------------------
<S>                                         <C>       <C>         <C>     <C>       <C>        <C>     <C>        <C>        <C>
ASSETS
Loans, net /1/                              $187,941  $ 18,255    9.71%   $142,970  $ 15,702   10.98%  $105,922   $ 11,227   10.60%
U.S. government securities                     1,020        49    4.80%      1,009        57    5.65%       799         44    5.51%
U.S. government agencies                                                        59         3    5.73%       556         36    6.53%
Mortgage backed securities                    89,976     5,025    5.58%     64,742     4,161    6.43%    40,382      2,273    5.63%
Other securities                               6,637       408    6.15%      4,602       318    6.92%     1,238         71    5.76%
Tax-exempt municipal securities /2/           23,026     1,168    7.76%     19,236     1,037    7.35%     9,685        502    7.06%
Federal funds sold                             2,418       101    4.18%        545        35    6.40%    12,668        618    4.88%
Interest earning deposits                      1,568        89    5.68%      1,337        95    7.09%
                                          ------------------------------------------------------------------------------------------
Total Earning Assets                         312,586    25,095    8.23%    234,500    21,408    9.29%   171,250     14,771    8.73%
Total Non-earning Assets                      36,758                        31,934                       27,555
                                          -----------                   -----------                   ----------
Total Assets                                $349,344                      $266,434                     $198,805
                                          ===========                   ===========                   ==========

LIABILITIES & SHAREHOLDERS' EQUITY
Money market deposits                       $ 40,624   $ 1,198    2.95%   $ 47,685   $ 1,377    2.89%  $ 28,720      $ 817    2.85%
Interest-bearing demand deposits (NOW)        39,495       648    1.64%     15,875       362    2.28%    21,612        489    2.26%
Savings deposits                              27,368       640    2.34%     22,575       606    2.69%    19,610        529    2.70%
Time deposits, $100,000 or more               46,388     2,102    4.53%     24,173     1,211    5.01%    12,825        604    4.71%
Other time deposits                           33,910     1,625    4.79%     23,939     1,357    5.67%    20,611        925    4.49%
Other borrowings                              25,187     1,201    4.77%     19,659     1,257    6.39%     3,756        213    5.67%
Trust preferred securities                    10,000     1,096   10.96%      7,889       858   10.88%
                                          ------------------------------------------------------------------------------------------
     Total interest-bearing liabilities      222,972     8,510    3.82%    161,795     7,028    4.34%   107,134      3,577    3.34%
Non-interest bearing demand deposits          98,168                        82,041                       71,726
Other non-interest bearing liabilities         2,889                         2,270                        2,881
Shareholders' equity                          25,315                        20,328                       17,064
                                          -----------                   -----------                   ----------
     and Shareholders' Equity               $349,344                      $266,434                     $198,805
                                          ===========                   ===========                   ==========

                                                     ----------                    ----------                   -----------
Net interest income                                   $ 16,585                      $ 14,380                      $ 11,194
                                                     ==========                    ==========                   ===========
Net interest spread /3/                                           4.41%                         4.95%                         5.39%

Net interest margin /4/                                           5.50%                         6.29%                         6.64%
</TABLE>

/1/  Loan fees have been included in the  calculation of interest  income.  Loan
     fees were  approximately  $1,723,874 , $1,058,170  and  $1,092,075  for the
     years ended December 31, 2001, 2000 and 1999,  respectively.  Loans are net
     of the allowance for loan losses and unearned income.

/2/  Yields on tax-exempt income have been computed on a tax equivalent basis.

/3/  Represents the annualized  average rate earned on  interest-earning  assets
     less the  average  rate paid on  interest-bearing  liabilities  adjusted to
     reflect tax benefit of tax-exempt income.

/4/  Represents net interest income as a percentage of average interest- earning
     assets adjusted to reflect tax benefit of tax-exempt income.

                                       15
<PAGE>

The following table sets forth, for the periods indicated,  the dollar amount of
changes  in   interest   earned  and  paid  for   interest-earning   assets  and
interest-bearing liabilities and the amount of change attributable to changes in
average  daily  balances  (volume) or changes in average  daily  interest  rates
(rate). The variances attributable to both the volume and rate changes have been
allocated to volume and rate changes in  proportion to the  relationship  of the
absolute dollar amount of the changes in each:

                  Rate/Volume Analysis of Net Interest Income

<TABLE>
<CAPTION>
                                                  Year Ended December 31,                 Year Ended December 31,
                                                   2001 Compared to 2000                   2000 Compared to 1999
                                            ---------------------------------       ---------------------------------
                                                Increase (decrease) due to              Increase (decrease) due to
                                                     Due to Change In                        Due to Change In
                                            ---------------------------------       ---------------------------------
                                              Volume      Rate      Total             Volume      Rate      Total
                                            ---------------------------------       ---------------------------------
<S>                                            <C>       <C>         <C>               <C>          <C>      <C>
Interest Income:
    Loans, net                                 $ 4,939   $ (2,386)   $ 2,553           $ 3,927      $ 548    $ 4,475
    U.S. government securities                       1         (9)        (8)               12          1         13
    U.S. government agencies                        (3)         0         (3)              (33)         0        (33)
    Mortgage backed securities                   1,622       (758)       864             1,370        518      1,888
    Other securities                               141        (51)        90               194         53        247
    Tax-exempt municipal securities                204        (73)       131               494         41        535
    Federal fundssold                              120        (54)        66              (591)         8       (583)
    Interest earning deposits                       16        (22)        (6)                0         95         95
                                            ---------------------------------       ---------------------------------
Total Interest Income                            7,040     (3,353)     3,687             5,373      1,264      6,637
                                            ---------------------------------       ---------------------------------

Interest Expense:
    Money market deposits                         (204)        25       (179)              540         20        560
    Interest-bearing demand deposits (NOW)         539       (253)       286              (130)         3       (127)
    Savings deposits                               129        (95)        34                79         (2)        77
    Time deposits, $100,000 or more              1,113       (222)       891               535         72        607
    Other time deposits                            565       (297)       268               149        283        432
    Other borrowings                               353       (409)       (56)              901        143      1,044
    Trust preferred securities                     238          0        238               858          0        858
                                            ---------------------------------       ---------------------------------
Total Interest Expense                           2,733     (1,251)     1,482             2,932        519      3,451
                                            ---------------------------------       ---------------------------------

Change in Net Interest Income                  $ 4,307   $ (2,102)   $ 2,205           $ 2,441      $ 745    $ 3,186
                                            =================================       =================================
</TABLE>

Provision for Loan Losses

Credit  risk is  inherent  in the  business  of  making  loans.  We set aside an
allowance for loan losses ("ALLL")  through  charges to earnings,  which charges
are  reflected in the income  statement as the  provision  for loan losses.  The
provision for loan losses  represents the amount charged  against current period
earnings to achieve an allowance for loan losses that in  management's  judgment
is adequate to absorb losses inherent in the loan portfolio.

                                       16
<PAGE>

We formally assess the ALLL in a multi-step  process on a quarterly  basis.  See
"Allowance for Loan Losses," below.

The provision for loan losses was $225,000 for the year ended December 31, 2001,
compared to $255,000  for the year ended  December  31,  2000.  The ratio of the
allowance  for loan  losses to total  loans at the end of period  was 1.17%, and
1.02% as of December 31, 2001 and 2000, respectively.

During 2000 the provision for loan losses increased to $255,000 from $180,000 in
1999. This increase was primarily attributable growth within the loan portfolio.

Noninterest Income

The following table sets forth the various  components of noninterest income for
the periods indicated (in thousands):

                              Noninterest Income
<TABLE>
<CAPTION>
                                                                            Years Ended December 31,
                                                                   -------------------------------------------
Components of Noninterest Income                                      2001           2000            1999
---------------------------------------------------------------    ------------   ------------    ------------
<S>                                                              <C>            <C>             <C>
Gain on sale of SBA loans                                        $          40  $          12   $         154
Service fees on deposit accounts                                         2,507          2,146           1,872
Gain on sale of investment securities                                      817             43             (98)
Gain on sale of other real estate owned                                     53            198              38
Other noninterest income                                                   653            417             390
                                                                   ------------   ------------    ------------
    Total                                                        $       4,070  $       2,816   $       2,356
                                                                   ============   ============    ============

As a Percentage of Average Assets
---------------------------------------------------------------
Gain on sale of SBA loans                                                0.01%          0.00%           0.08%
Service fees on deposit accounts                                         0.72%          0.81%           0.94%
Gain on sale of investment securities                                    0.23%          0.02%          -0.05%
Gain on sale of other real estate owned                                  0.02%          0.07%           0.02%
Other noninterest income                                                 0.19%          0.16%           0.20%
                                                                   ------------   ------------    ------------
    Total                                                                1.17%          1.06%           1.19%
                                                                   ============   ============    ============
</TABLE>

Service charges on deposits  represent  amounts charged to customers in the form
of transactional  fees and other charges imposed for providing services normally
associated with account services.  Gains from the sale of SBA loans are premiums
recognized on sales of loans  generated by us and sold in the secondary  market.
Gains on the

                                       17
<PAGE>

sale of other real estate owned (real estate  acquired  through  foreclosure  or
similar means) ("OREO") represent gains recognized when we sell OREO property.

Noninterest  income  increased  $1,254,000 or 44.5% over 2000 to $4.1 million in
2001. This increase was mainly due to the gain on sale of investment securities.
Due to the  decline in  overall  interest  rates  during  2001,  we were able to
recognize gains on sales of some of our securities.

Noninterest  income  increased  $460,000  or 19.5% over 1999 to $2.8  million in
2000.  This  increase was mainly due to the gain on sale of one OREO of $144,000
and the acquisition of VMB.  Service charges on deposits  increased  $274,000 or
14.6%.  Gain on sale of SBA loans  decreased  $142,000 or 92.2%,  primarily as a
result of lower premiums being offered by the secondary market. As a result, the
Company (i)  realized  less income on the loans it sold;  and (ii) chose to sell
fewer loans because of the aforementioned  diminished premiums.  Gain on sale of
OREO increased $160,000 or 421.1% to $198,000,  due primarily to the sale of one
large OREO property, which accounted for $144,000 of the overall gain.

Noninterest Expense

The following table sets forth the break-down of our noninterest expense for the
periods indicated(in thousands):

                                       18
<PAGE>

<TABLE>
<CAPTION>
                                                                            Years Ended December 31,
---------------------------------------------------------------------------------------------------------------
Components of Noninterest Expense                                     2001            2000            1999
---------------------------------------------------------------------------------------------------------------
<S>                                                              <C>             <C>             <C>
Salaries and employee benefits                                   $       8,481   $       6,797   $       5,291
Occupancy and furniture and equipment expense                            2,135           1,752           1,522
Professional services                                                      550             608             440
Stationery and supplies                                                    381             389             291
Promotional                                                                470             490             286
Data processing                                                          1,199             947             683
Office                                                                     534             427             427
Administrative                                                             923             937             783
Regulatory assessments                                                     253             180             124
Goodwill and other intangilbles                                            655             401             287
Other real estate owned                                                     14              78             109
Other noninterest expense                                                  933             571             346
---------------------------------------------------------------------------------------------------------------
    Total                                                        $      16,528   $      13,577   $      10,589
===============================================================================================================
Average full-time equivalent staff                                         167             134             110

As a Percentage of Average Assets
---------------------------------------------------------------------------------------------------------------
Salaries and employee benefits                                           2.43%           2.55%           2.66%
Occupancy and furniture and equipment expense                            0.61%           0.66%           0.77%
Professional services                                                    0.16%           0.23%           0.22%
Stationery and supplies                                                  0.11%           0.15%           0.15%
Promotional                                                              0.14%           0.18%           0.14%
Data processing                                                          0.34%           0.36%           0.34%
Office                                                                   0.15%           0.16%           0.22%
Administrative                                                           0.26%           0.35%           0.39%
Regulatory assessments                                                   0.07%           0.07%           0.06%
Goodwill and other intangilbles                                          0.19%           0.15%           0.15%
Other real estate owned                                                  0.00%           0.03%           0.06%
Other noninterest expense                                                0.27%           0.21%           0.17%
---------------------------------------------------------------------------------------------------------------
    Total                                                                4.73%           5.10%           5.33%
===============================================================================================================
</TABLE>

Noninterest  expense for 2001 was $16.5  million  compared to $13.6  million and
$10.6  million  for 2000 and 1999,  respectively.  Total  interest  expense as a
percentage  of average  assets  continued  to decline to 4.73% during 2001 as we
continued to achieve economies of scale.

During 2000 noninterest expenses increased $3.0 million or 28.3% over 1999. This
was mainly attributable to the acquisition of VMB, and a full year of operations
for the de novo branch located in Ontario, California, contributing $770,000 and
$161,000  respectively  to  the  overall  increase.  Advertising  and  promotion
increased $204,000 or 71.3% due in part to heavy promotion of the acquisition of
VMB through a grand opening  celebration  and other  marketing  campaigns.  Data
processing  increased $264,000 or 38.7% as we incurred additional volume charges
on work  relating  to VMB and  normal  growth  through  operations.  Salary  and
employee  benefits  increased  by  $1.5  million  or  28.4%  due to  approximate
increases related to the following; VMB acquisition - $265,000; de novo branches
-  $113,000;   financial  reporting  -  $93,000;  operations  -  $448,000;  loan
production  - $195,000 and loan  processing - $158,000 and the residual  through
general growth.

                                       19
<PAGE>

Provision for Income Taxes

Income tax expense was  $1,395,000  for 2001,  $1,095,000 for 2000, and $841,000
for 1999.  Accordingly,  we accrued taxes at an approximate  35.8% rate for 2001
compared to an approximate 32.6% and 30.2% rate for 2000 and 1999, respectively.

                              Financial Condition

Loan Portfolio

Overview.  We realized  steady growth in the loan  portfolio.  Total gross loans
were $389.6  million as of December  31, 2001  compared to $181.4  million as of
December 31, 2000, which  represents an increase of 114.8%.  Prior to the merger
with MCB on December  31, 2001,  we had realized a growth rate of  approximately
13.5% through internal operations.  Total gross loans increased by $64.2 million
or 54.8% in 2000 and by $10.6 million or 9.9% in 1999

Our real estate  mortgage  loans  consist  primarily  of loans made based on the
borrower's  cash flow and which are secured by deeds of trust on commercial  and
residential  property to provide  another  source of  repayment  in the event of
default.  These loans are the largest  single  component  of our loan  portfolio
accounting  for  approximately  $241.1  million,  or 61.9%,  of the  total  loan
portfolio at December 31, 2001.  It is our policy to restrict  real estate loans
to no more than seventy-five percent of the value of the property,  depending on
the type of property and its utilization.  We offer both floating and fixed rate
loans.  Maturities on such loans are  generally  limited to five to seven years,
although applicable amortization periods may range significantly longer.

Our  commercial  loans are made for the purpose of  providing  working  capital,
financing   the  purchase  of  equipment   or  for  other   business   purposes.
Approximately $63.9 million of the loan portfolio, or 16.4% at December 31, 2001
was made up of  commercial  loans.  Such  loans  include  short  term loans with
maturities  ranging  from thirty days to one year and term loans which are loans
with maturities  normally ranging from one to several years. Short term business
loans are  generally  intended to finance  current  transactions  and  typically
provide for periodic  principal  payments,  with interest payable monthly.  Term
loans normally  provide for floating  interest rates,  with monthly  payments of
both principal and interest.

Our real estate  construction  loans are primarily interim loans made to finance
the  construction  of  commercial  and  single  family   residential   property.
Approximately  $71.0 million or 18.2% of the loan portfolio at December 31, 2001
was made up of real estate  construction  loans. These loans are typically short
term.

Installment  loans  are  consumer  loans  made  for  the  purpose  of  financing
automobiles,  various  types of  consumer  goods,  and other  personal  purposes
including  overdrafts.  Consumer loans generally provide for the monthly payment
of  principal  and  interest.  Most of these loans are  secured by the  personal
property being purchased.

By policy,  we track our loan  categories  to ensure a balance to the  portfolio
both by type (e.g., real estate construction,  commercial real estate,  consumer
loans,  commercial  loans,  etc.) as well as by interest rate  (variable  versus
fixed  rate).  At December  31,  2001,  of our total loan  portfolio  (including
consumer  loans),  43.95% was in fixed rate  product  and 56.05% was in variable
rate product.

                                       20
<PAGE>

Loan Approval  Policies.  Loan  approval  authority is delegated by the Board of
Directors to the Chief  Executive  Officer  ("CEO"),  President and Chief Credit
Officer ("CCO") under Board  resolution that is reviewed and approved  annually.
Only the CEO,  with  recommendations  from the CCO,  is  empowered  to  delegate
lending authority to the Bank's officers. That delegated authority is documented
under a specific written credit  authority  provided to each lending officer and
maintained and monitored by the CCO.  Because  unsecured  loans present  greater
risk,  unsecured  lending  authorities  are  tightly  controlled  and  kept to a
practical  minimum.  The highest level of unsecured lending authority outside of
the Loan Committee is $500,000 which is delegated to both the CEO, President and
CCO. Regional Vice Presidents and Branch Managers generally operate at unsecured
lending  levels  of  $100,000  or  less.  Secured  lending  activity  meets  the
regulatory   definition  of  "secured"  requiring  as  collateral  either  cash,
marketable  securities or a first trust deed.  Maximum secured lending authority
is $2,000,000 and rests with the CEO,  President and CCO, with lesser amounts of
secured lending authority delegated to each lending officer. All new loans which
exceed $100,000,  or which would make the aggregate of any loans to one borrower
in excess of $100,000, are reviewed by the Bank's Loan Committee.

The following table sets forth our total loans  outstanding in each category and
the percentage of total loans in each category as of the dates indicated:

                           Loan Portfolio Composition

<TABLE>
<CAPTION>
(Dollars in thousands)
                         2001                   2000                    1999                   1998                    1997
                 ---------------------- ----------------------- ---------------------- ----------------------- ---------------------
                             Percent of             Percent of              Percent of             Percent of             Percent of
                   Amount      Total      Amount       Total      Amount      Total      Amount       Total      Amount      Total
                 ------------ --------- ------------ ---------- ------------ --------- ------------ ---------- ------------ --------
<S>              <C>            <C>     <C>             <C>     <C>            <C>     <C>             <C>     <C>            <C>
Real Estate
  Construction   $    70,990    18.22%  $    34,044     18.76%  $    25,102    21.42%  $    20,888     19.60%  $    17,930    17.59%
  Mortgage           241,063    61.88%       95,885     52.85%       53,344    45.52%       46,190     43.34%       46,753    45.87%
Commercial            63,917    16.41%       39,358     21.69%       30,456    25.99%       30,810     28.91%       28,825    28.28%
Installment/
  All other loans     13,586     3.49%       12,160      6.70%        8,275     7.07%        8,691      8.15%        8,426     8.26%
                   ---------- ---------   ---------- ----------   ---------- ---------   ---------- ----------   ---------- --------
Total gross loans    389,556   100.00%      181,447    100.00%      117,177   100.00%      106,579    100.00%      101,934   100.00%
Unearned income        1,109                  1,079                     794                    675                     607
Allowance for
  loan losses          4,557                  1,843                   1,242                  1,439                   1,773
                   ----------             ----------              ----------             ----------              ----------
Total net loans  $   383,890            $   178,525             $   115,141            $   104,465             $    99,554
                   ==========             ==========              ==========             ==========              ==========
</TABLE>

As of December 31, 2001, we had  commitments to extend credit of $103.2 million,
obligations under standby letters of credit of $3.3 million,  and no obligations
under commercial letters of credit.

