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U.S. SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

|ý                                           | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|------------------------------------------- | ----------------------------------------------------------------------------------------
|For the fiscal year ended December 31, 2002
|o                                           | TRANSITION REPORT PURSUANT TO 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(State or Other Jurisdiction of
Incorporation or Organization)                                                    |  | 33-0884369(I.R.S. Employer
Identification No.)
|--------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------
|1248 Fifth Avenue,
San Rafael, California 94901
(415) 784-2300(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)

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Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 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 ý    No o

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. ý

Indicate
by check mark whether the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2). Yes o    No ý

The
aggregate market value of the Common Stock held by non-affiliates, based upon the closing sale price of the Common Stock on June 28, 2002 as reported on the Nasdaq
National Market System, was approximately $37,091,240. Shares of Common Stock held by each officer, director and holder of 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. Such determination of affiliate status is not necessarily a conclusive determination for other purposes. The Registrant has no non-voting common
stock.

At
March 14, 2003, 3,937,389 shares of the Registrant's Common Stock were outstanding.

Documents Incorporated by Reference:

The information required to be furnished pursuant to Part III of this Form 10-K 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 22, 2003, 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, 2002.

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TABLE OF CONTENTS

|PART I                                                                   |  | 1       
|------------------------------------------------------------------------ |  | --------
|                                                                         |  | Item 1. 
|                                                                         |  | Item 2. 
|                                                                         |  | Item 3. 
|                                                                         |  | Item 4. 
|PART II                                                                  |  | 11      
|                                                                         |  | Item 5. 
|                                                                         |  | Item 6. 
|                                                                         |  | Item 7. 
|                                                                         |  | Item 7A.
|                                                                         |  | Item 8. 
|                                                                         |  | Item 9. 
|PART III                                                                 |  | 69      
|                                                                         |  | Item 10.
|                                                                         |  | Item 11.
|                                                                         |  | Item 12.
|                                                                         |  | Item 13.
|                                                                         |  | Item 14.
|PART IV                                                                  |  | 70      
|                                                                         |  | Item 15.
|SIGNATURES                                                               |  | 71      
|CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 |  | 73      
|INDEX TO EXHIBITS                                                        |  | 75      

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PART I

Discussions of certain matters contained in this Annual Report on Form 10-K 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 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". We do not undertake, and specifically disclaim any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or
circumstances after the date of those statements.

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"). Business Capital Trust I, which is a Delaware statutory trust, and MCB Statutory Trust I, which is a Connecticut statutory trust, are subsidiaries of Business Bancorp. These trusts were
formed for the exclusive purpose of issuing and selling trust preferred securities.

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 fifteen 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, 2002, we had total assets of $630.9 million, total loans of $378.1million and total deposits of $530.8 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.

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

Corporate
Growth Strategy

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 acquisition 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 accounts, 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

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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 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, 2002, we had a total of 211 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.

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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 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."

The
Sarbanes-Oxley Act of 2002

On
July 30, 2002, President Bush signed into law The Sarbanes-Oxley Act of 2002. This new legislation addresses accounting oversight and corporate governance matters, including:



We
have implemented procedures to comply with the requirements for expanded disclosure of internal controls and the certification of the financial statements. A significant portion of
the remaining items in the new legislation will become effective during 2003. We are currently evaluating what

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impacts the new legislation and its implementing regulations will have upon our operations, including a likely increase in certain outside professional costs.

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:



On
July 23, 2002, the U.S. Treasury proposed regulations requiring institutions to incorporate into their written money laundering plans a customer identification program
implementing reasonable procedures for:



Account
is defined as a formal banking or business relationship established to provide ongoing services, dealings, or other financial transactions. We do not expect the proposed
regulations will have a material impact on our operations.

Financial
Services Modernization Legislation

On
November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act of 1999 (the "GLBA"). 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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BB
and the Bank do not believe that the GLBA 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 GLBA 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 faces 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.

Expanded
Bank Activities.    The GLBA 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. 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 GLBA to the same extent as a national bank.

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.

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 $2.1 million at December 31, 2002. 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.

Transactions
with Affiliates

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 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 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

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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 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.

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, 2002, 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:



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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:



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. Due to continued growth in deposits and some recent bank failures, The BIF is nearing its minimum ratio of 1.25% of insured deposits as mandated by law. If the ratio drops below 1.25%, it is
likely the FDIC will be required to assess premiums on all banks for the frist time since 1996. 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, while not anticipated, could have a material adverse effect on BB's earnings.

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

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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. Furthermore, financial institutions are subject to 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 June, 2002 and
received a satisfactory CRA Assessment Rating.

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.

Our
earnings are impacted by changing interest rates. Changes in interest rates impact the demand for new loans, the credit profile of existing loans, the rates received on loans and
securities and rates paid on deposits and borrowings. The relationship between the rates received on loans and securities and the rates paid on deposits and borrowings is known as interest rate
spread. Given our current volume and mix of interest-bearing liabilities and interest-earning assets, our interest rate spread could be expected to increase during times of rising interest rates and,
conversely, to decline during times of falling interest rates. Although we believe our current level of interest rate sensitivity is reasonable, significant fluctuations in interest rates may have an
adverse effect on our business, financial condition and results of operations.

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

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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.

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. Properties

We own six of our offices and lease twelve 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. Management believes 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

There were no submissions of matters to a vote of security holders during the fourth quarter of the year ended December 31, 2002.

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PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

Our common 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 traded on the Nasdaq SmallCap Market. The quotations shown for 2002 reflect the high and low closing sales prices for our common
stock as reported by Nasdaq. The quotations shown for 2001 reflect the high and low bid prices for our common stock as reported by ADP Quotation Services, Historical Data Base. The following prices
have been adjusted to reflect the 5% stock dividend paid in 2002.