The following table shows the maturity  distribution and repricing  intervals of
our outstanding loans as of December 31, 2001. In addition,  the table shows the
distribution  of such loans as between those with variable or floating  interest
rates and those with fixed or predetermined interest rates.

                  Loan Maturities and Repricing Intervals

                                       21
<PAGE>

Time remaining to maturity       Fixed rate      Adjustable rate       Total
                               ---------------  -----------------  ------------
One year or less                     $ 20,663          $ 105,980     $ 126,643
After one year to five years          107,906             46,779       154,685
After five years                       42,622             65,606       108,228
                               ---------------  -----------------  ------------
    Total                           $ 171,191          $ 218,365     $ 389,556
                               ===============  =================  ============

As of December 31, 2001, the percentage of loans held for investment  with fixed
and floating interest rates was 44% and 56%, respectively.

Loans Secured by Real Estate-- General. At December 31, 2001, $312.1 million, or
approximately  80.1% of our loans were  secured by first  deeds of trust on real
estate.  Loans which are secured by real estate are  included  within all of the
various loan categories discussed above other than installment loans. All of the
our loans which are secured by real estate are  monitored and taken into account
in the quarterly computation of the adequacy of the allowance for loan and lease
losses.  Historical  loan  losses  are  tracked by loan  category  on a rolling,
eight-quarter  loss  experience  and  used  to  determine  the  adequacy  of our
allowance for loan and lease losses.

We require  title  insurance  insuring the status of the lien on all of the real
estate secured loans. We also require that fire and extended  coverage  casualty
insurance  (and,  if the property is located in a designated  flood zone,  flood
insurance)  is maintained  in an amount equal to the  outstanding  loan balance,
subject to applicable law that in some  instances may limit the required  amount
of hazard insurance to the cost to replace the insured improvements

Real Estate Mortgage Loans.  The value of real estate  collateral for commercial
mortgage  loans is supported  by formal  appraisals  performed by  Bank-approved
appraisers  and  conducted  in  accordance  with  applicable  state and  federal
regulations. Generally, these types of loans are made for a period of up to five
to seven years, amortization may be up to 30 years, loan-to-value ratios are 75%
or less, and debt service coverage ratios are 1.20:1 or better. As with any loan
category,  the  creditworthiness  of the  borrower and a proven track record are
primary  considerations  in the review of all loan  requests.  In  general,  the
borrower  should  provide a verifiable  primary source of repayment and a viable
secondary  source through either  personal or business cash flow, or personal or
business assets, and should be current on all outstanding debts.

Repayment  on  loans  secured  by  commercial  mortgages  generally  depends  on
successful  management of operations of the  collateral  properties.  The market
value of the collateral is subject to the vagaries of the real estate market and
general  economic  conditions.  We address these risks through our  underwriting
criteria,  including  loan-to-value  ratios  and debt  service  coverage  ratios
described above. The borrowers/guarantors must demonstrate creditworthiness and,
in  general,  have a credit  history  that is free  from past  delinquencies  or
default.  The  collateral  quality and type must meet our standards  and,  where
applicable, tenant leases are reviewed and paying capacity evaluated.

Risks  associated  with  commercial  mortgage loans will vary in accordance with
local,  state and national  economic  vagaries  and the cyclical  nature of real
estate  markets.  We attempt to mitigate  these risks by utilizing  underwriting
criteria  referenced  above  as well as by  monitoring  the  performance  of the
portfolio.

Real estate  construction  loans.  We finance the  construction  of residential,
commercial and industrial properties.  Our construction loans typically have the
following characteristics:

                                       22
<PAGE>

    .  First mortgages on the collateral real estate;

    .  Maturities of one year or less;

    .  A floating rate of interest based on the Bank's prime rate;

    .  Minimum cash equity of 15% of project cost;

    .  Maximum  loan-to-value  of 80% on  tract  construction  loans  and 75% on
       commercial/industrial loans;

    .  Appraisals by Bank-approved appraisers are required;

    .  Reserve for anticipated interest costs during construction;

    .  Recourse against the borrower or guarantor;

    .  Construction costs are verified

    .  Construction progress inspections are documented

    .  Loan disbursements are controlled in accordance with progress inspections
       and lien releases obtained.

For  commercial  and  industrial  properties,  we  typically  issue  a  stand-by
commitment  for  a  "take-out"  mini-perm  loan  on  the  property.  We  do  not
participate in joint ventures or take an equity  interest in connection with its
construction lending.

Construction  loans  involve  additional  risks  compared  with loans secured by
existing  improved real  property.  These include:  1) the  uncertainty of value
prior to  completion;  2) the inherent  uncertainty  in estimating  construction
costs;  3)  weather,   municipal  or  other  governmental-caused  delays  during
construction;  and 4)  the  inherent  uncertainty  of the  market  value  of the
completed project. As a result of these  uncertainties,  repayment is dependent,
in a large part,  on the success of the  ultimate  project.  If we are forced to
foreclose on a project  prior to or at completion  because of a default,  we may
not be able to recover all of the unpaid  balance of, and accrued  interest  on,
the loan as well as the related  foreclosure and holding costs. In addition,  we
may be required to fund additional amounts to complete a project and may have to
hold the property for an indeterminate  period of time.  Further,  future local,
state or  national  economic  conditions  could  have an  adverse  impact on the
potential  success of  construction  projects  financed by us and on  collateral
securing these loans.

Commercial Loans. We provide  short-term (30 days to one year) and long-term (up
to five years) commercial loans that may be either unsecured,  partially secured
or fully  secured.  Commercial  lines of credit  have a maturity  of one year or
less. A complete  re-analysis is required prior to renewing a commercial line of
credit.   All   commercial   loans  and  lines  of  credit  are  to  businesses,
professionals or individuals located in California.  Borrower income and/or cash
flow  is  analyzed  and  substantiated  in  support  of the  primary  source  of
repayment.  We  will  collateralize  the  loans  or  lines  of  credit  whenever
appropriate  to secure a secondary  source of repayment.  Collateral may include
cash, liens on accounts receivable and/or equipment,  marketable  securities and
first or junior  liens on real  estate.  As a matter  of  policy,  we  generally
require all principals of a business to guarantee the commercial loan or line of
credit.  All borrowers must  demonstrate,  on the basis of historical  cash flow
and/or the  conversion  of assets,  the ability to service and repay our loan as
well as all other  outstanding  loans.  Our SBA loans are  included  within  our
commercial loan category and are discussed in more detail below in "SBA Loans."

                                       23
<PAGE>

Risks  associated  with  commercial  loans  and  lines  of  credit  may  vary in
accordance  with  concentrations  in any one or group of  industries  and market
locations.  We have no material grouping or concentration of commercial loans to
any one or group of industries.  However,  all of our commercial loans and lines
of credit are to borrowers  located in California.  Accordingly,  it is expected
that an economic downturn impacting California to a greater degree than the rest
of the country would have a  correspondingly  greater  impact to our  commercial
loan portfolio

Consumer Loans. As of December 31, 2001, the total of all of our consumer loans,
which are included within our  "installment  and all other loan"  category,  was
$13.6  million  or 3.5%  of  total  loans.  Consumer  loans  may be  secured  or
unsecured, and are extended for a variety of purposes, including the purchase or
refinance  of  automobiles,  home  improvement,  home equity lines of credit and
overdraft   protection.   Consumer  loan   underwriting   standards  include  an
examination of the applicant's  credit history and payment record on other debts
and an evaluation of the  borrower's  ability to meet existing  obligations  and
payments on the proposed loan. Although credit worthiness of the applicant is of
primary importance,  the underwriting  process also includes a comparison of the
value of the  security,  if any, to the proposed loan amount.  For instance,  we
limit  our  home  equity  lines  of  credit  to a  maximum  total  loan-to-value
(including the first mortgage) of 80% calculated on a current appraisal. New car
loans are generally  advanced up to 80% of the purchase price although  advances
are permitted up to 90% should the applicant meet higher underwriting  standards
and for which the we receive a premium on the interest  rate.  By policy,  we do
not provide 100%  financing on any consumer  loans nor do we engage in sub-prime
lending in any way.

Consumer loans entail  moderate risk,  particularly  loans that are unsecured or
secured  by  rapidly  depreciating  assets  such  as  automobiles.   Repossessed
collateral for a defaulted  consumer loan may not provide an adequate  source of
repayment  of  the  outstanding  loan  balance  as a  result  of  damage  to the
collateral or  depreciation.  The remaining  deficiency may not warrant  further
collection efforts against the borrower beyond obtaining a deficiency  judgment.
Further,  the application of various federal and state laws,  including  federal
and state  bankruptcy  and  insolvency  laws,  may limit the amount which can be
recovered on such loans

         SBA Loans. At December 31, 2001,  approximately  $32.3 million, or 8.3%
of our total loan portfolio,  consisted of SBA loans. We are a Preferred ("PLP")
SBA Lender and actively engage in making SBA 7a loans, 504 loans, Express and 7a
Low Doc  loans.  SBA 7a and 504 loans  made for the  purchase  or  refinance  of
commercial,  retail or  industrial  loans may have  maturities  ranging up to 25
years, fully amortized.  Equipment or working capital loans will have maturities
of up to 7 or 10 years,  depending upon the  eligibility  for the applicable SBA
loan program.  The SBA provides  guaranties ranging from 50% to 80% of the gross
loan amount.

Risk  to the  Bank  associated  with  SBA  loans  is  greatly  mitigated  by the
government guarantee.

Nonperforming Assets

                                       24
<PAGE>

Nonperforming assets are comprised of loans on non-accrual status, loans 90 days
or more past due and still accruing interest, loans restructured where the terms
of  repayment  have been  renegotiated  resulting  in a reduction or deferral of
interest or  principal,  and OREO.  Loans are  generally  placed on  non-accrual
status when they become 90 days past due unless management  believes the loan is
adequately  collateralized  and in  the  process  of  collection.  Loans  may be
restructured  by  management  when a borrower  has  experienced  some  change in
financial status, causing an inability to meet the original repayment terms, and
where we believe the borrower will eventually  overcome those  circumstances and
repay the loan in full.  OREO consists of properties  acquired by foreclosure or
similar means that Management intends to offer for sale.

Management's classification of a loan as non-accrual is an indication that there
is reasonable  doubt as to the full  collectibility  of principal or interest on
the loan;  at this point,  we stop  recognizing  income from the interest on the
loan and  reverse any  uncollected  interest  that had been  accrued but unpaid.
These  loans  may or may  not be  collateralized,  but  collection  efforts  are
continuously pursued.

Interest on performing  loans is accrued and taken into income  daily.  Interest
received on  nonaccrual  loans is  credited  to income only upon  receipt and in
certain circumstances may be applied to principal until the loan has been repaid
in full, at which time the interest  received is credited to income. At December
31,  2001 we had $2.0  million of  nonperforming  assets,  which  included  $1.9
million  of  nonaccrual  loans and $18,000  in loans  past due 90 days and still
accruing.

When  appropriate  or necessary to protect our  interests,  real estate taken as
collateral on a loan may be taken by us through foreclosure or a deed in lieu of
foreclosure. Real property acquired in this manner is known as OREO. The OREO is
carried  on the books of the Bank as an  asset,  at the  lesser of the  recorded
investment  or the fair  value less  estimated  selling  costs  (net  realizable
value).  We  periodically  revalue the OREO properties and charge other expenses
for  any  required   write-downs.   The  OREO  represents  another  category  of
nonperforming  assets.  As of December  31, 2001 the Bank had $72,000 of OREO on
its books.

Certain  financial  institutions  have elected to use Special  Purpose  Vehicles
("SPV") to dispose of problem  assets.  A SPV is typically a subsidiary  company
with  an  asset  and  liability  structure  and  legal  status  that  makes  its
obligations  secure even if the parent  company  goes  bankrupt.  Under  certain
circumstances,  these financial institutions may exclude the problem assets from
their reported impaired, and nonperforming assets. We do not use those vehicles,
or any other structures, to dispose of problem assets.

The following table provides  information  with respect to the components of our
nonperforming assets as of the dates indicated(in thousands):


                                       25
<PAGE>

<TABLE>
<CAPTION>
Nonperforming Assets at December 31,
                                           2001          2000          1999          1998           1997
                                        -----------   ------------  ------------  ------------   -----------

<S>                                   <C>           <C>           <C>           <C>            <C>
Nonaccrual loans /1/                  $      1,947  $         999 $         477 $       1,235  $        459
Loans 90 days or more
   past due and still accruing                  18              0             7             0            69
                                        -----------   ------------  ------------  ------------   -----------
   Total nonperforming loans                 1,965            999           484         1,235           528
Other real estate owned                         72            505         1,036         1,069         1,360
                                        -----------   ------------  ------------  ------------   -----------
   Total nonperforming assets         $      2,037  $       1,504 $       1,520 $       2,304  $      1,888
                                        ===========   ============  ============  ============   ===========

Nonperforming loans as a
   percentage of total gross loans           0.50%          0.55%         0.41%         1.16%         0.52%
Nonperforming assets as a
   percentage of total assets                0.32%          0.48%         0.67%         1.26%         1.23%
Nonperforming assets as a
   percentage of total gross loans
   and other real estate owned               0.52%          0.83%         1.29%         2.14%         1.82%
</TABLE>

/1/ During the year ended  December  31,  2001,  approximately  $945 of interest
income  related to these loans was included in net income.  Additional  interest
income of  approximately  $150,892  would have been  recorded if these loans had
been paid in  accordance  with  their  original  terms and had been  outstanding
throughout the applicable  period then ended or, if not  outstanding  throughout
the applicable period then ended, since origination.

Allowance for Loan Losses

We maintain an ALLL at a level which, in our judgement, is adequate to cover the
inherent risk of loss associated with our loan portfolio. The provision for loan
losses is an  expense  charged  against  income and added to the ALLL in amounts
deemed  appropriate  by us to  maintain  the  ALLL  at an  adequate  level.  Our
judgement of the ALLL,  as discussed  below,  is based on the  evaluation of the
collectibility  of the loan  portfolio,  including  the nature of the  portfolio
credit  concentrations,  trends in historic loss experience,  specific  impaired
loans and economic conditions. It is only a judgement based on estimates, and no
assurance can be given that the judgement and estimates will accurately  predict
losses in the future.

On an ongoing basis, we perform monthly assessments of the ALLL to determine its
adequacy.  Specifically  categorized  and "watch  list"  credits are reviewed to
denote  sufficiency of any specific  reserves  established  on such credits.  We
evaluate and establish an estimate of the loss potential on each such loan while
considering industry risk factors, economic circumstances,  and related matters.
This  analysis/process  involves  extensive  judgement  and eventual  losses may
therefore differ from even the most recent estimates.

We formally assess the ALLL in a multi-step  process on a quarterly  basis.  The
determination of the ALLL begins with us reviewing each individual classified or
criticized  loan in detail,  evaluating,  among other  things,

                                       26
<PAGE>

the adequacy of  collateral,  payment  record,  current loan status and borrower
financial  capacity.  A loan loss  reserve is  assigned to each  classified  and
criticized loan (loans  categorized as  "Substandard,"  "Doubtful" and "Loss" as
well as "Special  Mention") from this quarterly  review based upon the specifics
of the loan's circumstances,  including updated collateral value,  borrower's or
guarantor's financial capacity, payment record and recent conversations with the
borrower.  Additionally, each quarter we update our eight-quarter loss migration
analysis to derive a rolling,  2-year loan loss  experience  percentage  by loan
category.  Specific loan pools by type (e.g.,  commercial loans, consumer loans)
are assigned an appropriate reserve factor based upon our historical  charge-off
experience  or a minimum  "floor",  whichever  is greater,  and then factors are
adjusted for current  conditions.  The Bank then applies the minimum  percentage
reserve factors in determining the ALLL.  These reserve factors have floors that
range from 0.40% to 0.80% depending on the particular loan category.

The ALLL can be further  impacted  (increased or decreased) by our assessment of
risk. Our risk  assessment  consists of a variety of factors.  These factors are
required to be considered when  determining the ALLL. The factors  considered by
us include items such as: changes in lending policies and procedures; changes in
national/local  economic  conditions;  changes  in the  nature and volume of the
portfolio; changes in experience, ability and depth of lending staff, changes in
past dues,  classified  and  non-accruals;  changes  in  quality of loan  review
systems;  existence and effect of loan  concentrations  as well as the effect of
external factors (competition,  legal, regulatory policies,  etc.). Although all
of these  factors are  consistently  considered  and applied,  the combined risk
assessment has a relatively nominal effect on the provision and allowance. These
factors are considered and evaluated, but do not readily determine the provision
or allowance.

After our assessment of risk is factored into consideration,  the resulting loan
loss factor of each loan category is then applied to the existing loan portfolio
by  category  and added to the loan loss  reserve  total  from the review of the
criticized  and classified  loans to arrive at a total ALLL.  This total ALLL is
then  compared  to a  regulatory  reasonableness  test to  ensure  that our ALLL
compares favorably.

We apply a  regulatory  reasonableness  test in  determining  both  the  current
provision  as well as the  overall  allowance.  The test begins by using a three
year weighted average net charge-offs to beginning total loans, with the highest
weight being placed on the most current year. The  calculated  weighting is then
applied to non-classified loans. Classified loans (Substandard,  Doubtful, Loss)
are also risk  weighted to  determine  an allowance  amount.  The risk  weighted
totals for the classified and  non-classified  assets are then added together to
determine the regulatory reasonableness amount.

Although  various  factors  go into the  determination  of the  ALLL,  different
factors  have  greater or lesser  weights  associated  with them.  For  example,
although the impact of economic  factors is a  consideration  in determining the
ALLL,  it generally  has a minimal or nominal  effect on the total  allowance in
comparison  to  actual   losses  which  have  a  much  greater   effect  on  the
determination of the ALLL.

Because  specific loan  circumstances  are reviewed  together with broader total
historical loan loss experience  which may be further impacted by our evaluation
of internal and external factors, changes in asset quality can have a beneficial
impact  to one  component  of the ALLL  without  unduly  influencing  the  other
components.

The process of determining the ALLL involves judgmental discretion, and eventual
losses may therefore differ from even the most recent estimates. Accordingly, we
attempt to provide for additional  potential  losses not yet

                                       27
<PAGE>

identified as known concerns in order to establish and maintain the allowance at
a level that should be sufficient on an ongoing basis.

We have  policies,  designed  primarily  for  internal  use, to analyze the risk
factors  associated with the loan portfolio and to enable us to assess such risk
factors  prior to  granting  new  loans,  and to assess the  sufficiency  of the
allowance.

When a loan is deemed to be uncollectible  by us, it is charged-off  against the
allowance for loan losses.  Conversely,  when a previously  charged-off  loan is
subsequently collected,  such recoveries are additions to the allowance for loan
losses.  The difference  between the total amount of loans  charged-off  and the
total amount of recoveries collected on previously charged-off loans is referred
to as net loan charge-offs (or net loan recoveries if recoveries are larger than
charge-offs).

For the year  ended  December  31,  2001,  we had net  recoveries  of $53,000 as
compared  to net  charge-offs  of  $119,000  and  $377,000  in  2000  and  1999,
respectively.

As of December 31, 2001 the allowance for loan loss was $4.6 million or 1.17% of
total loans as of that date.  As of December 31, 2000,  the  allowance  was $1.8
million or 1.02% of total loans as of that date.  The allowance was $1.2 million
or 1.06% of total loans as of  December  31,  1999.  Although  these  levels are
deemed  adequate  by  us,  no  assurance  can be  given  that  further  economic
difficulties or other  circumstances  which would adversely affect our borrowers
and their  ability  to repay  outstanding  loans will not occur  which  would be
reflected in increased losses in our loan portfolio, which losses could possibly
exceed the amount then reserved for loan losses.

Effective  January  1,  1995,  we  adopted  Statement  of  Financial  Accounting
Standards  No.114,  Accounting by Creditors for Impairment of a Loan (SFAS 114),
as amended by SFAS No. 118,  Accounting by Creditors for  Impairment of a Loan -
Income Recognition and Disclosures. These pronouncements provide that when it is
probable that a creditor will be unable to collect all amounts due in accordance
with the terms of the loan that such loan is deemed impaired. Impaired loans are
accounted for  differently  in that the amount of the impairment is measured and
reflected in the records of the creditor.  Information  concerning  our impaired
loans at December 31, 2001 and 2000 is  contained in Note 3 to the  Consolidated
Financial Statements (see "Item 7" herein).

The table below summarizes,  for the periods indicated, loan balances at the end
of each  period  and the  daily  averages  during  the  period;  changes  in the
allowance for loan losses  arising from loans  charged-off,  recoveries on loans
previously  charged-off,  and additions to the allowance which have been charged
against earnings; and certain ratios related to the allowance for loan losses:


                                       28
<PAGE>

<TABLE>
<CAPTION>
Analysis of the Allowance for Loan Losses
                                                  2001             2000             1999              1998             1997
                                              ------------     ------------     ------------     -------------     ------------
<S>                                        <C>               <C>              <C>              <C>              <C>
(Dollars in thousands)
Allowance for loan losses:
Beginning balance                          $        1,843    $       1,242    $       1,439    $        1,773   $        1,298
Adjustments /1/                                     2,436              465                                                 555
Charge-offs:
   Real estate - mortgage                                              225               10               179              169
   Commercial                                          98               17              482               231              389
   Consumer and other                                  58               34               70               225               90
                                           ---------------   --------------   --------------   ---------------  ---------------
      Total charge-offs                               156              276              562               635              648
                                           ---------------   --------------   --------------   ---------------  ---------------
Recoveries:
   Real estate - mortgage                                               28                2                43               39
   Commercial                                         198              110              166                72               18
   Consumer and other                                  11               19               17                36               24
                                           ---------------   --------------   --------------   ---------------  ---------------
      Total recoveries                                209              157              185               151               81
                                           ---------------   --------------   --------------   ---------------  ---------------
Net charge-offs (recoveries)                          (53)             119              377               484              567
Provision charged to operating expense                225              255              180               150              487
                                           ---------------   --------------   --------------   ---------------  ---------------
Ending balance                             $        4,557    $       1,843    $       1,242    $        1,439   $        1,773
                                           ===============   ==============   ==============   ===============  ===============

Loans at end of period                     $      389,556    $     181,447    $     117,177    $      106,579   $      101,934
Average loans during period                $      187,941    $     142,970    $     105,922    $       97,660   $       70,110

Ratios:
Allowance to loans at end of period                 1.17%            1.02%            1.06%             1.35%            1.74%
Net charge-offs (recoveries)
    to average loans during period                 -0.03%            0.08%            0.36%             0.50%            0.81%
Net charge-offs (recoveries)
    to allowance at beginning of period            -2.88%            9.58%           26.20%            27.30%           43.68%
</TABLE>

------------------------------------

/1/ Acquired  $555,000 in reserves in connection  with acquistion of High Desert
National Bank in 1997,  $465,000 in reserves in connection  with  acquisition of
Valley Merchants Bank in 2000, and $2,436,000 in reserves in connection with the
merger with MCB Financial Corporation in 2001

The following  table provides a breakdown of the allowance for loan losses as of
the dates indicated:

                                       29
<PAGE>

<TABLE>
<CAPTION>
Allocation of the Allowance for Loan Losses
(Dollars in thousands)
                         2001                    2001                     1999                   1998                    1997
                ---------------------- ----------------------- ---------------------- ----------------------- ----------------------
                           Percent of             Percent of              Percent of             Percent of              Percent of
                Allowance     Loans    Allowance     Loans     Allowance    Loans     Allowance    Loans      Allowance    Loans
                   for       in Each      for       in Each      for       in Each      for       in Each        for      in Each
                  Loan     Category to   Loan     Category to    Loan     Category to   Loan     Category to     Loan    Category to
                 Losses    Total Loans  Losses    Total Loans   Losses    Total Loans  Losses    Total Loans    Losses   Total Loans
                ---------- ----------- ---------- ------------ ---------- ----------- ---------- ------------ ---------- -----------
<S>             <C>           <C>      <C>            <C>      <C>           <C>      <C>           <C>       <C>           <C>
Real Estate     $   2,367     80.10 %  $     959      71.61 %  $     541     66.94 %  $     446     62.94 %   $     893     63.46 %
Commercial          1,462     16.41 %        611      21.69 %        246     25.99 %        265     28.91 %         371     28.28
Consumer              300      3.49          273       6.70          455      7.07          728      8.15           509      8.26
Not Allocated         428       N/A
                ---------- ----------- ---------- ------------ ---------- ----------- ---------- ------------ ---------- -----------
          Total $   4,557    100.00 %  $   1,843     100.00 %  $   1,242    100.00 %  $   1,439    100.00 %   $   1,773    100.00 %
                ========== =========== ========== ============ ========== =========== ========== ============ ========== ===========
</TABLE>

Investment Portfolio

Our  investment  portfolio was $169.9 million  representing  26.9% of the Bank's
total assets as of December 31, 2001.  The  portfolio  grew by $77.8  million or
2.7%  in  2001.  We  invest  in  governmental,  mortgage-backed,  municipal  and
corporate  securities  and  categorize  those  securities as held to maturity or
available for sale  depending upon the  circumstances  in place as to our intent
and  ability to hold such  securities.  We invest our liquid  funds in excess of
loan  requirements  in the investment  portfolio and fed funds sold,  which is a
cash equivalent.  During 2000 our securities portfolio increased by $8.8 million
or 10.6% over December 31, 1999.

The following table  summarizes the book value and market value and distribution
of our investment securities as of the dates indicated:

                             Investment Portfolio

<TABLE>
<CAPTION>
                                                                    For the Years Ended December 31,
                                          --------------------------------------------------------------------------------------
                                                      2001                          2000                          1999
                                          ---------------------------   --------------------------    --------------------------
                                             Book          Market          Book          Market          Book         Market
                                             Value          Value          Value         Value          Value          Value
                                          ------------   ------------   ------------   -----------    -----------   ------------
<S>                                     <C>            <C>            <C>            <C>            <C>           <C>
Available for Sale:
  U.S. Treasury securities              $      26,008  $      26,155
  U.S. government agencies                      1,022          1,064
  Mortgage backed securities                  117,371        118,597  $      61,640  $     62,333   $     69,017  $      68,331
  Municipal securities                         20,534         21,030         22,058        22,995         12,648         11,963
  Other securities                              2,032          2,055          5,736         5,761          2,044          2,000
                                          ------------   ------------   ------------   -----------    -----------   ------------
    Total available for sale            $     166,967  $     168,901  $      89,434  $     91,089   $     83,709  $      82,294
                                          ============   ============   ============   ===========    ===========   ============

Held to Maturity:
  U.S. Treasury securities              $       1,026  $       1,029  $       1,005  $      1,006   $      1,012  $       1,003
                                          ------------   ------------   ------------   -----------    -----------   ------------
    Total held to maturity              $       1,026  $       1,029  $       1,005  $      1,006   $      1,012  $       1,003
                                          ============   ============   ============   ===========    ===========   ============
</TABLE>
                                       30
<PAGE>

         The  following   table   summarizes  the  maturity  of  our  investment
securities and their weighted average yield at December 31, 2001:

<TABLE>
<CAPTION>
                                                    After 1 Year       After 5 Years
                                 Within 1 Year     Within 5 Years     Within 10 Years    After 10 Years           Total
                               -------------------------------------------------------------------------------------------------
(Dollars in thousands)          Amount    Yield   Amount     Yield    Amount    Yield    Amount    Yield    Amount     Yield
<S>                              <C>       <C>      <C>        <C>      <C>       <C>    <C>        <C>     <C>           <C>
U.S. Treasury and other
     U.S. government agencies    $24,068   2.27%    $4,180     5.15%                                         $28,248      2.70%
Mortgage backed securities                             374     5.27%    $8,130    6.31%  $110,093   6.33%    118,597      6.33%
Obligations of state and
    political subdivisions /1/       182   7.17%       103     5.45%                       20,745   7.24%     21,030      7.23%
Other securities                                                                            2,055   6.74%      2,055      6.74%
--------------------------------------------------------------------------------------------------------------------------------
   Total                         $24,250   2.31%    $4,657     5.17%    $8,130    6.31%  $132,893   6.48%   $169,930      5.84%
================================================================================================================================
</TABLE>

/1/ Yields on tax-exempt obligations have been computed on a tax equivalent
basis.

Deposits & Other Borrowings

Deposits are our primary source of funds.  At December 31, 2001 we had a deposit
mix of 32.1% in noninterest-bearing  demand deposits, 46.8% in NOW, money market
and savings deposits, and 23.1% in time deposits. Our deposits are obtained from
a  cross-section  of the  communities we serve.  Our business is not seasonal in
nature.  We accept  deposits in excess of  $100,000  from our  customers.  Those
deposits are priced to remain  competitive.  As of each of the reporting periods
covered we had no brokered funds on deposit.

We are not dependent upon funds from sources outside of the United States nor do
we have any and have not made loans to any  foreign  entities.  We have not made
any loans to finance leveraged buyouts or for highly leveraged transactions.

As of December 31, 2001 we had total  deposits of $518.1  million an increase of
95.6% or $253.2 million from December 31, 2000. Of this increase  $210.4 million
or 83.1% was acquired  through the merger with Metro  Commerce  Bank on December
31, 2001..  Total deposits at December 31, 2000 and 1999 were $264.9 million and
$186.8 million,  respectively,  representing  growth of 41.8% in 2000. The $78.1
million  increase  in 2000 was due to the $49.6  million  in  deposits  acquired
through the Valley Merchants Bank acquisition (August of 2000), $12.0 million of
State of California  funds acquired and $16.5 million through internal growth in
operations.

                                       31
<PAGE>

The following  tables  summarize the  distribution of average daily deposits and
the average daily rates paid for the periods indicated(in thousands):

                      Average Deposits and Other Borrowings
<TABLE>
<CAPTION>
                                                                       For the Years Ended December 31,
                                             --------------------------------------------------------------------------------------
                                                       2001                          2000                         1999
                                             ---------------------------   --------------------------   ---------------------------
                                               Average        Average       Average        Average        Average        Average
                                               Balance         Rate         Balance          Rate         Balance         Rate
                                             ------------   ------------   -----------    -----------   ------------   ------------
<S>                                        <C>                    <C>    <C>                   <C>    <C>                    <C>
Noninterest-bearing demand deposits        $      98,168                 $     82,041                 $      71,726
Money market                                      40,624          2.95%        47,685          2.89%         28,720          2.85%
NOW                                               39,495          1.64%        15,875          2.28%         21,612          2.26%
Savings                                           27,368          2.34%        22,575          2.69%         19,610          2.70%
Time deposits, $100,000 and over                  46,388          4.53%        24,173          5.01%         12,825          4.71%
Other time deposits                               33,910          4.79%        23,939          5.67%         20,611          4.49%
                                             ------------                  -----------                  ------------
    Total deposits                               285,953          2.17%       216,288          2.27%        175,104          1.92%
Other borrowings                                  25,187          4.77%        19,659          6.39%          3,756          5.67%
Redeemable Preferred Securities of
Subsidiary Trust Holding Solely Junior
Subordinated Debentures                           10,000         10.96%         7,889         10.88%
                                             ------------                  -----------                  ------------
    Total deposits and borrowed funds      $     321,140          2.65%  $    243,836          2.88%  $     178,860          2.00%
                                             ============                  ===========                  ============
</TABLE>

The scheduled  maturities of our time deposits in  denominations  of $100,000 or
greater at December 31, 2001:

Time remaining to maturity                December 31, 2001
                                          -----------------
Three months or less                       $        53,878
After three months to six months                    11,699
After six months to one year                         9,156
After twelve months                                  1,902
                                          -----------------
          Total                            $        76,635
                                          =================

Short Term Borrowings

Due to the fact that our growth in loans had exceeded our growth in deposits, we
began to employ  short term  borrowings  from the Federal  Home Loan Bank (FHLB)
during 1999. We were first approved to borrow under the programs  offered by the
FHLB in July 1999.  The terms  offered to us by the  Federal  Home Loan Bank are
financing  availability  up to  25%  of  total  assets,  secured  by  acceptable
collateral,  for terms less than 5 years. For terms greater than 5 years through
30 years,  financing availability is limited to residential assets being pledged
as collateral.

At year-end  2001, we had $39.6  million in advances  against our line of credit
from the Federal Home Loan Bank (FHLB) due at various  times during 2002 through
2004 with a weighted  average rate of 3.48%.  The average  balance of these term
borrowings  were $25.2 million with an average rate of 4.77%. As of December 31,
2000 the  balance was $10.1  million,  due at various  times  during 2001 with a
weighted  average rate of 6.10% with an average balance of $19.7 million,  and a
weighted average rate of 6.39% for the twelve months ended. The balance may

                                       32
<PAGE>

vary by millions of dollars on any given day  depending  on  fluctuating  demand
deposit balances as of a particular day.

Liquidity and Interest Rate Risk Management

Liquidity  management  for banks  requires that funds always be available to pay
anticipated deposit withdrawals and maturing financial  obligations promptly and
fully in  accordance  with their  terms.  The  balance of the funds  required is
generally  provided by payments on loans,  sale of loans,  liquidation of assets
and the acquisition of additional deposit liabilities.  One-method banks utilize
for  acquiring  additional  liabilities  is through the  acceptance  of brokered
deposits,  which are  deposits  that bear  interest in excess of 75 basis points
over  prevailing  market  rates.  As of December 31, 2001 we carried no brokered
deposits in our  portfolio.  We have not accepted nor needed to accept  brokered
deposits as part of our normal operations.

In order to meet  liquidity  needs,  we  maintain a portion of our funds in cash
deposits in other banks, fed funds sold, and investment  securities  categorized
as available for sale.  As of December 31, 2001 our  liquidity  ratio was 16.7%,
defined  as $34.6  million  in cash and cash  equivalents  and $51.7  million in
investment  securities  available  for sale  (net of  those  pledged  to  secure
treasury, tax and loan items, FHLB borrowings and public monies) as a percentage
of deposits of $518.1 million.

Effective  planning  of asset  and  liability  maturities  and the  matching  of
interest rates to correspond with this maturity  matching is an integral part of
the active management of an institution's net yield. To the extent maturities of
assets and liabilities do not match in a changing interest rate environment, net
yields may be affected.  Even with  accurately  matched  repricing of assets and
liabilities,  risk remains in the form of prepayment  of assets,  timing lags in
adjusting  certain assets and  liabilities  that have varying  sensitivities  to
market interest rates and basis risk. In its overall attempt to match assets and
liabilities,  we take  into  account  rates  and  maturities  to be  offered  in
connection  with our  certificate  of deposit  program and offer  variable  rate
loans. We have generally been able to control our exposure to changing  interest
rates by managing the mix of floating rate to fixed rate instruments  within our
portfolio.

The  sensitivity  to interest  rate  fluctuations  is  measured in several  time
frames.   Various   strategies  such  as  liability  cost   administration   and
redeployment of asset  maturities are utilized to preserve  interest income from
the effect of changes in interest  rates.  The gap  positions are monitored as a
function  of the  ALCO  process.  The  monitoring  process  includes  the use of
periodic simulated business  forecasts,  which incorporate various interest rate
environments. Financial modeling is utilized to assist management in maintaining
consistent earnings in an environment of changing interest rates.

At December 31, 2001, we had  approximately  $242.6 million of  interest-bearing
liabilities  (NOW's,  Savings,  and Money Market  accounts)  maturing in zero to
three months. Although this short maturity indicates that these interest-bearing
liabilities  are sensitive to  adjustments  in interest  rates,  we believe this
sensitivity  is  significantly  lessened  due to the fact  that  these  interest
bearing liabilities mainly consist of low cost/low turnover demand deposits.  In
addition,  we pay competitive  rates on our time  certificates of deposit,  and,
accordingly,  even though some are shown as maturing in zero to three months, we
believe the substantial  majority of these accounts should continue to roll-over
at maturity.

                                       33
<PAGE>

At December 31, 2001  approximately  34.0% of our  interest-earning  assets were
subject  to  repricing  after  5  years.   The  majority  of  these  assets  are
Collateralized  Mortgage  Obligations  (CMO's).  Our interest  rate  sensitivity
analysis  with  respect to CMOs takes into account the  contractual  maturity of
these  obligations,  but does not take into  account  mandatory  payments on the
underlying mortgage payment  obligations,  which pay primarily interest in early
years, or prepayments of the underlying  mortgages,  which significantly  reduce
the maturity,  and therefore the risks,  of these  obligations.  Similarly,  our
other loans which  reprice after 5 years also only take into account only stated
maturities of these loans and not prepayments of these loans or monthly required
payments  which are  primarily  interest  in early  years.  We  anticipate  that
significantly less than 34.0% of our interest-earning assets which contractually
reprice after five years will actually reprice after five years.

At any given time,  the market value of our  securities  portfolio may be above,
at, or below market value.  While there is a  possibility  that there will be an
impact on net income should we need to sell securities  whose fair value is less
than the amortized cost, we are able to mitigate this risk by borrowing  against
the securities to raise liquidity versus having to sell the securities. Since we
do a monthly  mark-to-market  on the  available-for-sale  securities  portfolio,
there  would be minimal  impact on the  balance  sheet if we were forced to sell
securities whose fair value is less than the amortized cost.