2002

2001High

Low

Cash
Dividend
Declared

High

Low

Cash
Dividend
DeclaredFirst quarter

$
13.51

$
10.48

$
0.01

$
11.43

$
8.57

$
0.00Second quarter


14.50


13.24


0.01


12.03


10.48


0.00Third quarter


15.95


13.90


0.01


14.05


11.19


0.01Fourth quarter


17.99


14.43


0.01


13.33


10.48


0.01


We
had approximately 558 shareholders of record at December 31, 2002.

11

---

Item 6. Selected Consolidated Financial Data

SELECTED FINANCIAL INFORMATION

The following table represents the selected financial information at and for the five years ended December 31, 2002:

|                                                                |                                                     | 2002 |           | 2001   |   | 2000      |        | 1999 |           | 1998   |  
|--------------------------------------------------------------- | --------------------------------------------------- | ---- | --------- | ------ | - | --------- | ------ | ---- | --------- | ------ | -
|
|Statement of Income Data                                        |                                                     |      |           |        |   |           |        |      |           |        |  
|Interest Income                                                 |                                                     | $    | 38,088    |        | $ | 25,095    |        | $    | 21,408    |        | $
|Interest Expense                                                |                                                     |      | 7,790     |        |   | 8,510     |        |      | 7,027     |        |  
|                                                                |                                                     |      |           |        |   |           |        |      |           |        |  
|Net interest income                                             |                                                     |      | 30,298    |        |   | 16,585    |        |      | 14,381    |        |  
|Provision for loan losses                                       |                                                     |      | 1,000     |        |   | 225       |        |      | 255       |        |  
|                                                                |                                                     |      |           |        |   |           |        |      |           |        |  
|                                                                | Net interest income after provision for loan losses |      |           | 29,298 |   |           | 16,360 |      |           | 14,126 |  
|Non-interest income                                             |                                                     |      | 4,848     |        |   | 4,070     |        |      | 2,816     |        |  
|Operating expenses                                              |                                                     |      | 24,891    |        |   | 16,528    |        |      | 13,577    |        |  
|                                                                |                                                     |      |           |        |   |           |        |      |           |        |  
|Income before income taxes                                      |                                                     |      | 9,255     |        |   | 3,902     |        |      | 3,365     |        |  
|Income tax expense                                              |                                                     |      | 3,504     |        |   | 1,395     |        |      | 1,095     |        |  
|                                                                |                                                     |      |           |        |   |           |        |      |           |        |  
|Net income                                                      |                                                     | $    | 5,751     |        | $ | 2,507     |        | $    | 2,270     |        | $
|                                                                |                                                     |      |           |        |   |           |        |      |           |        |  
|Per Share Data                                                  |                                                     |      |           |        |   |           |        |      |           |        |  
|Net income per common share                                     |                                                     |      |           |        |   |           |        |      |           |        |  
|                                                                | Basic                                               |      | $         | 1.46   |   | $         | 1.18   |      | $         | 1.08   |  
|                                                                | Diluted                                             |      |           | 1.39   |   |           | 1.14   |      |           | 1.07   |  
|Cash dividends per common share                                 |                                                     |      | 0.04      |        |   | 0.02      |        |      | 0.00      |        |  
|Book value per common share                                     |                                                     |      | 14.82     |        |   | 13.30     |        |      | 11.06     |        |  
|Common shares outstanding at year end                           |                                                     |      | 3,944,899 |        |   | 4,102,255 |        |      | 2,128,212 |        |  
|Average common shares outstanding                               |                                                     |      | 3,940,663 |        |   | 2,130,564 |        |      | 2,095,329 |        |  
|Average common and common equivalent shares outstanding         |                                                     |      | 4,142,789 |        |   | 2,198,589 |        |      | 2,116,427 |        |  
|Performance Ratios                                              |                                                     |      |           |        |   |           |        |      |           |        |  
|Return on average assets                                        |                                                     |      | 0.93      | %      |   | 0.72      | %      |      | 0.85      | %      |  
|Return on average shareholders' equity                          |                                                     |      | 10.40     | %      |   | 9.90      | %      |      | 11.17     | %      |  
|Net interest margin                                             |                                                     |      | 5.54      | %      |   | 5.44      | %      |      | 6.29      | %      |  
|Dividend payout ratio                                           |                                                     |      | 2.88      | %      |   | 1.75      | %      |      | 0.00      | %      |  
|Equity to assets ratio                                          |                                                     |      | 9.26      | %      |   | 8.64      | %      |      | 7.56      | %      |  
|Balance Sheet Data  At Period End                              |                                                     |      |           |        |   |           |        |      |           |        |  
|Investment Securities                                           |                                                     | $    | 179,180   |        | $ | 169,927   |        | $    | 92,095    |        | $
|Loans, net                                                      |                                                     |      | 372,658   |        |   | 383,890   |        |      | 178,525   |        |  
|Assets                                                          |                                                     |      | 630,932   |        |   | 631,250   |        |      | 311,541   |        |  
|Deposits                                                        |                                                     |      | 530,839   |        |   | 518,086   |        |      | 264,927   |        |  
|Borrowings                                                      |                                                     |      | 23,625    |        |   | 40,224    |        |      | 10,125    |        |  
|Trust Preferred Securities                                      |                                                     |      | 13,462    |        |   | 13,495    |        |      | 10,000    |        |  
|Shareholders' Equity                                            |                                                     |      | 58,446    |        |   | 54,557    |        |      | 23,543    |        |  
|Asset Quality Ratios                                            |                                                     |      |           |        |   |           |        |      |           |        |  
|Nonperforming assets to total assets                            |                                                     |      | 0.32      | %      |   | 0.32      | %      |      | 0.48      | %      |  
|Nonperforming assets to total loans and other real estate owned |                                                     |      | 0.54      | %      |   | 0.52      | %      |      | 0.83      | %      |  
|Alowance for loan losses to total loans                         |                                                     |      | 1.44      | %      |   | 1.17      | %      |      | 1.02      | %      |  
|Net charge-offs to average loans                                |                                                     |      | 0.03      | %      |   | -0.03     | %      |      | 0.08      | %      |  
|Regulatory Capital Ratios                                       |                                                     |      |           |        |   |           |        |      |           |        |  
|Leverage Ratio                                                  |                                                     |      | 7.83      | %      |   | 6.90      | %      |      | 7.80      | %      |  
|Tier 1 Capital                                                  |                                                     |      | 10.78     | %      |   | 9.60      | %      |      | 9.70      | %      |  
|Total Capital                                                   |                                                     |      | 12.02     | %      |   | 11.20     | %      |      | 11.80     | %      |  