The  following   table  sets  forth  the  interest  rate   sensitivity   of  our
interest-earning assets and interest-bearing liabilities as of December 31, 2001
using the interest  rate  sensitivity  gap ratio.  For purposes of the following
table,  an asset or liability is  considered  rate-sensitive  within a specified
period when it can be repriced or matures within its contractual  terms.  Actual
payment patterns may differ from contractual payment patterns.

                      Interest Rate Sensitivity Analysis


<TABLE>
<CAPTION>
December 31, 2001                                               Over 90     After One       After
                                                   90 days      days to      Year to        Five
(in thousands)                                     or less      365 days    Five Years      Years        Total
                                                 ------------  -----------  -----------  ------------  -----------
<S>                                            <C>           <C>          <C>          <C>           <C>
Earning Assets (Rate Sensitive):
   Interest-bearing deposits with other banks                  $       50                              $       50
   Investment securities                         $    21,103        3,147   $    4,657   $   141,023      169,930
   Loans, gross of allowance for possible
       losses and deferred loan fees                 216,392       15,701      108,505        48,958      389,556
                                                 ------------  -----------  -----------  ------------  -----------
     Total                                           237,495       18,898      113,162       189,981      559,536
                                                 ------------  -----------  -----------  ------------  -----------

Interest-Bearing Liabilities (Rate Sensitive):
   Interest-bearing demand deposits (NOW)             57,977                                               57,977
   Savings deposits                                   32,234                                               32,234
   Money market deposits                             152,394                                              152,394
   Time deposits, $100,000 or more                    53,878       20,855        1,902                     76,635
   Other time deposits                                18,923       20,297        3,691                     42,911
   Other borrowings                                   30,799                     9,425                     40,224
   Trust preferred securities                                                                 13,495       13,495
                                                 ------------  -----------  -----------  ------------  -----------
     Total                                           346,205       41,152       15,018        13,495      415,870
                                                 ------------  -----------  -----------  ------------  -----------
Period GAP                                       $  (108,710)  $  (22,254)  $   98,144   $   176,486
                                                 ============  ===========  ===========  ============
Cumulative GAP                                   $  (108,710)  $ (130,964)  $ (32,820)  $   143,666
                                                 ============  ===========  ===========  ============
Interest Sensitivity GAP Ratio                       (45.77%)    (117.76%)      86.73%        92.90%
                                                 ============  ===========  ===========  ============
Cumulative Interest Sensitivity                      (45.77%)     (51.08%)      (8.88%)       25.68%
                                                 ============  ===========  ===========  ============
</TABLE>

                                       34
<PAGE>

Liquidity and Capital Resources

In 1990, the banking industry began to phase in new regulatory  capital adequacy
requirements  based  on  risk-adjusted  assets.  These  requirements  take  into
consideration the risk inherent in investments, loans, and other assets for both
on-balance  sheet and off-balance  sheet items.  Under these  requirements,  the
regulatory  agencies  have set  minimum  thresholds  for Tier 1  capital,  total
capital and leverage ratios.

The risk-based guidelines are used to evaluate capital adequacy and are based on
the institution's  asset risk profile and off-balance  sheet exposures,  such as
unused loan  commitments and standby letters of credit.  The guidelines  require
that a portion of total capital be core, or Tier 1, capital consisting of common
shareholders' equity and noncumulative  perpetual preferred stock, less goodwill
and certain other deductions,  with the remaining, or Tier 2, capital consisting
of  other  elements,   primarily   certain  other  forms  of  preferred   stock,
subordinated  debt and mandatory  convertible  debt, plus the allowance for loan
losses,  subject to certain  limitations.  The leverage  ratio is Tier 1 capital
divided by adjusted average assets.

At December 31, 2001, the Bank's and Business  Bancorps's  capital  exceeded all
minimum  regulatory  requirements  and  the  Bank  was  considered  to be  "well
capitalized"  as defined in the  regulations  issued by the FDIC.  In connection
with the pending acquisition of Valley Merchants Bank in 2000 it was anticipated
that the Bank would require  additional  capitalization.  On March 21, 2000, the
Company  raised  approximately  $9.7 million in net proceeds from an offering of
$10.0  million  of  principal   amount  of  10-7/8%  Fixed  Rate  Capital  Trust
Pass-through  Securities.  In August of 2000,  approximately  $8.7  million  was
contributed  to the Bank from  Business  Bancorp to maintain the Bank's  capital
position as "well capitalized".

Impact of Inflation; Seasonality

The  primary  impact of  inflation  on us is its effect on interest  rates.  Our
primary source of income is net interest income, which is affected by changes in
interest rates. Our attempt to limit the impact of inflation on our net interest
margin  through  management of  rate-sensitive  assets and  liabilities  and the
analysis of interest rate  sensitivity.  The effect of inflation on premises and
equipment  as well as  noninterest  expenses  has not been  significant  for the
periods covered in this Annual Report. Our business is generally not seasonal.

                                       35
<PAGE>
Item 7. Financial Statements.


                        BUSINESS BANCORP AND SUBSIDIARIES

                        DECEMBER 31, 2001, 2000 AND 1999


                                    Contents


                                                                            Page

Independent Auditors' Report..................................................1


Financial Statements

    Consolidated Balance Sheets
    December 31, 2001 and 2000................................................2

    Consolidated Statements of Income
    For the Years Ended December 31, 2001 and 2000 and 1999...................3

    Consolidated Statement of Changes in Stockholders' Equity
    For the Years Ended December 31, 2001 and 2000 and 1999...................4

    Consolidated Statements of Cash Flows
    For the Years Ended December 31, 2001 and 2000 and 1999...................5


Notes to Consolidated Financial Statements....................................7
<PAGE>

                          Independent Auditors' Report


Board of Directors and Stockholders
Business Bancorp
San Rafael, California

We have audited the accompanying consolidated balance sheets of Business Bancorp
and  subsidiaries  (the  "Bancorp")  as of December  31, 2001 and 2000,  and the
related consolidated  statements of income,  changes in stockholders' equity and
cash flows for each of the years in the  three-year  period  ended  December 31,
2001. These  consolidated  financial  statements are the  responsibility  of the
Bancorp's  management.  Our  responsibility  is to  express  an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated
financial  statements  are free of  material  misstatement.  An  audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  consolidated  financial  statements.  An audit also includes  assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.  We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the financial position of Business Bancorp and
subsidiaries  as of  December  31,  2001  and  2000,  and  the  results  of  its
operations,  changes in its stockholders' equity, and its cash flows for each of
the years in the three-year  period ended December 31, 2001, in conformity  with
accounting principles generally accepted in the United States of America.


/s/ Vavrinek, Trine, Day & Co., LLP

Rancho Cucamonga, California
February 22, 2002

                                      -1-
<PAGE>

                        BUSINESS BANCORP AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                        DECEMBER 31, 2001 AND 2000


<TABLE>
<CAPTION>
                                                         Assets
                                                                                                     2001                  2000
                                                                                                 -------------        -------------

<S>                                                                                              <C>                  <C>
Cash and due from banks                                                                          $  34,614,727        $  16,921,114
Interest-bearing deposits in other financial institutions                                               50,000            3,364,000
Investment securities
 Available-for-sale                                                                                168,901,737           91,089,294
 Held-to-maturity, fair value of $1,029,375 in 2001
 and $1,005,620 in 2000                                                                              1,025,758            1,005,231
Federal Home Loan Bank and Federal Reserve Bank
 restricted stock at cost                                                                            3,112,800            1,246,200
Loans, net of unearned income                                                                      388,447,347          180,367,894
 Less Allowance for Loan Losses                                                                     (4,557,616)          (1,842,715)
                                                                                                 -------------        -------------
  Net Loans                                                                                        383,889,731          178,525,179
Premises and equipment                                                                               9,725,253            5,766,284
Accrued interest receivable                                                                          2,885,574            2,049,766
Deferred tax asset                                                                                   1,126,210              447,862
Other real estate owned, net                                                                            72,584              504,754
Goodwill and other intangible assets                                                                21,675,017            7,545,733
Other assets                                                                                         4,170,294            3,075,322
                                                                                                 -------------        -------------
    Total Assets                                                                                 $ 631,249,685        $ 311,540,739
                                                                                                 =============        =============

                                            Liabilities and Stockholders' Equity
Liabilities
 Deposits
 Noninterest-bearing                                                                               155,935,475           95,434,574
 Interest-bearing                                                                                  362,150,549          169,492,618
                                                                                                 -------------        -------------
 Total Deposits                                                                                    518,086,024          264,927,192
 Borrowed funds                                                                                     40,223,796           10,125,000
 Bancorp Obligated Mandatorily Redeemable Preferred
    Securities of Subsidiary Trust Holding Solely Junior
    Subordinated Debentures                                                                         13,495,313           10,000,000
 Accrued interest and other liabilities                                                              4,887,832            2,945,523
                                                                                                 -------------        -------------
                                                                                                   576,692,965          287,997,715
                                                                                                 -------------        -------------
Commitments and Contingencies (Note #11)

Stockholders' Equity
 Serial preferred stock - no par value, 20,000,000 shares authorized
  but unissued                                                                                             --                   --
 Common stock - no par value, authorized 20,000,000 shares,
 issued and outstanding, 3,907,439 and 2,026,869 shares
  in 2001 and 2000, respectively                                                                    35,141,371            6,646,626
 Retained earnings                                                                                  18,388,464           15,922,222
 Accumulated other comprehensive income                                                              1,026,885              974,176
                                                                                                 -------------        -------------
   Total Stockholders' Equity                                                                       54,556,720           23,543,024
                                                                                                 -------------        -------------
   Total Liabilities and Stockholders' Equity                                                    $ 631,249,685        $ 311,540,739
                                                                                                 =============        =============
</TABLE>

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

                                      -2-
<PAGE>

                        BUSINESS BANCORP AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

<TABLE>
<CAPTION>
                                                       2001                    2000                    1999
                                                   ------------            ------------            ------------
<S>                                                <C>                     <C>                     <C>
Interest Income
  Interest and fees on loans                       $ 18,255,378            $ 15,701,729            $ 11,226,876
  Interest on investment securities
    Taxable                                           5,489,230               4,544,567               2,424,171
    Exempt from Federal taxes                         1,168,100               1,037,126                 501,619
  Interest on deposits                                   81,557                  90,049                    --
  Interest on Federal funds sold                        100,726                  34,885                 617,758
                                                   ------------            ------------            ------------
      Total Interest Income                          25,094,991              21,408,356              14,770,424
                                                   ------------            ------------            ------------
Interest Expense
  Interest on deposits
    NOW and money market accounts                     1,845,678               1,739,211               1,305,793
    Savings                                             639,692                 606,364                 528,636
    Time deposits $100,000 and over                   2,102,199               1,356,732                 604,028
    Time deposits under $100,000                      1,625,380               1,210,610                 925,486
  Interest on Trust Preferred Securities              1,081,111                 857,917                    --
  Interest on other borrowings                        1,216,412               1,256,808                 212,790
                                                   ------------            ------------            ------------
      Total Interest Expense                          8,510,472               7,027,642               3,576,733
                                                   ------------            ------------            ------------
      Net Interest Income                            16,584,519              14,380,714              11,193,691
Provision for Loan Losses                               225,000                 255,000                 180,000
                                                   ------------            ------------            ------------
      Net Interest Income After Provision
       for Loan Losses                               16,359,519              14,125,714              11,013,691
                                                   ------------            ------------            ------------
Other Income
  Service fees                                        3,160,929               2,563,340               2,261,995
  Gain on sale of SBA loans                              39,779                  11,967                 154,246
  Gain on sale of other real estate owned                52,779                 197,504                  38,168
  Gain (loss) on sale of investments                    816,836                  43,321                 (98,041)
                                                   ------------            ------------            ------------
      Total Other Income                              4,070,323               2,816,132               2,356,368
                                                   ------------            ------------            ------------
Other Expenses
  Salaries and employee benefits                      8,480,565               6,797,516               5,290,708
  Occupancy, net                                      1,072,065                 854,444                 746,684
  Furniture and equipment                             1,062,620                 897,670                 775,536
  Other operating expenses                            5,912,653               5,027,752               3,775,799
                                                   ------------            ------------            ------------
      Total Other Expenses                           16,527,903              13,577,382              10,588,727
                                                   ------------            ------------            ------------
Income Before Income Taxes                            3,901,939               3,364,464               2,781,332
                                                   ------------            ------------            ------------
Income Taxes
  Current                                             1,395,900               1,447,550               1,019,999
  Deferred                                                 (884)               (352,750)               (178,972)
                                                   ------------            ------------            ------------
                                                      1,395,016               1,094,800                 841,027
                                                   ------------            ------------            ------------

Net Income                                         $  2,506,923            $  2,269,664            $  1,940,305
                                                   ============            ============            ============

Earnings Per Share
  Basic                                            $       1.24            $       1.14            $       0.99
                                                   ============            ============            ============

  Diluted                                          $       1.20            $       1.13            $       0.97
                                                   ============            ============            ============
</TABLE>

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

                                      -3-
<PAGE>

                        BUSINESS BANCORP AND SUBSIDIARIES
            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

<TABLE>
<CAPTION>
                                                                                                        Accumulated
                                                Number of                                                  Other           Total
                                                 Shares       Common      Comprehensive    Retained    Comprehensive   Stockholders'
                                               Outstanding    Stock           Income       Earnings        Income          Equity
                                               ----------- -------------  -------------  ------------  --------------  -------------

<S>              <C>                             <C>        <C>            <C>            <C>              <C>         <C>
Balance, January 1, 1999                         1,559,175  $ 5,726,269                   $11,713,655        $ 3,002   $ 17,442,926

  Stock options exercised                           13,264       77,550                                                      77,550
  Stock issued to 401-K Plan                        11,650      142,945                                                     142,945
  Five-for-four stock split (Note #12)             391,872
  Cash in lieu of fractional shares                                                            (1,402)                       (1,402)
  Tax effect of stock options exercised - 1998                  310,090                                                     310,090
  Comprehensive Income
    Net income for the period                                              $ 1,940,305      1,940,305                     1,940,305
    Unrealized security holding losses
      (net of $535,692 tax)                                                   (935,989)                     (935,989)      (935,989)
    Reclassification adjustment for realized
      losses (net of $31,471 tax benefit)                                       54,988                        54,988         54,988
                                                                          ------------
    Total comprehensive income                                             $ 1,059,304
                                               -----------  ------------  =============  -------------  -------------  -------------
Balance, December 31, 1999                       1,975,961    6,256,854                    13,652,558       (877,999)    19,031,413

  Stock options exercised                           50,836      389,161                                                     389,161
  Stock issued to 401-K Plan                            72          611                                                         611
  Comprehensive Income
    Net income for the period                                                2,269,664      2,269,664                     2,269,664
    Unrealized security holding gains
      (net of $1,304,866 tax)                                                1,877,734                     1,877,734      1,877,734
    Reclassification adjustment for realized
      gains (net of $17,762 tax expense)                                       (25,559)                      (25,559)       (25,559)
                                                                          ------------
    Total comprehensive income                                             $ 4,121,839
                                               -----------  ------------  =============  -------------  -------------  -------------
Balance, December 31, 2000                       2,026,869    6,646,626                    15,922,222        974,176     23,543,024

  Stock options exercised                            7,200       40,000                                                      40,000
  Stock issued in connection with purchase of
    MCB Financial Corporation                    1,873,370   28,454,745                                                  28,454,745
  Cash dividend paid                                                                          (40,681)                      (40,681)
  Comprehensive Income
    Net income for the period                                                2,506,923      2,506,923                     2,506,923
    Unrealized security holding gains
      (net of $373,029 tax)                                                    533,381                       533,381        533,381
    Reclassification adjustment for realized
      gains (net of $336,164 tax expense)                                     (480,672)                     (480,672)      (480,672)
                                                                          -------------
    Total comprehensive income                                             $ 2,559,632
                                               -----------  ------------  =============  -------------  -------------  -------------
Balance, December 31, 2001                       3,907,439  $35,141,371                   $18,388,464    $ 1,026,885   $ 54,556,720
                                               ===========  ============                 =============  =============  =============
</TABLE>

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

                                      -4-
<PAGE>

                        BUSINESS BANCORP AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

<TABLE>
<CAPTION>
                                                                                      2001              2000              1999
                                                                                  -------------     -------------     -------------

<S>                                                                               <C>               <C>               <C>
Cash Flows From Operating Activities
 Net Income                                                                       $   2,506,923     $   2,269,664     $   1,940,305
 Adjustments to Reconcile Net Income to
   Net Cash Provided by Operating Activities
     Depreciation and amortization of premises and equipment                            902,069           730,220           625,220
     Amortization of intangibles                                                        654,667           400,845           286,942
     Provision for loan losses                                                          225,000           255,000           180,000
     Provision for losses on other real estate owned                                      5,000            64,586            24,415
     Net (gain)/loss on sale of assets                                                 (893,511)         (279,384)           78,137
     Increase in accrued interest receivable                                            (26,825)         (609,164)         (627,531)
     (Increase)/decrease in deferred assets                                                --             605,138          (400,273)
     Net amortization/accretion of premiums/discounts
      on investment securities                                                        1,800,132           704,158           696,379
     FHLB stock dividend                                                                (90,500)          (99,000)           (6,000)
     Net increase in cash surrender value of life insurance policies                    (67,669)          (63,899)          (37,340)
     Increase in other assets                                                          (748,551)         (572,947)          (65,058)
     (Decrease)/increase in interest payable and other liabilities                      (69,361)        1,316,301           115,021
     (Increase)/decrease in prepaid taxes                                                 6,865           193,260          (383,027)
                                                                                  -------------     -------------     -------------
        Net Cash Provided By Operating Activities                                     4,204,239         4,914,778         2,427,190
                                                                                  -------------     -------------     -------------
Cash Flows From Investing Activities
 Net change in interest-bearing deposits in other financial institutions              3,314,000         1,586,000              --
 Proceeds from maturities of available-for-sale securities                              100,000           880,000         3,301,800
 Proceeds from sales of investment securities available-for-sale                     34,734,683        14,734,593         6,994,039
 Proceeds from maturities of held-to-maturity securities                              1,000,000              --           1,055,000
 Principal reduction of mortgage-backed securities                                   29,071,973         8,649,254         6,134,290
 Purchase of investment securities available-for-sale                              (115,379,319)      (23,922,813)      (75,146,074)
 Purchase of investment securities held-to-maturity                                  (1,034,609)             --          (1,513,906)
 Purchase of Valley Merchants Bank (net of cash and cash
   equivalents acquired)                                                                   --          (5,554,281)             --
 Purchase of MCB Financial Corporation (net of cash and cash
   equivalents acquired)                                                             16,909,655              --                --
 Purchase of Federal Home Loan Bank and Federal Reserve Bank stock                   (2,288,750)             --                --
 Redemption of Federal Home Loan Bank stock                                             852,600            52,800              --
 Purchase of life insurance policies                                                       --            (603,082)             --
 Net increase in loans to customers                                                 (24,518,327)      (28,162,762)      (10,931,034)
 Recoveries of loans previously written-off                                             209,886           156,969           184,906
 Capital expenditures                                                                (1,895,339)       (1,209,282)         (521,905)
 Proceeds from sale of equipment                                                         28,282            42,300            15,044
 Proceeds from sale of other real estate owned                                          175,838           898,722           388,566
                                                                                  -------------     -------------     -------------
        Net Cash Used In Investing Activities                                       (58,719,427)      (32,451,582)      (70,039,274)
                                                                                  -------------     -------------     -------------
</TABLE>