12

---

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

General

Total loans were $378.1 million at December 31, 2002 compared to $388.4 million at December 31, 2001. Investment securities increased
to $179.2 million at December 31, 2002 from $169.9 million at December 31, 2001. Our primary source of funds, deposits from customers, were $530.8 million at
December 31, 2002 compared to $518.1 million at December 31, 2001.

Net
income was $5.8 million, $2.5 million, and $2.3 million for 2002, 2001 and 2000, 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 million. 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 financial statements of income for the year ended 2001. Goodwill arising from the transaction totaled $14.1 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
107/8% 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. See Part IItem 1.
"Description of BusinessHistory."

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.

Our
net interest income increased 82.7% to $30.3 million in 2002 from $16.6 million in 2001. This was primarily due to the 77.3% increase in average interest-earning
assets.

Our
net interest income increased 15.3% to $16.6 million in 2001 from $14.4 million in 2000. This was primarily due to the 33.3% increase in average interest-earning assets
partially offset by the 113 basis point decrease in our net yield on interest-earning assets.

The
following table presents, for the years indicated, our condensed average balance sheet information together with interest income and yields earned on average interest-earning assets
and

13

---

interest expense and rates paid on average interest-bearing liabilities. Average balances are average daily balances.

|                                        |                                            | For the twelve
months ended
December 31, 2002 |         | For the twelve
months ended
December 31, 2001 |         | For the twelve
months ended
December 31, 2000 |       
|--------------------------------------- | ------------------------------------------ | --------------------------------------------- | ------- | --------------------------------------------- | ------- | --------------------------------------------- | ------
|
|
|ASSETS                                  |                                            |                                               |         |                                               |         |                                               |       
|Federal funds sold                      |                                            | $                                             | 2,449   |                                               | $       | 37                                            |       
|Interest earning deposits               |                                            |                                               | 680     |                                               |         | 9                                             |       
|Investment securities                   |                                            |                                               |         |                                               |         |                                               |       
|                                        | Taxable                                    |                                               |         | 139,412                                       |         |                                               | 6,339 
|                                        | Tax-exempt(2)                              |                                               |         | 22,162                                        |         |                                               | 1,110 
|Loans, net(1)                           |                                            |                                               | 389,430 |                                               |         | 30,592                                        |       
|                                        |                                            |                                               |         |                                               |         |                                               |       
|                                        | Total Earning Assets                       |                                               |         | 554,133                                       |         |                                               | 38,087
|                                        | Total Non-earning Assets                   |                                               |         | 67,599                                        |         |                                               |       
|                                        |                                            |                                               |         |                                               |         |                                               |       
|                                        |                                            | Total Assets                                  |         | $                                             | 621,732 |                                               |       
|                                        |                                            |                                               |         |                                               |         |                                               |       
|LIABILITIES & SHAREHOLDERS' EQUITY      |                                            |                                               |         |                                               |         |                                               |       
|MMDA, NOW and savings                   |                                            | $                                             | 253,142 |                                               | $       | 3,364                                         |       
|Time certificates, $100,000 or more     |                                            |                                               | 65,151  |                                               |         | 1,305                                         |       
|Other time certificates                 |                                            |                                               | 40,406  |                                               |         | 1,042                                         |       
|                                        |                                            |                                               |         |                                               |         |                                               |       
|                                        | Total Interest-bearing Deposits            |                                               |         | 358,699                                       |         |                                               | 5,711 
|Other borrowings                        |                                            |                                               | 18,221  |                                               |         | 705                                           |       
|Trust preferred securities              |                                            |                                               | 13,477  |                                               |         | 1,373                                         |       
|                                        |                                            |                                               |         |                                               |         |                                               |       
|                                        | Total Interest-bearing Liabilities         |                                               |         | 390,397                                       |         |                                               | 7,789 
|Non-interest bearing demand deposits    |                                            |                                               | 171,522 |                                               |         |                                               |       
|Other non-interest bearing liabilities  |                                            |                                               | 4,486   |                                               |         |                                               |       
|Shareholders' equity                    |                                            |                                               | 55,327  |                                               |         |                                               |       
|                                        | Total Liabilities and Shareholders' Equity |                                               |         | 621,732                                       |         |                                               |       
|                                        |                                            |                                               |         |                                               |         |                                               |       
|Net Interest Income                     |                                            |                                               |         |                                               | $       | 30,298                                        |       
|                                        |                                            |                                               |         |                                               |         |                                               |       
|Interest rate spread                    |                                            |                                               |         |                                               |         |                                               |       
|Contribution of interest free funds     |                                            |                                               |         |                                               |         |                                               |       
|                                        |                                            |                                               |         |                                               |         |                                               |       
|Net yield on interest-earning assets(3) |                                            |                                               |         |                                               |         |                                               |       
|                                        |                                            |                                               |         |                                               |         |                                               |       

---

The most significant impact on our net interest income between periods is derived from the interaction of changes in the volume of, and rate
earned orpaid on, interest-earning assets and interest-bearing liabilities. The volume of interest-earning asset dollars in loans and investments, compared to the volume of interest-bearing
liabilities represented by deposits and borrowings, combined with the spread, produces the changes in the net interest income between periods. The table below sets forth,