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

                                       -5-
<PAGE>


                        BUSINESS BANCORP AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

<TABLE>
<CAPTION>
                                                                                    2001               2000                1999
                                                                                -------------      -------------      -------------
<S>                                                                             <C>                <C>                <C>
Cash Flows From Financing Activities
  Net increase in demand deposits, NOW accounts,
   savings accounts, and money market deposits                                     22,438,277          7,285,511         20,704,232
  Net increase in certificates of deposit                                          20,272,073         20,866,355          2,261,089
  Net increase/(decrease) in FHLB borrowing                                        29,499,132         (8,075,000)        18,200,000
  Issuance of Bancorp obligated mandatorily
    redeemable preferred securities of subsidiary
    trust holding solely junior subordinated debentures                                  --           10,000,000               --
  Stock options exercised, net of tax effect                                           40,000            389,161            387,640
  Cash dividends paid                                                                 (40,681)              --                 --
  Stock issued through 401(K) plan                                                       --                  611            142,945
  Cash paid in lieu of fractional shares                                                 --                 --               (1,402)
                                                                                -------------      -------------      -------------
      Net Cash Provided By Financing Activities                                    72,208,801         30,486,638         41,694,504
                                                                                -------------      -------------      -------------
Net (Increase)/Decrease in Cash and Cash Equivalents                               17,693,613          2,949,834        (25,917,580)
Cash and Cash Equivalents, Beginning of Year                                       16,921,114         13,971,280         39,888,860
                                                                                -------------      -------------      -------------
Cash and Cash Equivalents, End of Year                                             34,614,727         16,921,114         13,971,280
                                                                                =============      =============      =============
Supplemental Disclosure of Cash Flows Information
  Interest paid                                                                 $   6,144,374      $   1,196,226      $   3,598,157
                                                                                =============      =============      =============
  Income taxes paid                                                             $   1,450,000      $   1,210,000      $     769,986
                                                                                =============      =============      =============
Non-Cash Investing Activities
  Net change in accumulated other comprehensive income                          $      52,709      $   1,852,175      $     881,001
                                                                                =============      =============      =============
  Transfer from loans to OREO                                                   $        --        $     135,947      $     548,758
                                                                                =============      =============      =============
  Origination of loans to facilitate OREO                                       $     304,111      $        --        $     175,800
                                                                                =============      =============      =============
  Transfer from investments held-to-maturity to available-for-sale              $        --        $        --        $   1,065,000
                                                                                =============      =============      =============
Non-Cash Financing Activities
  Tax effect of stock options exercised                                         $        --        $      25,851      $     310,090
                                                                                =============      =============      =============
Supplemental Disclosure
  Net change in assets/liabilities due to acquisition
   Increase in interest-bearing deposits in other financial institutions        $        --        $   4,950,000
                                                                                =============      =============
   Increase in investments                                                      $  27,219,420      $   6,812,259
                                                                                =============      =============
   Increase in net loans                                                        $ 180,977,000      $  35,678,924
                                                                                =============      =============
   Increase in premises and equipment                                           $   3,222,892      $   1,414,229
                                                                                =============      =============
   Increase in other real estate owned                                          $        --        $      90,000
                                                                                =============      =============
   Increase in goodwill and other intangible assets                             $  14,783,951      $   5,711,007
                                                                                =============      =============
   Increase in other assets                                                     $   2,149,762      $   1,070,318
                                                                                =============      =============
   Increase in demand, money market and savings deposits                        $ 177,768,481      $  39,015,744
                                                                                =============      =============
   Increase in certificates of deposit                                          $  32,680,000      $  10,570,707
                                                                                =============      =============
   Increase in other borrowings                                                 $     599,664      $        --
                                                                                =============      =============
   Increase in trust preferred securities                                       $   3,495,313      $        --
                                                                                =============      =============
   Increase in other liabilities                                                $   2,011,670      $     586,005
                                                                                =============      =============
</TABLE>

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

                                       -6-
<PAGE>

Note #1 - Summary of Significant Accounting Policies

The accounting and reporting  policies of Business Bancorp and subsidiaries (the
"Bancorp")  conform to accounting  principles  generally  accepted in the United
States of America and to general practice within the banking industry. A summary
of the significant accounting and reporting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows:

A.  Principles of Consolidation

    The consolidated  financial  statements  include the Bancorp and it's wholly
    owned  subsidiaries,  Business  Bank of California  (the  "Bank"),  Business
    Capital Trust I, and MCB  Statutory  Trust I. All  significant  intercompany
    balances and transactions have been eliminated.

B.  Nature of Operations

    Business  Bancorp,  a bank holding company,  was incorporated on January 21,
    2000 in the State of California for the purpose of acquiring and holding all
    of the outstanding stock of the Bank.  Business Capital Trust I, a statutory
    business trust,  was incorporated on March 10, 2000 in the State of Delaware
    for the purpose of issuing and selling Cumulative Trust Preferred Securities
    (the "Trust  Preferred  Securities")  and using the  proceeds to acquire the
    junior subordinated  debentures issued by the Bancorp. On December 31, 2001,
    the Bancorp  completed  the  acquisition  of MCB Financial  Corporation  and
    Subsidiaries.  The Bank has been organized as a single operating segment and
    operates sixteen offices in the Inland Empire region of Southern  California
    and  in  the  Northern  California  cities  of  San  Rafael,  Petaluma,  San
    Francisco,  South San  Francisco  and  Hayward,  and  provides  a variety of
    financial services to individuals and small-to-medium  size businesses.  The
    Bank  offers a full  range of  commercial  banking  services  including  the
    acceptance of checking and savings deposits, and the making of various types
    of installment, commercial and real estate loans.

C.  Use of Estimates

    The  preparation  of financial  statements  in  conformity  with  accounting
    principles  generally  accepted  in the United  States of  America  requires
    management  to make  estimates  and  assumptions  that  affect the  reported
    amounts of assets and  liabilities  and disclosure of contingent  assets and
    liabilities at the date of the financial statements and the reported amounts
    of revenues and expenses during the reporting  period.  Actual results could
    differ from those estimates.

    Estimates that are particularly  susceptible to significant change relate to
    the  determination of the allowance for losses on loans and the valuation of
    real estate acquired in connection  with  foreclosures or in satisfaction of
    loans. In connection with the  determination of the allowances for losses on
    loans and foreclosed real estate,  management obtains independent appraisals
    for significant properties.

    While management uses available information to recognize losses on loans and
    foreclosed real estate,  future additions to the allowances may be necessary
    based on changes  in local  economic  conditions.  In  addition,  regulatory
    agencies,  as an integral part of their  examination  process,  periodically
    review the Bank's allowances for losses on loans and foreclosed real estate.
    Such agencies may require the Bank to recognize  additions to the allowances
    based on their judgments about information  available to them at the time of
    their examination.  Because of these factors, it is reasonably possible that
    the allowances for losses on loans and foreclosed real estate may change.

D.  Cash and Cash Equivalents

    For the purpose of the statements of cash flows,  cash and cash  equivalents
    includes cash and due from banks,  cash items in transit,  and Federal funds
    sold  balances as of the  year-end.  Generally,  Federal  funds are sold for
    one-day periods.

    Banking  regulations  require that all banks  maintain a percentage of their
    deposits as reserves in use or on deposit with the Federal Reserve Bank. The
    Bank complied with the reserve requirements as of December 31, 2001.

    The Bank  maintains  amounts  due from  banks that may  periodically  exceed
    Federally  insured limits.  The Bank has not experienced any losses in these
    accounts.

                                      -1-
<PAGE>

Note #1 - Summary of Significant Accounting Policies, Continued

E.   Interest-bearing Deposits in Banks

     Interest-bearing  deposits in banks mature  within one year and are carried
at cost.

F.  Investment Securities and Mortgage-Backed Securities

    In accordance with Statement of Financial  Accounting Standards ("SFAS") No.
    115,  "Accounting  for Certain  Investments in Debt and Equity  Securities,"
    which  addresses the accounting for  investments in equity  securities  that
    have  readily  determinable  fair  values  and for  investments  in all debt
    securities,  securities are classified in three categories and accounted for
    as follows:  debt, equity, and mortgage-backed  securities that the Bank has
    the  positive  intent and  ability to hold to  maturity  are  classified  as
    held-to-maturity  and are  measured  at  amortized  cost;  debt,  equity and
    mortgage backed  securities  bought and held  principally for the purpose of
    selling  in the near  term are  classified  as  trading  securities  and are
    measured  at fair  value,  with  unrealized  gains and  losses  included  in
    earnings;  debt,  equity and  mortgage-backed  securities  not classified as
    either    held-to-maturity    or   trading    securities   are   deemed   as
    available-for-sale and are measured at fair value, with unrealized gains and
    losses,  net of  applicable  taxes,  reported  in a  separate  component  of
    stockholders'  equity. Gains or losses on sales of investment securities and
    mortgage-backed  securities  are  determined on the specific  identification
    method.  Premiums and discounts are amortized or accreted using the interest
    method over the expected lives of the related securities.

G.  Loans and Interest on Loans

    Loans are stated at unpaid principal  balances,  less the allowance for loan
    losses  and  net  deferred  loan  fees  and  unearned  discounts.  The  Bank
    recognizes loan origination fees as income over the term of the loan.

    In accordance  with SFAS No. 114, (as amended by SFAS No. 118),  "Accounting
    by Creditors for Impairment of a Loan," those loans identified as "impaired"
    are measured on the present value of expected  future cash flows  discounted
    at the loan's effective interest rate, except that as a practical expedient,
    a creditor may measure impairment based on a loan's observable market price,
    or the fair value of the collateral if the loan is collateral  dependent.  A
    loan is  impaired  when it is  probable  the  creditor  will  not be able to
    collect all  contractual  principal and interest  payments due in accordance
    with the terms of the loan agreement.

    Loans are placed on nonaccrual when a loan is specifically  determined to be
    impaired or when  principal or interest is  delinquent  for 90 days or more.
    Any unpaid  interest  previously  accrued on those  loans is  reversed  from
    income.  Interest  income  generally is not recognized on specific  impaired
    loans unless the  likelihood  of further loss is remote.  Interest  payments
    received  on such loans are  applied as a  reduction  of the loan  principal
    balance.

H.  Provision and Allowance for Loan Losses

    The allowance  for loan losses  (ALLL) is  maintained  at a level which,  in
    management's  judgment,  is adequate to absorb credit losses inherent in the
    loan  portfolio.  The  amount  of the  allowance  is based  on  management's
    evaluation of the collectibility of the loan portfolio, including the nature
    of  the  portfolio,   credit  concentrations,   trends  in  historical  loss
    experience, specific impaired loans, and economic conditions. Allowances for
    impaired loans are generally  determined  based on collateral  values or the
    present  value of  estimated  cash flows.  The  allowance  is increased by a
    provision  for loan  losses,  which is  charged to  expense  and  reduced by
    charge-offs,  net of  recoveries.  Changes  in  the  allowance  relating  to
    impaired  loans are charged or credited to the  provision  for loan  losses.
    Because of uncertainties  inherent in the estimation  process,  management's
    estimate of credit  losses  inherent in the loan  portfolio  and the related
    allowance may change.

                                      -2-
<PAGE>

Note #1 - Summary of Significant Accounting Policies, Continued

I.  Premises and Equipment

    Land is  carried at cost.  Premises  and  equipment  are stated at cost less
    accumulated depreciation.  Repairs and maintenance are expensed as incurred.
    Depreciation  is  computed  on the  straight-line  basis over the  estimated
    useful lives of the related assets,  which range from three to thirty years.
    Leasehold improvements are amortized using the straight-line method over the
    estimated  useful lives of the  improvements  or the  remaining  lease term,
    whichever  is shorter.  Depreciation  expense was  $902,069,  $730,220,  and
    $625,220 for the years ended December 31, 2001, 2000 and 1999, respectively.

J.  Goodwill and Core Deposit Intangible Purchased

    Goodwill  represents the excess of the purchase price over the fair value of
    the net assets  acquired during 2001,  2000 and 1997.  Through  December 31,
    2001, goodwill was amortized using the straight-line method over fifteen and
    twenty years.  Amortization expense charged to operations for 2001, 2000 and
    1999 was $524,508, $270,686 and $156,783, respectively.

    Core deposit  intangibles were recorded for  acquisitions  during 2001, 1997
    and  1994.  The core  deposit  intangibles  are  being  amortized  using the
    straight-line method over the estimated lives of the deposits acquired which
    range from four to fifteen years. Amortization expense charged to operations
    for 2001, 2000 and 1999 was $129,963, $130,159 and $130,159, respectively.

    Effective January 1, 2002, goodwill will no longer be amortized,  but rather
    will be tested for  impairment  annually as a result of the adoption of SFAS
    No. 142, "Goodwill and Other Intangible Assets." The Bancorp does not expect
    to recognize  any  impairment  on goodwill  upon adoption of SFAS No. 142 in
    2002. The core deposit  intangible asset will continue to be amortized using
    the same method described above.

K.  Loan Sales and Servicing

    Gains  and  losses  from  the  sale  of  participating  interests  in  loans
    guaranteed by the Small Business  Administration  (SBA) are recognized based
    on the premium  received or discount  paid and the cost basis of the portion
    of the loan sold. The cost basis of the portion of the loan sold was arrived
    at by allocating the total cost of each loan between the guaranteed  portion
    of the loan sold and the unguaranteed portion of the loan retained, based on
    their  relative fair values.  The book value  allocated to the  unguaranteed
    portion of the loan,  if less than the  principal  amount,  is recorded as a
    discount  on the  principal  amount  retained.  The  discount is accreted to
    income over the remaining  estimated  life of the loan. The Bank retains the
    servicing  on the  portion  of the loans sold and  recognizes  income on the
    servicing fees that are received.

L.  Income Taxes

    Provisions for income taxes are based on amounts  reported in the statements
    of income (after  exclusion of non-taxable  income such as interest on state
    and  municipal   securities)   and  include   deferred  taxes  on  temporary
    differences  in the  recognition of income and expense for tax and financial
    statement  purposes.  Deferred taxes are computed on the liability method as
    prescribed in SFAS No. 109, "Accounting for Income Taxes."

M.  Other Real Estate Owned

    Other  real  estate  owned,   which   represents  real  estate  acquired  by
    foreclosure,  is recorded at the lesser of the  outstanding  loan balance or
    the  fair  value  less  selling  costs  of  the  property  at  the  time  of
    foreclosure.  Any valuation  adjustments required at the time of foreclosure
    are charged to the  allowance  for loan  losses.  Any  subsequent  valuation
    adjustments,   operating  expenses  or  income,  and  gains  and  losses  on
    disposition of such properties are recognized in current operations.

                                      -3-
<PAGE>

Note #1 - Summary of Significant Accounting Policies, Continued

N.  Advertising

     Advertising  costs are charged to expense during the year in which they are
incurred.

O.   Earning Per Shares (EPS)

     Basic EPS excludes dilution and is computed by dividing income available to
     common  stockholders  by  the  weighted-average  number  of  common  shares
     outstanding  for the period.  Diluted EPS reflects the  potential  dilution
     that could occur if  securities  or other  contracts  to issue common stock
     were  exercised or converted  into common stock or resulted in the issuance
     of common stock that then shared in the earnings of the Bancorp.

P.   Stock-Based Compensation

     SFAS No. 123, "Accounting for Stock-Based  Compensation,"  encourages,  but
     does not require,  companies to record  compensation  cost for  stock-based
     employee  compensation  plans at fair  value.  The  Bancorp  has  chosen to
     continue to account for stock-based  compensation using the intrinsic value
     method  prescribed in Accounting  Principles  Board ("APB") Opinion No. 25,
     "Accounting  for Stock Issued to Employees,"  and related  interpretations.
     Accordingly, compensation cost for stock options is measured as the excess,
     if any, of the quoted  market price of the  Bancorp's  stock at the date of
     the grant over the amount an employee must pay to acquire the stock.

Q.   Comprehensive Income

     In  accordance  with  SFAS  No.  130,  "Reporting   Comprehensive  Income,"
     disclosure of  comprehensive  income and its components are reported by the
     Bancorp.   Changes  in  unrealized  gains  (losses)  on  available-for-sale
     securities,  net of income  taxes,  are the only  component of  accumulated
     other comprehensive income for the Bancorp.

R.   Accounting for Business Capital Trust I and MCB Statutory Trust I

     Business Capital Trust I is a statutory business trust created for the sole
     purpose of issuing and selling  Cumulative Trust Preferred  Securities (the
     "Trust Preferred  Securities") and using the proceeds to acquire the junior
     subordinated debentures issued by Business Bancorp.

     MCB  Statutory  Trust  I is a  statutory  business  trust  created  for the
     exclusive  purpose of issuing  and  selling  Trust  Securities.  The entire
     proceeds  were  invested  by the  Trust in Junior  Subordinated  Deferrable
     Interest  Debentures  of MCB Financial  Corporation,  which was acquired by
     Business Bancorp on December 31, 2001.

     For  financial  reporting  purposes,  Business  Capital  Trust  I  and  MCB
     Statutory  Trust I are treated as  subsidiaries  of Business  Bancorp  and,
     accordingly,  the  accounts  are  included  in the  consolidated  financial
     statements of the Bancorp.  The Trust Preferred Securities are presented as
     a separate line item in the  consolidated  balance sheet under the caption,
     "Bancorp  Obligated   Mandatorily   Redeemable   Preferred   Securities  of
     Subsidiary  Trust  Holding  Solely  Junior  Subordinated  Debentures."  For
     financial   reporting   purposes,   the  Bancorp   records   the   dividend
     distributions payable on the Trust Preferred Securities as interest expense
     in the consolidated statement of income.

S.   Current Accounting Pronouncements

     In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
     No. 142,  "Accounting for Goodwill and Other Intangible  Assets," effective
     starting with fiscal years beginning after December 15, 2001. This standard
     establishes new accounting  standards for goodwill and continues to require
     the recognition of goodwill as an asset but does not permit amortization of
     goodwill as  previously  required by APB Opinion No. 17. The standard  also
     establishes a new method of testing  goodwill for  impairment.  It requires
     goodwill to be separately  tested for impairment at a reporting unit level.
     The amount of  goodwill  determined  to be  impaired  would be  expensed to
     current operations.  The Bancorp does not expect to recognize an impairment
     on goodwill upon the adoption of SFAS No. 142 in 2002.