14

---

for the years indicated, a summary of the changes in average asset and liability balances (volume) and changes in average interest rates (rate).

|                              |                                     | Twelve months ended December 31, 2002
Compared to
Twelve months ended December 31, 2001
Favorable / (Unfavorable) |        | Twelve months ended December 31, 2001
Compared to
Twelve months ended December 31, 2000
Favorable / (Unfavorable) |       
|----------------------------- | ----------------------------------- | ----------------------------------------------------------------------------------------------------------------- | ------ | ----------------------------------------------------------------------------------------------------------------- | ------
|
|
|Interest Income:              |                                     |                                                                                                                   |        |                                                                                                                   |       
|                              | Federal funds sold                  |                                                                                                                   | $      | 1                                                                                                                 |       
|                              | Interest earning deposits           |                                                                                                                   |        | (50                                                                                                               | )     
|                              | Investment securities:              |                                                                                                                   |        | 0                                                                                                                 |       
|                              |                                     | Taxable                                                                                                           |        |                                                                                                                   | 2,346 
|                              |                                     | Tax-exempt                                                                                                        |        |                                                                                                                   | (44   
|Loans, net                    |                                     |                                                                                                                   | 19,571 |                                                                                                                   |       
|                              |                                     |                                                                                                                   |        |                                                                                                                   |       
|                              |                                     | Total Interest Income                                                                                             |        |                                                                                                                   | 21,824
|                              |                                     |                                                                                                                   |        |                                                                                                                   |       
|Interest Expense:             |                                     |                                                                                                                   |        |                                                                                                                   |       
|                              | MMDA, NOW and savings               |                                                                                                                   |        | (3,369                                                                                                            | )     
|                              | Time certificates, $100,000 or more |                                                                                                                   |        | (850                                                                                                              | )     
|                              | Other time certificates             |                                                                                                                   |        | (311                                                                                                              | )     
|                              | Other borrowings                    |                                                                                                                   |        | 332                                                                                                               |       
|                              | Trust preferred securities          |                                                                                                                   |        | (381                                                                                                              | )     
|                              |                                     |                                                                                                                   |        |                                                                                                                   |       
|                              |                                     | Total Interest Expense                                                                                            |        |                                                                                                                   | (4,579
|                              |                                     |                                                                                                                   |        |                                                                                                                   |       
|Change in Net Interest Income |                                     | $                                                                                                                 | 17,245 |                                                                                                                   | $     
|                              |                                     |                                                                                                                   |        |                                                                                                                   |       

---

Interest
income in 2002 increased to $38.1 million from $25.1 million in 2001. This was primarily due to the increase in average loans partially offset by a 121 basis point
decline in the yield earned on average interest-earning assets. Average loans increased $201.5 million, or 107.2%, to $389.4 million in 2002 compared to $187.9 million in 2001.
The increase in average loans during 2002 was primarily due to the merger with MCB on December 31, 2001. The yield earned on average interest-earning assets decreased to 6.95% during 2002 from
8.16% during 2001, reflecting the overall decline in market interest rates during this period. Loans represented approximately 70.3% of total interest-earning assets during 2002 compared to 60.1%
during 2001.

Interest
expense during 2002 decreased to $7.8 million from $8.5 million during 2001. Lower interest rates paid on interest-bearing liabilities were offset by the volume
increase in interest-bearing liabilities. The interest rates paid on interest-bearing liabilities decreased by 182 basis points during 2002 to 2.00% compared to 3.82% during 2001. This decrease was
due to the overall declining market rate environment. Average interest-bearing liabilities increased 75.1% to $390.4 million during 2002 from $223.0 million during 2001. The increase in average
interest-bearing liabilities was due primarily to the merger with MCB on December 31, 2001.

As
a result of the foregoing analyses, our net yield on interest-earning assets increased during 2002 to 5.54% from 5.44% during 2001.

Interest
income in 2001 increased to $25.1 million from $21.4 million in 2000. This was primarily due to the increase in average loans partially offset by a 113 basis point
decline in the yield earned on average interest-earning assets. Average loans increased $45.0 million, or 31.5%, to $187.9 million in 2001 compared to $143.0 million in 2000. The
yield earned on average interest-earning assets decreased to 8.16% during 2001 from 9.29% during 2000, reflecting the overall decline in market interest rates during this period. Loans represented
approximately 60.1% of total interest-earning assets during 2001 compared to 61.0% during 2000.

15

---

Interest expense during 2001 increased to $8.5 million from $7.0 million during 2000. The volume increase in interest-bearing liabilities was partially offset by lower
interest rates paid on those liabilities. Average interest-bearing liabilities increased 37.8% to $223.0 million during 2001 from $161.8 million during 2000. The interest rates paid on
interest-bearing liabilities decreased by 52 basis points during 2001 to 3.82% compared to 4.34% during 2000. This decrease was due to the overall declining market rate environment.

As
a result of the foregoing analyses, our net yield on interest-earning assets decreased during 2001 to 5.44% from 6.29% during 2000.

Provision
for Loan Losses

Credit
risk is inherent in the business of making loans. We set aside an allowance for loan losses ("ALL") 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.

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

The
provision for loan losses was $1,000,000 for the year ended December 31, 2002, compared to $225,000 for the year ended December 31, 2001 and $255,000 for the year ended
December 31, 2000. The ratio of the allowance for loan losses to total loans was 1.44% and 1.17% at December 31, 2002 and 2001, respectively.

The
increase in the provision for loan losses in 2002 was recorded due to growth in the loan portfolio and deteriorating economic conditions in our market areas.

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):

Years Ended December 31,Components of Non-interest Income2002

2001

2000Service fees on deposit accounts


3,272


2,410


1,936Gain on sale of SBA loans

$
282

$
40

$
12Gain on sale of other real estate owned





52


198Gain on sale of investment securities


266


817


43Other income


1,028


751


627Total

$
4,848

$
4,070

$
2,816As a Percentage of Average AssetsService fees on deposit accounts


0.53
%

0.69
%

0.73
%Gain on sale of SBA loans


0.05
%

0.01
%

0.00
%Gain on sale of other real estate owned


0.00
%

0.01
%

0.07
%Gain on sale of investment securities


0.04
%

0.23
%

0.02
%Other income


0.17
%

0.21
%

0.24
%Total


0.78
%

1.17
%

1.06
%


16

---

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 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 $778,000, or 19.1%, to $4.8 million in 2002. Increases in service fees on deposit accounts, gains on sale of SBA loans and other income were partially
offset by decreases in gains on sales of OREO and gains on sales of investment securities.

Noninterst
income increased $1.3 million, or 44.5%, to $4.1 million in 2001. This increase was primarily due to the increase in service fees on deposit accounts and the
increase in gains on sales 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.

Operating Expenses

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

Years Ended December 31,Components of Operating Expenses2002

2001

2000Salaries and employee benefits

$
12,544

$
8,481

$
6,797Occupancy and equipment


4,087


2,135


1,752Data processing


1,630


1,198


947Legal and other professional fees


1,185


381


530Telephone, postage and supplies


1,258


915


853Marketing and promotion


417


472


491Amortization of intangibles


341


654


401FDIC insurance and regulatory assessments


152


98


82Other expenses


3,277


2,194


1,724Total

$
24,891

$
16,528

$
13,577Average full-time equivalent staff


219


167


134As a Percentage of Average AssetsSalaries and employee benefits


2.02
%

2.43
%

2.55
%Occupancy and equipment


0.66
%

0.61
%

0.66
%Data processing


0.26
%

0.34
%

0.36
%Legal and other professional fees


0.19
%

0.11
%

0.20
%Telephone, postage and supplies


0.20
%

0.26
%

0.32
%Marketing and promotion


0.07
%

0.14
%

0.18
%Amortization of intangibles


0.05
%

0.19
%

0.15
%FDIC insurance and regulatory assessments


0.02
%

0.03
%

0.03
%Other expenses


0.53
%

0.63
%

0.65
%Total


4.00
%

4.73
%

5.10
%


Our
operating expenses increased by $8.4 million, or 50.6%, in 2002 compared to 2001. This increase was primarily due to the merger with MCB on December 31, 2001. Pursuant
to purchase accounting standards, the operating expenses of MCB are not reflected in the 2001 and 2000 amounts shown above.

17

---

We
recorded approximately $685,000 in costs associated with the merger with MCB Financial Corporation and the on-going integration effort during 2002. These costs are
included in the legal and other professional fees category.

Our
operating expenses increased by $3.0 million, or 21.7%, in 2001 compared to 2000. Our total operating expenses as a percentage of average assets have continued to decline from
5.10% in 2000, to 4.73% in 2001 and to 4.00% in 2002. The decline in 2002 was due primarily to the economies of scale generated from the merger with MCB and the elimination of the amortization of
goodwill due to a change in the accounting for goodwill. See Note #7 of the Notes to Consolidated Financial Statements.

Income Taxes

Our effective income tax rate was 37.9% in 2002 compared to 35.8% in 2001 and 32.5% in 2000. The effective rates were lower than the statutory rate of 42%
primarily due to the benefits of tax-exempt income on municipal securities.

Financial Condition

Investment Portfolio

Our investment portfolio market value was $179.2 million, representing 28.4% of the our total assets as of December 31, 2002. The portfolio grew by
$9.3 million or 5.4% in 2002. At year-end 2001, the investment portfolio was 26.9% of total assets. 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.

The
following table summarizes the amortized cost and estimated fair value and distribution of our investment securities as of the dates indicated:

|                    |                            | For the Years Ended December 31,
|------------------- | -------------------------- | --------------------------------
|
|
|Available for Sale: |                            |                                 
|                    | U.S. Treasury securities   |                                 
|                    | U.S. government agencies   |                                 
|                    | Mortgage backed securities |                                 
|                    | Municipal securities       |                                 
|                    | Other securities           |                                 
|                    |                            |                                 
|                    |                            | Total available for sale        
|                    |                            |                                 
|Held to Maturity:   |                            |                                 
|                    | U.S. Treasury securities   |                                 
|                    |                            |                                 
|                    |                            | Total held to maturity          
|                    |                            |                                 

18

---

The
following table summarizes the maturity of our investment securities and their weighted average yield at December 31, 2002:

Maturities of Investment Securities at December 31, 2002

|                                                   |       | Within 1 Year |       | After 1 Year
Within 5 Years |      | After 5 Years
Within 10 Years |   | After 10 Years |     | Total |     
|-------------------------------------------------- | ----- | ------------- | ----- | --------------------------- | ---- | ----------------------------- | - | -------------- | --- | ----- | ----
|
|
|U.S. Treasury and other U.S. government agencies   |       | $             | 3,053 |                             | 2.56 | %                             |   |                |     |       |     
|Mortgage backed securities                         |       |               |       |                             |      |                               |   |                |     |       |     
|Obligations of state and political subdivisions(1) |       |               |       |                             |      |                               |   | 105            |     | 7.95  | %   
|Other securities                                   |       |               |       |                             |      |                               |   |                |     |       |     
|                                                   |       |               |       |                             |      |                               |   |                |     |       |     
|                                                   | Total |               | $     | 3,053                       |      | 2.56                          | % | $              | 105 |       | 7.95
|                                                   |       |               |       |                             |      |                               |   |                |     |       |     

---

Loan Portfolio

Total gross loans were $379.1 million as of December 31, 2002 compared to $389.6 million as of December 31, 2001, which represents a
decrease of 2.7%.

Our
commercial real estate and other real estate 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
$279.1 million, or 73.6%, of the total loan portfolio at December 31, 2002. It is our policy to restrict real estate loans to no more than a
range of 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 $33.4 million of the
loan portfolio, or 8.8% at December 31, 2002, 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 $59.9 million
or 15.8% of the loan portfolio at December 31, 2002 was made up of real estate construction loans. These loans are typically short term.