                                      -4-
<PAGE>

Note #1 - Summary of Significant Accounting Policies, Continued

T.  Reclassifications

Certain amounts in the 2000 and 1999 consolidated financial statements have been
reclassified to conform with the 2001 presentation.


Note #2 - Investment Securities

At December 31, 2001 and 2000, the investment securities portfolio was comprised
of  securities  classified  as  available-for-sale   and  held-to-maturity,   in
conjunction  with  the  adoption  of  SFAS  No.  115,  resulting  in  investment
securities  available-for-sale  being  carried  at  fair  value  and  investment
securities  held-to-maturity being carried at cost, adjusted for amortization of
premiums and accretions of discounts.

Available-for-Sale Securities

The amortized cost and estimated fair value of available-for-sale  securities at
December 31, 2001 and 2000, were as follows:

<TABLE>
<CAPTION>
                                                          December 31, 2001
                                     ----------------------------------------------------------
                                                        Gross         Gross
                                       Amortized     Unrealized     Unrealized
                                         Cost           Gains         Losses        Fair Value
                                     ------------   ------------   ------------    ------------
<S>                                  <C>            <C>            <C>             <C>
U.S. Treasury obligations            $ 26,155,320   $       --     $       --      $ 26,155,320
Obligations of U.S. Government
  agencies and corporations             1,064,100           --             --         1,064,100
Obligations of state and political
  subdivisions                         20,533,760        598,984       (102,512)     21,030,232
Mortgage backed securities            117,371,155      1,551,547       (326,017)    118,596,685
Corporate bonds                         2,032,351         39,529        (16,480)      2,055,400
                                     ------------   ------------   ------------    ------------
                      Total          $167,156,686   $  2,190,060   $   (445,009)   $168,901,737
                                     ============   ============   ============    ============

                                                          December 31, 2000
                                     ----------------------------------------------------------
                                                        Gross         Gross
                                       Amortized     Unrealized     Unrealized
                                         Cost           Gains         Losses        Fair Value
                                     ------------   ------------   ------------    ------------
Obligations of state and political
  subdivisions                       $ 22,058,162   $  1,041,766   $   (105,283)   $ 22,994,645
Mortgage backed securities             61,639,744        732,000        (38,636)     62,333,108
Corporate bonds                         5,735,910         46,054        (20,423)      5,761,541
                                     ------------   ------------   ------------    ------------
                      Total          $ 89,433,816   $  1,819,820   $   (164,342)   $ 91,089,294
                                     ============   ============   ============    ============
</TABLE>
                                      -5-
<PAGE>

Note #2 - Investment Securities, Continued

Held-to-Maturity Securities

The amortized  cost and estimated fair value of  held-to-maturity  securities at
December 31, 2001 and 2000, were as follows:

<TABLE>
<CAPTION>
                                                          December 31, 2001
                              ------------------------------------------------------------------
                                                 Gross              Gross
                               Amortized       Unrealized         Unrealized
                                 Cost            Gains              Losses            Fair Value
                              ----------       ----------       --------------        ----------
<S>                           <C>              <C>              <C>                   <C>
U.S. Treasury obligations     $1,025,758       $    3,617       $          --         $1,029,375
                              ==========       ==========       ==============        ==========

                                                          December 31, 2000
                              ------------------------------------------------------------------
                                                 Gross              Gross
                               Amortized       Unrealized         Unrealized
                                 Cost            Gains              Losses            Fair Value
                              ----------       ----------       --------------        ----------
U.S. Treasury obilgations     $1,005,231       $      389       $          --         $1,005,620
                              ==========       ==========       ==============        ==========
</TABLE>

The amortized cost and fair values of investment  securities  available-for-sale
and held-to-maturity at December 31, 2001, by expected maturity are shown below.
Expected  maturities will differ from contractual  maturities  because borrowers
may have  the  right  to call or  prepay  obligations  with or  without  call or
prepayment penalties.

<TABLE>
<CAPTION>
                                                                      December 31, 2001
                                             ------------------------------------------------------------------
                                                      Securities                          Securities
                                                   Held-to-Maturity                    Available-for-Sale
                                             ------------------------------      ------------------------------
                                               Amortized                          Amortized
                                                 Cost           Fair Value           Cost           Fair Value
                                             ------------      ------------      ------------      ------------
<S>                                          <C>               <C>               <C>               <C>
Amounts maturing in
   One year or less                          $  1,025,758      $  1,029,375      $ 23,219,883      $ 23,221,587
   After one year through five years                 --                --           4,279,700         4,283,494
   After five years through ten years                --                --               8,130             8,130
   After ten years                                   --                --         139,648,973       141,388,526
                                             ------------      ------------      ------------      ------------
                                             $  1,025,758      $  1,029,375      $167,156,686      $168,901,737
                                             ============      ============      ============      ============
</TABLE>

Proceeds from sales and maturities of investment  securities  available-for-sale
during 2001,  2000,  and 1999 were  $34,834,683,  $15,614,593,  and  $10,295,839
respectively. In 2001, gross gains and gross losses on those sales were $818,360
and $1,524,  respectively.  In 2000, gross gains and gross losses on those sales
were $81,889 and $38,568, respectively. In 1999, gross gains and gross losses on
those sales were  $2,200 and  $88,659,  respectively.  Proceeds  from  principal
reductions  of   mortgage-backed   securities  in  2001,   2000  and  1999  were
$29,071,973, $8,649,254 and $6,134,290, respectively.

                                      -6-
<PAGE>

Note #2 - Investment Securities, Continued

During 2001, proceeds from maturities of investment securities  held-to-maturity
were $1,000,000.  There were no sales of held-to-maturity  investment securities
during 2001, 2000 and 1999. Amortized cost for the  held-to-maturity  investment
securities sold,  during 1999, were  $3,838,257.  In 1999, gross gains and gross
losses on those sales were $46,751 and $58,333, respectively. Amortized cost for
held-to-maturity   investment   securities   transferred  to  available-for-sale
investment  securities  during 1999 were $1,066,043,  resulting in an unrealized
gain  of   $1,043.   There  were  no   maturities   of   investment   securities
held-to-maturity  during 2000. Proceeds from maturities of investment securities
held-to-maturity  during  1999 were  $1,055,000.  There  were no gains or losses
recognized.

During 1999, the Bank sold off the majority of the  held-to-maturity  investment
securities, with the remaining investments transferred to the available-for-sale
portfolio to comply with SFAS 115. The sale and subsequent transfer was affected
by a change of the investment policy of the Bank's management.

Included  in  stockholders'  equity at December  31,  2001,  2000,  and 1999 are
$1,026,885  of net  unrealized  gains (net of $718,166  estimated  tax expense),
$974,176 of net unrealized  gains (net of $681,302  estimated tax expense),  and
$877,999  of net  unrealized  losses (net of $536,865  estimated  tax  benefit),
respectively, in investment securities available-for-sale.

Securities having a carrying value of approximately $117,235,000 and $68,235,000
and a market  value of  $117,235,000  and  $69,623,000  at December 31, 2001 and
2000,  respectively,  were pledged to secure treasury,  tax and loan items, FHLB
borrowings and public monies, as required by law, and for other purposes.

Note #3 - Loans

The  composition  of the loan  portfolio at December  31, 2001 and 2000,  was as
follows:

                                                    2001               2000
                                               -------------      -------------
Real estate                                    $ 287,556,603      $ 122,543,152
Commercial                                        90,194,627         44,657,289
Installment                                       10,100,658         12,703,032
All other (including overdrafts)                   1,704,579          1,543,313
                                               -------------      -------------
                                                 389,556,467        181,446,786
Less:  Unearned income                            (1,109,120)        (1,078,892)
                                               -------------      -------------
Loans, Net of Unearned Income                  $ 388,447,347      $ 180,367,894
                                               =============      =============

At  December  31,  2001 and 2000,  the Bank had  loans  identified  as  impaired
totaling approximately $1,947,000 and $999,000, respectively. The following is a
summary of the investment in impaired  loans,  the related  allowance for credit
losses, and income recognized thereon as of December 31:

<TABLE>
<CAPTION>
                                                       2001         2000         1999
                                                    ----------   ----------   ----------
<S>                                                 <C>          <C>          <C>
Recorded investment in impaired loans               $1,947,000   $  999,000     $477,000
Related allowance for loan losses                      223,502      116,335      141,000
Average recorded investment in impaired loans        1,639,000      198,000      842,000
Cash receipts applied to reduce principal balance      192,884        9,702      147,953
Cash receipts recognized as interest income              7,123          269        1,717

</TABLE>

At December 31, 2001 and 2000,  the Bank had $18,000 and $0 in loans past due 90
days or more in interest or principal and still accruing interest.

Note #4 - Allowance for Loan Losses

Transactions in the allowance for loan losses are summarized as follows:

                                      -7-
<PAGE>

<TABLE>
<CAPTION>
                                                                 2001          2000           1999
                                                             -----------    -----------    -----------
<S>                                                          <C>            <C>            <C>
Balance, Beginning of Year                                   $ 1,842,715    $ 1,241,733    $ 1,439,308
Provision charged to expense                                     225,000        255,000        180,000
Allowance on loans acquired from MCB Financial Corporation
  in 2001 and Valley Merchants Bank in 2000.                   2,436,400        464,825           --
Loans charged-off                                               (156,385)      (275,812)      (562,481)
Recoveries                                                       209,886        156,969        184,906
                                                             -----------    -----------    -----------
Balance, End of Year                                         $ 4,557,616    $ 1,842,715    $ 1,241,733
                                                             ===========    ===========    ===========
</TABLE>

Note #5 - Premises and Equipment

Major classifications of premises and equipment are summarized as follows:

                                                       2001            2000
                                                   ------------    ------------
Buildings and improvements                         $  4,330,500    $  3,943,399
Furniture, equipment, and software                   10,959,189       4,279,618
Construction in progress                                150,568            --
                                                   ------------    ------------
                                                     15,440,257       8,223,017
Less:  accumulated depreciation and amortization     (7,358,329)     (4,100,058)
                                                   ------------    ------------
                                                      8,081,928       4,122,959
Land                                                  1,643,325       1,643,325
                                                   ------------    ------------
                                                   $  9,725,253    $  5,766,284
                                                   ============    ============

Note #6 - Other Assets

On November 27, 1998, the Bank acquired a forty-nine  percent equity  investment
in Financial Data Solutions, Inc., an affiliate which provides a variety of data
processing services to the financial services industry.  This investment,  which
is accounted for using the equity  method,  amounted to $506,600 at December 31,
2001. Under the equity method,  the original  investment is recorded at cost and
is adjusted  periodically  to  recognize  the Bank's share of earnings or losses
after the date of acquisition. The condensed results of operations and financial
position of Financial Data Solutions,  Inc. at December 31, 2001, are summarized
as follows:

Condensed Results of Operations
Revenues                          $ 3,201,144
Expenses                           (3,141,156)
                                  -----------
Net income                        $    59,988
                                  ===========

Condensed Financial Position
Total assets                      $ 2,265,060
Total liabilities                 $ 1,231,183

                                      -8-
<PAGE>

Note #7 - Income Taxes

The  provision  for income  taxes is  comprised  of the  following  current  and
deferred amounts:

                                    2001              2000              1999
                                -----------       -----------       -----------
Federal Income Tax
Current                         $   960,600       $ 1,002,920       $   714,270
Deferred                            (29,938)         (286,560)         (174,739)
                                -----------       -----------       -----------
                                    930,662           716,360           539,531
                                -----------       -----------       -----------
State Franchise Tax
Current                             435,300           444,630           305,729
Deferred                             29,054           (66,190)           (4,233)
                                -----------       -----------       -----------
                                    464,354           378,440           301,496
                                -----------       -----------       -----------
Total                           $ 1,395,016       $ 1,094,800       $   841,027
                                ===========       ===========       ===========

As a result of the  following  items,  the total tax expense for 2001,  2000 and
1999,  was different  than the amount  computed by applying the  statutory  U.S.
Federal income tax rate to income before taxes and extraordinary item:

<TABLE>
<CAPTION>
                                               2001                            2000                          1999
                                   -----------------------------   -----------------------------  ----------------------------
                                                    Percent of                      Percent of                    Percent of
                                                      Pretax                          Pretax                        Pretax
                                       Amount         Income           Amount         Income         Amount         Income
                                   ---------------  ------------   ---------------  ------------  --------------  ------------
<S>                                   <C>               <C>           <C>               <C>           <C>             <C>
Federal rate                          $ 1,326,660       34.0 %        $ 1,143,910       34.0 %        $ 945,653       34.0 %
Changes due to State Franchise
  tax, net of Federal tax benefit         306,470        7.9              249,770        7.4            198,987        7.1
Exempt interest                          (353,540)      (9.1)            (321,460)      (9.6)          (172,380)      (6.2)
Other                                     115,426        3.0               22,580        0.7           (131,233)      (4.7)
                                   ---------------  ------------   ---------------  ------------  --------------  ------------
                                      $ 1,395,016       35.8 %        $ 1,094,800       32.5 %        $ 841,027       30.2 %
                                   ===============  ============   ===============  ============  ==============  ============
</TABLE>

Net deferred tax assets are  determined  from the  following  cumulative  timing
differences  between book and tax return recognition as of December 31, 2001 and
2000:

                                                             2001        2000
                                                         ----------   ----------
Deferred Tax Assets
Allowance for loan losses                                $1,275,000   $  270,000
Other real estate                                            30,000       84,000
Deferred income                                             393,000      380,000
Accruals not currently deductible                           880,000      381,000
Other                                                         6,710       13,862
                                                         ----------   ----------
                                                          2,584,710    1,128,862
                                                         ----------   ----------
Deferred Tax Liabilities
Fixed assets                                                129,000         --
Intangible assets                                           532,500         --
Valuation allowance for investment securities               797,000      681,000
                                                         ----------   ----------
                                                          1,458,500      681,000
                                                         ----------   ----------
Net Deferred Tax Assets                                  $1,126,210   $  447,862
                                                         ==========   ==========

No valuation allowance has been established  because, in management's  judgment,
all deferred tax assets are likely to be realized.

                                      -9-
<PAGE>

Note #8 - Certificates of Deposit

The aggregate  amount of time deposits in  denominations  of $100,000 or more at
December 31, 2001 and 2000 was $76,635,000 and $35,792,373, respectively.

At December 31, 2001, the scheduled maturities of time deposits are as follows:

    Year Ending
    December 31,
--------------------
       2002                                                         $113,436,213
       2003                                                            4,918,611
       2004                                                              982,991
       2005                                                                7,643
       2006                                                               88,000
    Thereafter                                                           125,000
                                                                    ------------
      Total                                                         $119,558,458
                                                                    ============

Note #9 - Borrowings

Pursuant to  collateral  agreements  with the FHLB,  advances are secured by all
capital stock in the FHLB and certain  mortgage-backed  securities.  Of the FHLB
advances of  $39,624,132  at December  31,  2001,  $30,199,132  matures in 2002,
$5,825,000 matures in 2003 and $3,600,000 matures in 2004. The combined advances
bear a weighted average interest rate of 3.48%.  FHLB advances of $10,125,000 at
December 31, 2000 matured in 2001 and bore  interest at a weighted  average rate
of 5.96 percent.

The Bank has  $599,664  in a Treasury  Tax and loan note option with the Federal
Reserve Bank.  Approximately  $1,064,000 in securities is pledged as collateral.
The note  option is repaid on demand.  The  interest is an average of the weekly
Federal funds rate less 25 basis points.

Note #10 - Trust Preferred Securities

On March 23,  2000,  Business  Capital  Trust I, a wholly  owned  subsidiary  of
Business  Bancorp,  issued  $10,000,000 of 10.875%  Cumulative  Trust  Preferred
Securities.  Business Capital Trust I invested the gross proceeds of $10,000,000
from the  offering  in the junior  subordinated  debentures  issued by  Business
Bancorp. The subordinated debentures were issued concurrent with the issuance of
the Trust Preferred  Securities.  Business  Bancorp will pay the interest on the
junior subordinated debentures to Business Capital Trust I, which represents the
majority  of  revenues  and the  primary  source of  dividend  distributions  by
Business  Capital  Trust I to the  holders  of the Trust  Preferred  Securities.
Business Bancorp has guaranteed,  on a subordinated  basis,  payment of Business
Capital  Trust I's  obligations.  Business  Bancorp  has the right,  assuming no
default has occurred,  to defer payments of interest on the junior  subordinated
debentures  at any time for a period not to exceed ten  consecutive  semi-annual
periods.  The Trust Preferred  Securities will mature on March 23, 2030, but can
be called after March 23, 2010.

On September 7, 2000, MCB Financial  Corporation completed an offering of 10.60%
capital  securities in an aggregate amount of $3.0 million through MCB Statutory
Trust I (the "Trust"), a wholly owned trust subsidiary formed for the purpose of
the offering.  The entire proceeds of the issuance were invested by the trust in
$3,000,000 of 10.60% Junior Subordinated Deferrable Interest Debentures due 2030
issued by MCB Financial Corporation. The debentures represent the sole assets of
the Trust. Interest on the debentures is payable semi-annually and the principal
is redeemable by MCB Financial  Corporation  at a premium  beginning on or after
September 7, 2010 through September 6, 2020 plus any accrued and unpaid interest
to the  redemption  date.  On or after  September  7,  2020,  the  principal  is
redeemable by the Bancorp at 100% of the principal  amount.  The trust preferred
securities  are  subject  to  mandatory  redemption  to the  extent of any early
redemption of the debentures and upon maturity of the debentures on September 7,
2030.  The  debentures  bear the same  terms  and  interest  rates as the  trust
preferred securities.

                                      -10-
<PAGE>

Note #10 - Trust Preferred Securities, Continued

On December 31, 2001, the Bancorp completed the acquisition of the MCB Financial
Corporation.  In accordance with SFAS No. 141, all assets and liabilities of MCB
Financial Corporation have been recorded at their fair value.  Accordingly,  the
Bancorp has recorded the debentures at $3.5 million.

The Company has guaranteed,  on a subordinated  basis,  distributions  and other
payments due on the trust preferred securities.

The  debentures  and  related  Trust  investment  in the  debentures  have  been
eliminated in consolidation and the trust preferred  securities are reflected as
outstanding in the accompanying consolidated financial statements.

Under applicable regulatory guidelines, the trust preferred securities currently
qualify  as  Tier 1  capital  up to a  maximum  of 25% of  Tier 1  capital.  Any
additional portion of trust preferred securities would currently qualify as Tier
2 capital. As of December 31, 2001, $10.5 million outstanding of trust preferred
securities qualified as Tier 1 capital.

Note #11 - Commitments and Contingencies

The Bank leases, from nonaffiliates,  its premises under noncancelable operating
leases  expiring  through June 2014.  The leases  contain  options to extend for
periods from one to twenty years. The cost of such rentals has not been included
in the following schedule.