Consumer
and other loans are made for the purpose of financing automobiles, various types of consumer goods, and other personal purposes including overdrafts. These 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

19

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interest rate (variable versus fixed rate). At December 31, 2002, of our total loan portfolio (including consumer loans), 41.0% was in fixed rate product and 59.0% was in variable rate
product.

Loan
Approval Policies.    Loan approval authority is delegated by the Board of Directors to the Chief Executive Officer ("CEO"), the President and the Chief Credit Officer
("CCO") under Board resolution that is reviewed and approved annually. Only the Directors' Loan Committee, with recommendations from the CCO, is empowered to delegate lending authority to the Bank's
officers in addition to approving certain loans itself as discussed below. 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 Directors' Loan Committee is $2,000,000 which requires the joint signature of two of the following three individuals: the CEO, President or CCO. Regional Vice
Presidents and Branch Managers generally operate at unsecured lending levels of $250,000 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 outside of the Directors' loan committee is $4,000,000 and requires the joint signature of two of the following
three individuals: the CEO, the President or the
CCO, with lesser amounts of secured lending authority delegated to each lending officer. All new loans which exceed $300,000, or which would make the aggregate of any loans to one borrower in excess
of $300,000, are reviewed by the Directors' 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:

|                                |                                     | 2002 |         | 2001    |      | 2000  |   | 1999    |         | 1998 |      
|------------------------------- | ----------------------------------- | ---- | ------- | ------- | ---- | ----- | - | ------- | ------- | ---- | -----
|
|
|Real estateconstruction        |                                     | $    | 59,854  |         | 15.8 | %     | $ | 66,812  |         | 17.2 | %    
|Commercial real estate          |                                     |      | 253,105 |         | 66.9 |       |   | 218,782 |         | 56.3 |      
|Real estateother               |                                     |      | 25,951  |         | 6.9  |       |   | 19,280  |         | 5.0  |      
|Commercial                      |                                     |      | 33,441  |         | 8.8  |       |   | 70,104  |         | 18.0 |      
|Consumer and other              |                                     |      | 6,791   |         | 1.8  |       |   | 14,578  |         | 3.8  |      
|                                |                                     |      |         |         |      |       |   |         |         |      |      
|                                | Total loans, gross                  |      |         | 379,142 |      | 100.3 |   |         | 389,556 |      | 100.3
|Less: unearned income           |                                     |      | (1,042  | )       | (0.3 | )     |   | (1,109  | )       | (0.3 | )    
|                                |                                     |      |         |         |      |       |   |         |         |      |      
|                                | Total loans, net of unearned income |      |         | 378,100 |      | 100.0 |   |         | 388,447 |      | 100.0
|Less: allowance for loan losses |                                     |      | (5,442  | )       | (1.4 | )     |   | (4,557  | )       | (1.2 | )    
|                                |                                     |      |         |         |      |       |   |         |         |      |      
|                                | Total Loans, Net                    |      | $       | 372,658 |      | 98.6  | % | $       | 383,890 |      | 98.8 
|                                |                                     |      |         |         |      |       |   |         |         |      |      

As of December 31, 2002, we had commitments to extend credit of $90.9 million, obligations under standby letters of credit of
$1.6 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, 2002. 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.

Time remaining to maturity

Fixed rate

Adjustable rate

TotalOne year or less

$
26,566

$
88,777

$
115,343After one year to five years


90,909


42,121


133,030After five years


38,128


92,641


130,769Total

$
155,603

$
223,539

$
379,142


20

---

As
of December 31, 2002, the percentage of loans held for investment with fixed and floating interest rates was 41% and 59%, respectively.

Loans
Secured by Real EstateGeneral.    At December 31, 2002, $338.9 million, or approximately 89.4% of our loans were secured by real estate. Loans
which are secured by real estate are included within all of the various loan categories discussed above other than consumer and other loans. All 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 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 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

Commercial
Real Estate and Real EstateOther 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 25 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:



21

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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 our 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 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 and projected 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 and commercial real estate loan categories and are discussed in more detail below in "SBA Loans."

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. 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, 2002, the total of all of our consumer loans was $6.8 million or 1.8% 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%

22

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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 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, 2002, approximately $39.3 million, or 10.4% 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 of a business 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 85%of the gross loan amount. Risk to the Bank associated with SBA loans is greatly mitigated by the government guarantee.

Nonperforming Assets

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.

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.

At
December 31, 2002 we had $2.0 million in nonperforming assets, which included $797,000 in nonaccrual loans, $249,000 in loans past due 90 days and still accruing
and $995,000 in OREO.

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

23

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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):

Nonperforming Assets at December 31,

|                                                                                      |                            | 2002 |      | 2001  |   | 2000  |       | 1999 |      | 1998  |  
|------------------------------------------------------------------------------------- | -------------------------- | ---- | ---- | ----- | - | ----- | ----- | ---- | ---- | ----- | -
|Nonaccrual loans(1)                                                                   |                            | $    | 797  |       | $ | 1,947 |       | $    | 999  |       | $
|Loans 90 days or more past due and still accruing                                     |                            |      | 249  |       |   | 18    |       |      | 0    |       |  
|                                                                                      |                            |      |      |       |   |       |       |      |      |       |  
|                                                                                      | Total nonperforming loans  |      |      | 1,046 |   |       | 1,965 |      |      | 999   |  
|Other real estate owned                                                               |                            |      | 995  |       |   | 72    |       |      | 505  |       |  
|                                                                                      |                            |      |      |       |   |       |       |      |      |       |  
|                                                                                      | Total nonperforming assets |      | $    | 2,041 |   | $     | 2,037 |      | $    | 1,504 |  
|                                                                                      |                            |      |      |       |   |       |       |      |      |       |  
|Nonperforming loans as a percentage of total gross loans                              |                            |      | 0.28 | %     |   | 0.50  | %     |      | 0.55 | %     |  
|Nonperforming assets as a percentage of total assets                                  |                            |      | 0.32 | %     |   | 0.32  | %     |      | 0.48 | %     |  
|Nonperforming assets as a percentage of total gross loans and other real estate owned |                            |      | 0.54 | %     |   | 0.52  | %     |      | 0.83 | %     |  