     Year Ending
    December 31,                                                     Amount
----------------------                                          ----------------
        2002                                                          $ 942,176
        2003                                                            925,592
        2004                                                            882,863
        2005                                                            738,161
        2006                                                            685,325
     Thereafter                                                       2,824,721
                                                                ----------------
        Total                                                       $ 6,998,838
                                                                ================

The total rental  expenditure by the Bank was approximately  $362,000,  $230,000
and $199,000 for 2001, 2000 and 1999, respectively.

The Bancorp is involved in various litigation.  In the opinion of Management and
the Bancorp's legal counsel,  the disposition of the litigation pending will not
have a material effect on the Bancorp's consolidated financial statements.

In the normal course of business,  the Bank is a party to financial  instruments
with off-balance-sheet  risk. These financial instruments include commitments to
extend  credit  and  standby  letters  of  credit.  To  varying  degrees,  these
instruments  involve  elements of credit and interest rate risk in excess of the
amount  recognized in the balance sheets.  The Bank's exposure to credit loss in
the event of non-performance by the other party to the financial instruments for
commitments to extend credit and standby letters of credit is represented by the
contractual amount of those instruments. At December 31, 2001 and 2000, the Bank
had commitments to extend credit of approximately  $103,244,000 and $69,782,000,
including standby letters of credit of approximately  $3,310,000 and $1,278,000,
respectively.

                                      -11-
<PAGE>

Note #11 - Commitments and Contingencies, Continued

Commitments  to extend  credit are  agreements  to lend to a customer as long as
there is no violation of any condition established in the contract.  Commitments
generally  have fixed  expiration  dates or other  termination  clauses  and may
require  payment of a fee. Since many of the  commitments are expected to expire
without  being  drawn  upon,  the total  commitment  amounts do not  necessarily
represent  future  cash   requirements.   The  Bank  evaluates  each  customer's
creditworthiness  on a case-by-case  basis. The amount of collateral obtained if
deemed  necessary by the Bank upon extension of credit is based on  management's
credit evaluation.  Collateral held varies but may include accounts  receivable,
inventory,   property,   plant  and   equipment,   income-producing   commercial
properties, residential properties and properties under construction.

Standby  letters of credit  are  conditional  commitments  issued by the Bank to
guarantee  the  performance  of a customer  to a third  party.  The credit  risk
involved in issuing  letters of credit is essentially  the same as that involved
in extending loans to customers.

Note #12 - Stock Split

On July 21, 1999, the Board of Directors approved a five-for-four stock split of
its common  stock.  For purposes of  calculating  earnings per share,  the stock
split has been applied retroactively.

Note #13 - Stock Option Plan

The  Bancorp's  incentive  stock option and  nonqualified  plan  ratified by the
stockholders  in 1994 and amended in 1997 provides for issuance of up to 612,956
shares (after giving retroactive effect for a five-for-four  stock split in 1999
and a 20% stock dividend in 1996) of the Bancorp's  unissued  common stock to be
granted to certain  officers,  key  employees and directors at not less than the
fair market value of such shares at the dates of grant, with an option's maximum
term as ten years.

The Bancorp applies APB Opinion No. 25 and related interpretations in accounting
for its stock option plan. Accordingly, no compensation cost has been recognized
for its  fixed  stock  option  plan.  Had  compensation  costs for the plan been
determined  on the fair  value at the grant  dates  consistent  with the  method
prescribed  by SFAS No. 123,  the  Bancorp's  net income and  earnings per share
would have been adjusted to the pro forma amounts indicated below:

                                           2001           2000           1999
                                       -----------    -----------    -----------
Net Income             As reported     $ 2,506,923    $ 2,269,664    $ 1,940,305
                       Pro forma       $ 2,322,628    $ 2,197,197    $ 1,862,479

Earnings per share     As reported     $      1.24    $      1.14    $      0.99
                       Pro forma       $      1.14    $      1.10    $      0.95

Earnings per share -   As reported     $      1.20    $      1.13    $      0.97
assuming dilution      Pro forma       $      1.11    $      1.09    $      0.93

The fair value of each option  granted was  estimated on the date of grant using
the Black-Scholes option pricing model with the following  assumptions for 2001,
2000 and 1999, respectively; risk-free rates of 4.30%, 5.14% and 6.58%,

                                      -12-
<PAGE>

dividend  yield of zero percent for all years,  volatility  of 17%, 40% and 35%,
and expected life of five years for 2001 and seven years for 2000 and 1999.

Note #13 - Stock Option Plan, Continued

A summary of the status of the Bancorp's stock option plan is presented below:

<TABLE>
<CAPTION>
                                     2001                              2000                               1999
                      --------------------------------  ---------------------------------  ---------------------------------
                           Number of Shares                 Number of Shares                   Number of Shares
                      ----------------------- Weighted  ----------------------  Weighted   ----------------------  Weighted
                       Available              Average   Available               Average    Available               Average
                         For                  Exercise     For                  Exercise      For                  Exercise
                      Granting    Outstanding  Price    Granting   Outstanding   Price     Granting   Outstanding   Price
                      ----------  ----------- --------  ---------- -----------  ---------  ---------- -----------  ---------
<S>                     <C>          <C>      <C>         <C>         <C>        <C>         <C>         <C>        <C>
Outstanding,
  beginning of year     193,820      354,640  $  9.49     225,070     374,226    $  9.09     247,070     365,890    $  8.99
Issued in connection
  with merger                        209,872  $  6.05          -           -         -            -          -          -
Granted                  (6,000)       6,000  $ 12.04     (33,750)     33,750    $ 10.31     (26,875)     26,875    $  8.64
Exercised                             (7,200) $  5.56                 (50,836)   $  7.15                 (13,664)   $  5.68
Cancelled                27,250      (27,250) $  9.91       2,500      (2,500)   $  8.40       4,875      (4,875)   $  8.73
                      ----------  -----------           ---------- -----------             ---------- -----------
Outstanding,            215,070      536,062   $ 8.20     193,820     354,640    $  9.49     225,070     374,226    $  9.09
                      ==========  ===========           ========== ===========             ========== ===========
  end of year

Options exercisable
  at year-end                        536,062                          231,315                            210,839
Weighted-average fair
  value of options granted
  during the year                     $ 3.06                        $    2.48                          $    3.12
</TABLE>

A summary of the options  outstanding and exercisable as of December 31, 2001 is
presented below:

<TABLE>
<CAPTION>
                                             Options Outstanding                                    Options Exercisable
                            ----------------------------------------------------------     ----------------------------------
                                                                         Weighted
         Range of                Number              Average             Average               Number
         Exercise             Outstanding            Life In             Exercise            Outstanding           Average
           Price                12/31/01              Years               Price               12/31/01              Price
-----------------------     -----------------      ------------      -----------------     ----------------       -----------
<S>    <C>     <C>                  <C>                   <C>                 <C>                  <C>              <C>
       $2.76 - $6.48                147,224               5.08                $  4.99              147,224          $  4.99
       $7.23 - $9.79                276,713               6.21                $  8.76              276,713          $  8.76
      $10.20 - $12.20               112,125               6.79                $ 11.04              112,125          $ 11.04
                             ----------------                                               ---------------
                                    536,062               6.02                $  8.20              536,062          $  8.20
                             ================                                               ===============
</TABLE>

                                      -13-
<PAGE>

Note #14 - Other Operating Expenses

The following is a composition of other  operating  expenses for the years ended
December 31:

<TABLE>
<CAPTION>
                                                          2001         2000         1999
                                                       ----------   ----------   ----------
<S>                                                    <C>          <C>          <C>
Advertising and promotion                              $  471,551   $  489,875   $  285,940
Insurance and assessments                                 259,087      187,148      123,959
Data processing                                         1,198,417      946,958      682,773
Amortization of goodwill and other intangible assets      654,471      400,845      286,942
Stationery and supplies                                   381,024      388,920      290,847
Professional                                              613,772      597,223      439,670
Office                                                    533,934      437,074      426,772
Administrative                                          1,122,903      964,058      783,485
Other real estate owned                                    14,344      130,296      109,013
Other                                                     663,150      485,355      346,398
                                                       ----------   ----------   ----------
                                                       $5,912,653   $5,027,752   $3,775,799
                                                       ==========   ==========   ==========
</TABLE>

Note #15 - Deferred Directors' Fees

The Bancorp  offers an option to its directors  whereby they may choose to defer
all or part of their  fees into a market  rate time  certificate  of  deposit on
their behalf. The Bank has no additional  commitment or funding  requirement for
this arrangement.

Note #16 - Earnings Per Share

The following is a  reconciliation  of net income and shares  outstanding to the
income and number of shares used to compute EPS:

<TABLE>
<CAPTION>
                                              2001                           2000                           1999
                                 -----------------------------  -----------------------------  -----------------------------
                                    Income          Shares         Income          Shares         Income          Shares
                                 --------------  -------------  --------------  -------------  --------------  -------------
<S>                                 <C>             <C>           <C>              <C>           <C>              <C>
Net Income as Reported              $2,506,923                    $ 2,269,664                    $ 1,940,305
Shares Outstanding at Year End                      2,034,069                      2,026,869                      1,975,961
Impact of Weighting Shares
 Purchased During the Year                             (4,960)                       (31,317)                       (20,287)
                                 --------------  -------------  --------------  -------------  --------------  -------------
 Used in Basic EPS                   2,506,923      2,029,109       2,269,664      1,995,552       1,940,305      1,955,674
Dilutive Effect of Outstanding
 Stock Options                                         64,786                         20,093                         41,592
                                 --------------  -------------  --------------  -------------  --------------  -------------
 Used in Dilutive EPS               $2,506,923      2,093,895     $ 2,269,664      2,015,645     $ 1,940,305      1,997,266
                                 ==============  =============  ==============  =============  ==============  =============
</TABLE>

Note #17 - Profit Sharing Plan

The Bank sponsors a defined contribution section 401(K) profit sharing plan that
covers  all  eligible  employees.  Contributions  to the plan are based  upon an
amount equal to 50% of each  participant's  eligible  contribution  for the plan
year not to exceed 6% of the employee's  compensation.  Future contributions are
at the discretion of management and the board of directors. The Bank contributed
$161,506,   $135,416  and  $106,918  to  the  Plan  for  2001,  2000  and  1999,
respectively.

                                      -14-
<PAGE>

Note #18 - Other Real Estate Owned

Other Real Estate Owned is carried at the lesser of the outstanding loan balance
or estimated  fair value of the real estate less selling  costs.  An analysis of
the transactions for the years ended December 31 is as follows:

                                                         2001           2000
                                                     -----------    -----------
Balance, Beginning of Year                           $   504,754    $ 1,036,227
Additions                                                   --          225,946
Sales                                                   (427,170)      (692,833)
Valuation adjustment and other reductions                 (5,000)       (64,586)
                                                     -----------    -----------
Balance, End of Year                                 $    72,584    $   504,754
                                                     ===========    ===========

The balances at December 31, 2001 and 2000 are shown net of reserve.

Note #19 - Reserve for Losses on Other Real Estate Owned

Transactions  in the reserve for other real estate owned are  summarized for the
years ended December 31:

                                               2001         2000         1999
                                            ---------    ---------    ---------
Balance, Beginning of Year                  $ 208,665    $ 203,696    $ 317,389
Provision charged to other expense              5,000       64,586       38,356
Charge-offs and other reductions             (158,776)     (59,617)    (152,049)
                                            ---------    ---------    ---------
Balance, End of Year                        $  54,889    $ 208,665    $ 203,696
                                            =========    =========    =========

Note #20 - Transactions with Related Parties

In the ordinary course of business,  the Bank has granted loans to, and accepted
deposits from,  certain  directors,  officers,  principal  shareholders  and the
companies with which they are associated.  All such loans and deposits were made
under  terms which are  consistent  with the Bank's  normal  lending and deposit
policies.

At  December  31,  2001 and 2000,  loans  outstanding  to related  parties  were
approximately $6,175,000 and $3,364,000, respectively.

Undisbursed loan amounts to related parties amounted to approximately $1,740,000
and $1,072,000 at December 31, 2001 and 2000, respectively.

At December 31, 2001 and 2000,  the Bank held deposits  from related  parties of
approximately $5,790,000 and $4,427,000, respectively.

                                      -15-
<PAGE>

Note #21 - Servicing Assets

A summary of the changes in servicing assets follows:

                                                            2001         2000
                                                          --------     --------
Balance, Beginning of Year                                $ 62,320     $ 75,952
Increase from loan sales                                    13,786       11,871
Amortization and other decreases charged to income         (14,095)     (25,503)
                                                          --------     --------
Balance, End of Year                                      $ 62,011     $ 62,320
                                                          ========     ========


The estimated  fair value of the  servicing  assets  approximated  book value at
December 31, 2001. Fair value is estimated by discounting  estimated future cash
flows from the servicing  assets using discount rates that  approximate  current
market rates over the expected lives of the loans being serviced.

For purposes of measuring  impairment,  the Bank has  identified  each servicing
asset with the underlying loan being  serviced.  A direct write down is recorded
where the fair value is below the carrying amount of a specific servicing asset.
The  amount  of loans  being  serviced  by the Bank for the  benefit  of  others
amounted to $25,164,125  and  $12,600,134  for the years ended December 31, 2001
and December 31, 2000, respectively.

Note #22 - Salary Continuation Plan

On August 31, 2000 and December 4, 1997, the Bancorp  acquired all of the assets
and  liabilities  of  Valley  Merchants  Bank and  High  Desert  National  Bank,
respectively.  As  a  result  of  the  acquisitions,   the  Bancorp  has  salary
continuation plans for certain key management  personnel.  The plans provide for
payments for ten years and thirteen years,  respectively,  commencing within one
month  upon  reaching  age 69 or death.  The  salary  continuation  expense  was
$32,235,  $24,777,  and $33,082 for the years ended December 31, 2001, 2000, and
1999, respectively. The Bancorp is committed to pay $400,000 and $520,000, (on a
future value basis) over the pay out periods of the plans.

Note #23 - Fair Value of Financial Instruments

SFAS No. 107, "Disclosures About Fair Value of Financial  Instruments," requires
disclosure of fair value information about financial instruments, whether or not
recognized in the statement of financial condition. In cases where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation  techniques.  Those techniques are significantly  affected by
the assumptions  used,  including the discount rate and estimates of future cash
flows. In that regard,  the derived fair value estimates cannot be substantiated
by comparison to independent  markets and, in many cases,  could not be realized
in  immediate  settlement  of the  instruments.  SFAS No. 107  excludes  certain
financial  instruments  and all  nonfinancial  instruments  from its  disclosure
requirements.  Accordingly,  the aggregate  fair value amounts  presented do not
represent the underlying value of the Bancorp.

                                      -16-
<PAGE>

Note #23 - Fair Value of Financial Instruments, Continued

The following  table presents the carrying  amounts and fair values of financial
instruments  at December 31, 2001 and 2000.  SFAS No. 107 defines the fair value
of a  financial  instrument  as the  amount  at which  the  instrument  could be
exchanged in a current  transaction  between  willing  parties,  other than in a
forced or liquidation sale.

<TABLE>
<CAPTION>
                                                                       2001                                2000
                                                        ----------------------------------  ---------------------------------
                                                            Carrying                            Carrying
                                                             Amount          Fair Value          Amount         Fair Value
                                                        -----------------  ---------------  ------------------ --------------
<S>                                                         <C>               <C>                <C>            <C>
Assets
 Cash and cash equivalents                                  $ 34,614,727      $34,614,727        $ 16,921,114   $ 16,921,114
 Interest-bearing deposits in other banks                         50,000           50,000           3,364,000      3,364,000
 Investment securities                                       173,040,295      173,043,912          93,340,725     93,341,114
 Loans                                                       388,447,347      388,608,362         180,367,894    179,413,078
 Accrued interest receivable                                   2,885,574        2,885,574           2,049,766      2,049,766

Liabilities
 Non-interest bearing deposits                               155,935,474      155,935,474          95,073,705     95,073,705
 Interest bearing deposits                                   362,150,550      362,333,736         169,492,618    169,285,700
 Accrued interest payable                                      1,751,430        1,751,430           1,196,226      1,196,226
 Other borrowings                                             40,223,796       40,486,424          10,125,000     10,125,473
 Bancorp obligated mandatorily redeemable
 preferred securities of subsidiary trust holding
 solely junior subordinated debentures                        13,495,313       13,819,387          10,000,000      9,851,750

<CAPTION>
                                                            Notional        Cost to Cede        Notional       Cost to Cede
                                                             Amount          or Assume           Amount          or Assume
                                                        -----------------  ---------------  ------------------ --------------
<S>                                                        <C>                <C>                <C>               <C>
Off-balance Sheet Instruments
 Commitments to extend credit
   and standby letters of credit                           $ 103,244,000      $ 1,032,440        $ 69,782,000      $ 697,820
</TABLE>

The  following  methods and  assumptions  were used by the Bancorp in estimating
fair value disclosures:

o   Cash and Cash Equivalents and  Interest-bearing  Deposits in Other Financial
    Institutions

    The  carrying  amounts  reported  in the  balance  sheet  for  cash and cash
    equivalents and  interest-bearing  deposits in other financial  institutions
    approximate  those assets' fair values due to the  short-term  nature of the
    assets.

o   Investment Securities

    Fair values are based upon quoted market prices, where available.

                                      -17-
<PAGE>

Note #23 - Fair Value of Financial Instruments, Continued

o   Loans

    For  variable-rate  loans that reprice  frequently  and with no  significant
    change in credit risk, fair values are based on carrying  amounts.  The fair
    values for other loans (for example,  fixed rate  commercial real estate and
    rental  property  mortgage loans and  commercial  and industrial  loans) are
    estimated  using  discounted  cash flow  analysis,  based on interest  rates
    currently being offered for loans with similar terms to borrowers of similar
    credit quality. Loan fair value estimates include judgments regarding future
    expected loss  experience and risk  characteristics.  The carrying amount of
    accrued interest receivable approximates its fair value.

o   Deposits

    The fair values disclosed for demand deposits (for example, interest-bearing
    checking  accounts and passbook  accounts) are, by definition,  equal to the
    amount  payable on demand at the  reporting  date (that is,  their  carrying
    amounts).  The fair values for certificates of deposit are estimated using a
    discounted cash flow calculation that applies interest rates currently being
    offered on certificates to a schedule of aggregated  contractual  maturities
    on such time  deposits.  The  carrying  amount of accrued  interest  payable
    approximates fair value.

o   Other Borrowings and Trust Preferred Securities

    The  fair  value  of the  other  borrowings  is  determined  by  discounting
    contractual  cash  flows  at  current  market  interest  rates  for  similar
    instruments.

o   Off-balance Sheet Instruments

    Fair values of loan commitments and financial guarantees are based upon fees
    currently  charged to enter  similar  agreements,  taking  into  account the
    remaining terms of the agreement and the counterparties' credit standing.