Allowance for Loan Losses

We maintain an ALL 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 ALL in amounts deemed appropriate by us to maintain the ALL at an adequate level. Our judgement of the ALL, 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 ALL to determine its adequacy. Specifically, classifed 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 ALL in a multi-step process on a quarterly basis. The determination of the ALL begins with us reviewing each individual classified or criticized loan
in detail, evaluating, among other things, 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

24

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then applies the minimum percentage reserve factors in determining the ALL. These reserve factors have floors that range from 0.40% to 0.80% depending on the particular loan category.

The
ALL 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 ALL. 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 taken 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 ALL. This total ALL is then compared to a regulatory reasonableness test to ensure that our ALL
compares favorably.

Although
various factors go into the determination of the ALL, different factors have greater or lesser weights associated with them. For example, although the impact of economic factors
is a consideration in determining the ALL, 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 ALL.

Because
specific loan circumstances are reviewed together with the 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 ALL without unduly influencing the other components.

The
process of determining the ALL 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 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, 2002, we had net charge-offs of $115,000 as compared to net recoveries of $53,000 in 2001 and net charge-offs of $119,000
in 2000.

As
of December 31, 2002 the allowance for loan losses was $5.4 million or 1.44% of total loans. As of December 31, 2001, the allowance for loan losses was
$4.6 million or 1.17% of total loans. 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 that would result in increased losses in our loan portfolio. These losses could possibly exceed the amount then
reserved for loan losses.

25

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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 provides 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, 2002 and 2001 is contained in Note 3 to the Consolidated Financial Statements (see "Item 8" 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:

Analysis of the Allowance for Loan Losses

|                                                                 |                      | 2002              |         | 2001 |     | 2000    |     | 1999 |         | 1998 |    
|---------------------------------------------------------------- | -------------------- | ----------------- | ------- | ---- | --- | ------- | --- | ---- | ------- | ---- | ---
|
|Allowance for loan losses:                                       |                      |                   |         |      |     |         |     |      |         |      |    
|Beginning balance                                                |                      | $                 | 4,557   |      | $   | 1,843   |     | $    | 1,242   |      | $  
|Adjustments(1)                                                   |                      |                   |        |      |     | 2,436   |     |      | 465     |      |    
|Charge-offs:                                                     |                      |                   |         |      |     |         |     |      |         |      |    
|                                                                 | Real estatemortgage |                   |         | 60   |     |         |    |      |         | 225  |    
|                                                                 | Commercial           |                   |         | 65   |     |         | 98  |      |         | 17   |    
|                                                                 | Consumer and other   |                   |         | 83   |     |         | 58  |      |         | 34   |    
|                                                                 |                      |                   |         |      |     |         |     |      |         |      |    
|                                                                 |                      | Total charge-offs |         |      | 208 |         |     | 156  |         |      | 276
|                                                                 |                      |                   |         |      |     |         |     |      |         |      |    
|Recoveries:                                                      |                      |                   |         |      |     |         |     |      |         |      |    
|                                                                 | Real estatemortgage |                   |         | 55   |     |         |    |      |         | 28   |    
|                                                                 | Commercial           |                   |         | 25   |     |         | 198 |      |         | 110  |    
|                                                                 | Consumer and other   |                   |         | 13   |     |         | 11  |      |         | 19   |    
|                                                                 |                      |                   |         |      |     |         |     |      |         |      |    
|                                                                 |                      | Total recoveries  |         |      | 93  |         |     | 209  |         |      | 157
|                                                                 |                      |                   |         |      |     |         |     |      |         |      |    
|Net charge-offs (recoveries)                                     |                      |                   | 115     |      |     | (53     | )   |      | 119     |      |    
|Provision charged to operating expense                           |                      |                   | 1,000   |      |     | 225     |     |      | 255     |      |    
|                                                                 |                      |                   |         |      |     |         |     |      |         |      |    
|Ending balance                                                   |                      | $                 | 5,442   |      | $   | 4,557   |     | $    | 1,843   |      | $  
|                                                                 |                      |                   |         |      |     |         |     |      |         |      |    
|Loans at end of period                                           |                      | $                 | 379,142 |      | $   | 389,556 |     | $    | 181,447 |      | $  
|Average loans during period                                      |                      | $                 | 389,430 |      | $   | 187,941 |     | $    | 142,970 |      | $  
|Ratios:                                                          |                      |                   |         |      |     |         |     |      |         |      |    
|Allowance to loans at end of period                              |                      |                   | 1.44    | %    |     | 1.17    | %   |      | 1.02    | %    |    
|Net charge-offs (recoveries) to average loans during period      |                      |                   | 0.03    | %    |     | -0.03   | %   |      | 0.08    | %    |    
|Net charge-offs (recoveries) to allowance at beginning of period |                      |                   | 2.52    | %    |     | -2.88   | %   |      | 9.58    | %    |    

---

26

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

Allocation of the Allowance for Loan Losses

|              |       | 2002 |       | 2001  |       | 2000   |   | 1999  |       | 1999  |       
|------------- | ----- | ---- | ----- | ----- | ----- | ------ | - | ----- | ----- | ----- | ------
|
|
|Real Estate   |       | $    | 3,243 |       | 89.40 | %      | $ | 2,367 |       | 78.20 | %     
|Commercial    |       |      | 1,462 |       | 8.80  |        |   | 1,462 |       | 18.00 |       
|Consumer      |       |      | 127   |       | 1.80  |        |   | 300   |       | 3.80  |       
|Not Allocated |       |      | 610   |       | N/A   |        |   | 428   |       | N/A   |       
|              |       |      |       |       |       |        |   |       |       |       |       
|              | Total |      | $     | 5,442 |       | 100.00 | % | $     | 4,557 |       | 100.00
|              |       |      |       |       |       |        |   |       |       |       |       

Deposits

Deposits are our primary source of funds. At December 31, 2002 we had a deposit mix of 34.8% in noninterest-bearing demand deposits, 46.0% in NOW, money
market and savings deposits, and 19.2% 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, 2002 we had total deposits of $530.8 million an increase of $12.8 million, or 2.5%, from December 31, 2001. Increases in
noninterest-bearing demand deposits were partially offset by decreases in time certificates of deposit.