Note #24 - Regulatory Matters

A.  Capital Requirements

    The Bancorp and Bank are subject to various regulatory capital  requirements
    administered by Federal and state banking agencies.  Failure to meet minimum
    capital  requirements can initiate certain mandatory and possibly additional
    discretionary actions by regulators that, if undertaken, could have a direct
    material  effect on the  consolidated  financial  statements.  Under capital
    adequacy  guidelines  and the  regulatory  framework  for prompt  corrective
    action,  the Bancorp  must meet  specific  capital  guidelines  that involve
    quantitative    measures   of   the   assets,    liabilities   and   certain
    off-balance-sheet items as calculated under regulatory accounting practices.
    The  capital  amounts and  classification  are also  subject to  qualitative
    judgments by the  regulators  about  components,  risk  weightings and other
    factors.

    Quantitative  measures  established by regulation to ensure capital adequacy
    require the Bancorp  and Bank to  maintain  minimum  amounts and ratios (set
    forth in the table  below) of total and Tier 1 capital  (as  defined  in the
    regulations) to  risk-weighted  assets (as defined) and of Tier 1 capital to
    average assets (as defined).  Management believes,  as of December 31, 2001,
    that the Bancorp and Bank exceed all capital adequacy  requirements to which
    they are subject.

                                      -18-
<PAGE>

Note #24 - Regulatory Matters, Continued

As of March 31,  2001,  the most  recent  notification  from the  Department  of
Financial  Institutions (DFI) categorized the Bank as well capitalized under the
regulatory  framework for prompt  corrective  action (there are no conditions or
events since that notification that management  believes have changed the Bank's
category). To be categorized as well capitalized, the Bank must maintain minimum
ratios as set forth in the table below.  The following table also sets forth the
Bancorp's and the Bank's actual capital  amounts and ratios  (dollar  amounts in
thousands):

<TABLE>
<CAPTION>
                                                                                      Amount of Capital Required
                                                                           --------------------------------------------------
                                                                              To Be Adequately                To Be
                                                    Actual Capital              Capitalized             Well Capitalized
                                                ------------------------   -----------------------   ------------------------
                                                   Amount       Ratio         Amount       Ratio       Amount        Ratio
                                                -------------  ---------   -------------  --------   ------------   ---------
<S>                                                <C>          <C>           <C>          <C>         <C>           <C>
As of December 31, 2001
Total capital to risk-weighted assets
  Business Bancorp                                 $49,137      11.2%         $35,201      8.0%        $44,002       10.0%
  Business Bank of California                       48,352      11.0%          35,121      8.0%         43,901       10.0%
Tier 1 capital to risk-weighted assets
  Business Bancorp                                  42,107       9.6%         $17,601      4.0%        $26,401        6.0%
  Business Bank of California                       43,795      10.0%          17,560      4.0%         26,341        6.0%
Tier 1 capital to average assets
  Business Bancorp                                  42,107       6.9%          24,496      4.0%         30,620        5.0%
  Business Bank of California                       43,795       7.2%          24,493      4.0%         30,616        5.0%

As of December 31, 2000
Total capital to risk-weighted assets
  Business Bancorp                                 $25,528      11.8%         $17,246      8.0%        $21,558       10.0%
  Business Bank of California                       25,627      11.7%          17,507      8.0%         21,884       10.0%
Tier 1 capital to risk-weighted assets
  Business Bancorp                                  21,003       9.7%           8,623      4.0%         12,935        6.0%
  Business Bank of California                       23,784      10.9%           8,754      4.0%         13,130        6.0%
Tier 1 capital to average assets
  Business Bancorp                                  21,003       7.8%          10,739      4.0%         13,423        5.0%
  Business Bank of California                       23,784       7.9%          12,101      4.0%         15,126        5.0%
</TABLE>

B.  Dividend Restrictions

    The FDIC and the Federal  Reserve  Board have  established  guidelines  with
    respect to the  maintenance of appropriate  levels of capital by banks under
    their  jurisdiction.  Compliance  with  the  standards  set  forth  in  such
    guidelines limits the amount of dividends which the Bancorp and the Bank may
    pay.

Note #25 - Restatement of Financial Statements

The Bank restated its 1999 financial  statements for recognition of deferred tax
assets previously  reserved for as originally  stated.  The valuation reserve on
deferred  tax  assets of  $350,000  was  recognized  into a prior  period  which
resulted  in  $350,000  of  additional  deferred  tax  assets  and  $350,000  of
additional retained earnings for the reporting period.

                                      -19-
<PAGE>

Note #26 - Acquisitions

On August 31, 2000, the Bancorp acquired 100% of the outstanding common stock of
Valley  Merchants  Bank (VMB) for  $12,235,151  in cash. VMB had total assets of
$56,696,599.  The  acquisition  was accounted  for using the purchase  method of
accounting in accordance with APB Opinion No. 16, "Business Combinations." Under
this  method of  accounting,  the  purchase  price was  allocated  to the assets
acquired and deposits and  liabilities  assumed based on their fair values as of
the  acquisition  date. The financial  statements  include the operations of VMB
from the date of the acquisition.  Goodwill arising from the transaction totaled
$5,711,007.  The results of VMB's  operations  are included in those reported by
the Bancorp beginning on September 1, 2000.

The following  unaudited pro forma combined  results of operations  assumes that
the  acquisition  occurred  on  January  1,  1999  and  2000,  respectively  (in
thousands, except per share data):

                                                            For the Year Ended
                                                               December 31,
                                                         -----------------------
                                                            2000         1999
                                                         ----------   ----------

Revenues                                                 $   27,456   $   27,456
Net income attributable to common shareholders                2,726        2,726

Earnings per common share:
     Basic                                               $     1.37   $     1.37
     Diluted                                                   1.35         1.35

These pro forma amounts are based upon certain  assumptions  and estimates which
the Bancorp  believes  are  reasonable.  The pro forma  consolidated  results of
operations do not purport to be  indicative of the results which would  actually
have been obtained had the acquisition  occurred on the dates indicated or which
may be obtained in the future.

On December 31, 2001,  the Bancorp issued  1,873,370  shares of common stock for
the acquisition of 100 percent of the outstanding common shares of MCB Financial
Corporation.  The  acquisition  was accounted  for using the purchase  method of
accounting in accordance with SFAS No. 141, "Business  Combinations." Under this
method of accounting,  the purchase  price was allocated to the assets  acquired
and  deposits  and  liabilities  assumed  based on their  fair  values as of the
acquisition date. The results of MCB Financial Corporation's operations have not
been  included  in the  consolidated  financial  statements  as the  acquisition
occurred on December 31, 2001.  Goodwill  arising from the  transaction  totaled
$13,489,951.

MCB Financial  Corporation  was a bank holding  company with one bank subsidiary
and one Trust  subsidiary,  and operated  five branches in the San Francisco Bay
Area and one branch in Upland,  California. As a result of the acquisition,  the
combined  organization is expected to be able to offer customers a broader array
of services and products than each could offer on their own.

The aggregate  purchase price was  $28,454,745 and was determined by multiplying
the number of outstanding shares of common stock of MCB Financial Corporation by
the conversion  ratio of 1.1763 and by the purchase price per common share.  The
result of this calculation was added to the fair value of the outstanding  stock
options.

                                      -20-
<PAGE>

Note #26 - Acquisition, Continued

The following table  summarizes the estimated fair values of the assets acquired
and liabilities  assumed at the date of acquisition.  MCB Financial  Corporation
obtained third-party valuations of certain intangible assets.

                                                       At December 31, 2001
                                                          (in Thousands)
                                                      -----------------------
Cash and cash equivalents                                   $  16,657
Investments                                                    27,219
Loans                                                         180,977
Premises and equipment                                          3,223
Intangible assets                                               1,294
Goodwill                                                       13,490
Other assets                                                    2,380
                                                            ---------
   Total Assets Acquired                                      245,240

Noninterest-bearing deposits                                  (52,654)
interest-bearing deposits                                    (157,794)
Trust preferred securities                                     (3,495)
other liabilities                                              (2,842)
                                                            ---------
   Net Assets Acquired                                      $  28,455
                                                            =========

The  $1,294,000  of acquired  intangible  assets was  assigned  to core  deposit
intangibles that are subject to amortization and has an estimated average useful
life of four to eight years, depending on the type of deposit account acquired.

The following  unaudited pro forma combined  results of operations  assumes that
the acquisition  occurred on January 1 2001 and 2000 respectively (in thousands,
except per share date):

                                                    For the Year Ended
                                                        December 31,
                                             ----------------------------------
                                                   2001              2000
                                             ----------------  ----------------
Revenues                                        $ 47,627           $ 42,942
Net Income                                         5,282              5,100

Earnings per common share
 Basic                                          $   1.33               1.17
 Diluted                                        $   1.28               1.13

These pro forma amounts are based upon certain  assumptions  and estimates which
the Bancorp  believes  are  reasonable.  The pro forma  consolidated  results of
operations do not purport to be  indicative of the results which would  actually
have been obtained had the acquisition  occurred on the dates indicated or which
may be obtained in the future.

                                      -21-
<PAGE>

Note #27 - Subsequent Events

During January 2002, the Bancorp repurchased 85,617 shares of common stock for a
total of $1,233,218  from  shareholders  who did not vote in favor of the merger
between Business Bancorp and MCB Financial Corporation.  In order to qualify for
dissenters' rights, a shareholder must not have voted in favor of the merger and
must have made a written demand on the Bancorp within 30 days after shareholders
were mailed the notice of approval of the merger.

On February 4, 2002,  the Board of Directors  adopted a Shareholder  Rights Plan
and declared a dividend  distribution of One Right for each outstanding share of
the Company's  common stock.  Each  Preferred  Share Purchase Right will entitle
shareholders  to buy one  one-hundredth  of a share  of the  Company's  Series A
Participating  Preferred  Stock at an exercise price of $50.00.  The Rights will
become  exercisable  after  a  person  or  group  acquires  10% or  more  of the
outstanding  common stock or announces a tender offer, the consummation of which
would result in ownership by a person or group of 10% or more of the outstanding
common stock. The Rights will expire on February 15, 2012.

On February 20, 2002,  the Board of Directors  approved a plan to repurchase and
retire up to $5 million of the  Company's  outstanding  stock in open market and
private transactions during the next five years. The repurchase will be financed
using its available cash.

On March 6, 2002,  the Board of Directors  declared a cash dividend of $0.01 per
share payable March 29, 2002 to shareholders of record on March 15, 2002.

NOTE #28 - Condensed Financial Information Of Parent Company Only

<TABLE>
<CAPTION>
                              Condensed Balance Sheet
                                                               2001            2000
                                                           ------------    ------------
<S>                                                        <C>             <C>
Assets
 Cash and cash equivalents                                 $    931,565    $    831,372
 Investment in subsidiaries                                  66,559,280      32,791,637
 Other assets                                                 1,034,225         360,870
                                                           ------------    ------------
 Total Assets                                              $ 68,525,070    $ 33,983,879
                                                           ============    ============

Liabilities and Shareholders' Equity
 Trust preferred securities                                $ 13,495,313      10,000,000
 Other liabilities                                              473,037         440,855
 Shareholders' equity                                        54,556,720      23,543,024
                                                           ------------    ------------
 Total Liabilities                                         $ 68,525,070    $ 33,983,879
                                                           ============    ============

                           Condensed Statement of Income

Equity in undistributed income of Bank                     $  3,255,901    $  2,840,022
Equity in undistributed income of Trust                         (15,051)          3,363
Other income                                                     (3,999)           --
Interest on Trust Preferred Securities                       (1,081,111)       (873,368)
Other expenses                                                 (162,098)       (159,443)
                                                           ------------    ------------

Income Before Income Taxes                                    1,993,642       1,810,574

Income Tax Benefit                                              513,281         425,038
                                                           ------------    ------------

Net Income                                                 $  2,506,923    $  2,235,612
                                                           ============    ============
</TABLE>

                                      -22-
<PAGE>

NOTE #28 - Condensed Financial Information Of Parent Company Only, Continued

<TABLE>
<CAPTION>
                             Statements of Cash Flows
                                                                  2001              2000
                                                            ----------------   ------------
<S>                                                         <C>                <C>
Cash Flows from Operating Activities
  Net income                                                $      2,506,923   $  2,235,612
  Adjustments to reconcile net income to net cash
    used by operating activities:
      Equity in undistributed income of Bank                      (3,251,903)    (2,840,022)
      Equity in undistributed income of Trust                         15,051         (3,363)
      Net change in assets and liabilities                          (129,959)       105,835
                                                            ----------------   ------------

        Net cash used by operating activities                       (859,888)      (501,938)
                                                            ----------------   ------------

Cash Flows from Investing Activities
 Purchase of MCB Financial Corporation (net of cash
  and cash equivalents acquired)                                     710,762
 Dividends from subsidiaries                                         250,000
  Investment in subsidiaries                                            --       (9,030,000)
                                                            ----------------   ------------

        Net cash provided (used) by investing activities             960,762     (9,030,000)
                                                            ----------------   ------------

Cash Flows from Financing Activities
  Proceeds from sale of common stock                                  40,000        363,310
  Cash dividends paid                                                (40,681)
  Proceeds from issuance of Trust Preferred Securities                           10,000,000
                                                            ----------------   ------------

        Net cash provided by financing activities                       (681)    10,363,310
                                                            ----------------   ------------

Net Increase in Cash and Cash Equivalents                            100,193        831,372
Cash and Cash Equivalents, Beginning of Year                         831,372           --
                                                            ----------------   ------------
Cash and Cash Equivalents, End of Year                      $        931,565   $    831,372
                                                            ================   ============

Supplemental Cash Flow Information
  Cash paid during the year for:
    Interest                                                $      1,087,500   $    498,438
                                                            ================   ============
    Taxes                                                   $           --     $       --
                                                            ================   ============

Supplemental Disclosures
    Net change in accumulated other comprehensive income    $         52,709   $  2,221,550
                                                            ================   ============
    Tax effect of stock options exercised                   $           --     $     25,851
                                                            ================   ============
</TABLE>

                                      -23-
<PAGE>

Item 8. Changes In and Disagreements With Accountants on Accounting and
        Financial Disclosure.

        None.

        PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
        With Section 16(a) of the Exchange Act.

The information required to be furnished pursuant to this item will be set forth
in the registrant's  proxy statement (the "Proxy  Statement") to be furnished to
stockholders  in  connection  with the  solicitation  of proxies by our Board of
Directors for use at the 2002 Annual Meeting of  Shareholders  to be held on May
23, 2002, and is incorporated herein by reference.

Item 10. Executive Compensation

The information required to be furnished pursuant to this item will be set forth
in the Proxy Statement, and is incorporated herein by reference.

Item 11. Security Ownership of Certain Beneficial Owners and Management.

The information required to be furnished pursuant to this item will be set forth
in the Proxy Statement and is incorporated herein by reference.

Item 12. Certain Relationships and Related Transactions.

The information required to be furnished pursuant to this item will be set forth
in the Proxy Statement, and is incorporated herein by reference.

                                      -24-
<PAGE>

Item 13. Exhibits and Reports on Form 8-K.

      (a)  Exhibits: The Exhibit Index is incorporated by reference.

      (b)  Reports on Form 8-K. We filed the following Current Reports on
           Form 8-K:

                None

                                      -25-
<PAGE>

SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned,  thereunto duly authorized, on the 28th day of March,
2002.

                              By /s/ Alan J. Lane
                              -----------------------------------
                              Alan J. Lane
                              Chief Executive Officer
                              (Principal Executive Officer)


                              By /s/ Patrick E. Phelan
                              --------------------------
                              Patrick E. Phelan
                              Executive Vice President / Chief Financial Officer
                              (Principal Financial Officer)
                              (Principal Accounting Officer)

                                      -26-
<PAGE>

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities indicated on the 28th day of March, 2002.

Name                                                 Title
----                                                 -----

/s/ D. William Bader                                 Director
------------------------------------
D. William Bader


/s/ Neal T. Baker                                    Director
------------------------------------
Neal T. Baker


/s/ John E. Duckworth                                Director
------------------------------------
John E. Duckworth


/s/ Charles O. Hall                                  Director
------------------------------------
Charles O. Hall


/s/ Timothy J. Jorstad                               Chairman; Director
------------------------------------
Timothy J. Jorstad


/s/ Alan J. Lane                                     Director
------------------------------------
Alan J. Lane


/s/ Catherine H. Munson                              Director
------------------------------------
Catherine H. Munson


/s/ Patrick E. Phelan                                Director
------------------------------------
Patrick E. Phelan


/s/ Gary T. Ragghianti                               Director
------------------------------------
Gary T. Ragghianti


/s/ John L. Riddell                                  Director
------------------------------------
John L. Riddell


/s/ Arnold H. Stubblefield                           Director
------------------------------------
Arnold H. Stubblefield


/s/ John L. Stubblefield                             Director
------------------------------------
John L. Stubblefield


/s/ Edward P. Tarrant                                Director
------------------------------------
Edward P. Tarrant


/s/ Randall J. Verrue                                Director
------------------------------------
Randall J. Verrue

                                      -27-

<PAGE>

                                  EXHIBIT INDEX
Exhibit
No.  Exhibit

2    Agreement and Plan of  Reorganization,  dated as of August 15, 2001, by and
     between MCB Financial Corporation and Business Bancorp and their respective
     subsidiary banks, Metro Commerce Bank and Business Bank of California (1)

3.1  Articles of Incorporation (2)

3.2  Amendments to Articles of Incorporation (1)

3.3  Bylaws (3)

3.4  Amendments to Bylaws (1)

4.1  Amended and Restated Declaration of Trust of Business Capital Trust I dated
     March 23, 2000 (3)

4.2  Amended and Restated  Declaration  of Trust of MCB Statutory  Trust I dated
     September 7, 2000 (4)

4.3  Indenture between Business Bancorp and Trustee dated March 23, 2000 (3)

4.4  Indenture between MCB Financial Corporation and State Street Bank and Trust
     Company, as Trustee, dated September 7, 2000 (4)

4.5  Guarantee  Agreement  between  Business Bancorp and Trustee dated March 23,
     2000 (3)

4.6  Guarantee Agreement between MCB Financial Corporation and State Street Bank
     and Trust Company, as Trustee, dated September 7, 2000 (4)

10.1 Stock Option Plan (3)

11   Statement re:  computation of per share earnings (the information  required
     to be  furnished  pursuant  to this  exhibit is  contained  in the Notes to
     Consolidated Financial Statements)

21   Subsidiaries  of the registrant (the  information  required to be furnished
     pursuant  to  this  exhibit  is  contained  in the  Notes  to  Consolidated
     Financial Statements)

23   Consent of Vavrinek, Trine, Day & Co., LLP

----------

(1)  Incorporated  by  reference  to  prospectus  of the  registrant  under Rule
     424(b)(3), filed November 2, 2001 (No. 333-70080)

(2)  Incorporated  by reference to the  registrant's  Registration  Statement on
     Form S-4, filed September 25, 2001 (No. 333-70080)

(3)  Incorporated  by reference to the  registrant's  Registration  Statement on
     Form 10SB, filed June 26, 2000 (No. 0-31593)

(4)  Incorporated by reference to MCB Financial  Corporation's  Quarterly Report
     on Form 10-QSB, filed November 14, 2000

                                      -28-