Our
noninterest-bearing demand deposit accounts increased 18.5% to $184.7 million at December 31, 2002 compared to $155.9 million at December 31, 2001.

Our
money market deposit accounts ("MMDA"), negotiable order of withdrawal accounts ("NOW") and savings accounts increased 0.7% to $244.4 million at December 31, 2002
compared to $242.6 million at December 31, 2001.

Our
total time certificates of deposit decreased 14.9% to $101.7 million at December 31, 2002 compared to $119.5 million at December 31, 2001.

27

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

|                                                                                                  |                                   | For the Years Ended December 31, |        
|------------------------------------------------------------------------------------------------- | --------------------------------- | -------------------------------- | -------
|
|
|Noninterest-bearing demand deposits                                                               |                                   | $                                | 171,522
|Money market                                                                                      |                                   |                                  | 163,849
|NOW                                                                                               |                                   |                                  | 54,966 
|Savings                                                                                           |                                   |                                  | 34,327 
|Time deposits, $100,000 and over                                                                  |                                   |                                  | 65,151 
|Other time deposits                                                                               |                                   |                                  | 40,406 
|                                                                                                  |                                   |                                  |        
|                                                                                                  | Total deposits                    |                                  |        
|Other borrowings                                                                                  |                                   |                                  | 18,221 
|Redeemable Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures |                                   |                                  | 13,477 
|                                                                                                  |                                   |                                  |        
|                                                                                                  | Total deposits and borrowed funds |                                  |        
|                                                                                                  |                                   |                                  |        

The
following table shows the scheduled maturities of our time deposits in denominations of $100,000 or greater at December 31, 2002:

Time remaining to maturity

December 31, 2002Three months or less

$
38,595After three months to six months


16,670After six months to one year


8,009After twelve months


1,236Total

$
64,510


Other Borrowings

Other borrowings as of December 31, 2002 and 2001 were $23.6 million and $40.2 million, respectively. The $16.6 million decrease in
other borrowings was primarily due to the $12.5 million increase in our total deposits. As our deposits increase, we are able to reduce our reliance on higher-cost, wholesale
funding. At December 31, 2002, borrowings consisted of Federal Home Loan Bank (FHLB) advances. The average balance of the other borrowings during 2002 was 18.2 million with a weighted
average rate of 3.87%. During 2001, the average balance of the other borrowings was $25.2 million with a weighted average rate of 4.77%. See Note 10 of the Notes to Consolidated
Financial Statements for additional information concerning other borrowings.

Liquidity and Cash Flow

The objective of our liquidity management is to maintain our ability to meet the day-to-day cash flow requirements of our customers who
either wish to withdraw funds or require funds to meet their credit needs. We must manage our liquidity position to meet the needs of our customers while maintaining an appropriate balance between
assets and liabilities to meet the return on investment expectations of our shareholders. We monitor the sources and uses of funds on a daily basis to maintain an acceptable liquidity position. In
addition to liquidity from core deposits and repayments and maturities of loans and investments, we also have the ability to sell securities under agreements to repurchase, obtain FHLB advances or
purchase overnight Federal Funds.

28

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BB is a company separate and apart from the Bank and therefore it must provide for its own liquidity. In addition to its own operating expenses, BB is responsible for the payment of the
interest on the outstanding trust preferred securities and the dividends paid on our common stock. Substantially all of BB's revenues are obtained from dividends declared and paid by the Bank. There
are statutory and regulatory provisions that limit the ability of the Bank to pay dividends to BB. At December 31, 2002, the Bank had approximately $2.1 million available to be paid as a
dividend to BB. We do not believe that such restrictions will adversely impact BB's ability to meet its ongoing cash obligations.

As
of December 31, 2002, we did not have any material commitments for capital expenditures.

Net
cash provided by operating activities totaled $10.0 million in 2002, compared to $4.2 million in 2001 and $4.9 million in 2000. The $5.8 million increase
in net cash provided by operating activities in 2002 was primarily due to the merger with MCB on December 31, 2001.

Net
cash used in investing activities totaled $4.7 million in 2002, compared to $58.7 million in 2001 and $32.5 million in 2000. The $54 million decrease in
net cash used in investing activities in 2002 was primarily due to the increase in the principal reduction of mortgage-backed securities and the net decrease in loans to customers.

Net
cash used in financing activities was $7.4 million in 2002, compared to net cash provided by financing activities of $72.2 million in 2001 and $30.5 million in
2000. A reduction in our certificates of deposit and borrowings from the Federal Home Loan Bank contributed to the net use of cash in financing activities in 2002.

Capital Resources

Shareholders' equity at December 31, 2002 increased to $58.4 million from $54.6 million at December 31, 2001. We paid cash dividends
of $0.04 and $0.02 per common share in 2002 and 2001, respectively.

We
had $13.5 million in trust preferred securities outstanding at December 31, 2002 and 2001. Under applicable regulatory guidelines, the trust preferred securities qualify
as Tier I capital up to a maximum of 25% of Tier I capital. Any additional portion of trust preferred securities would qualify as Tier 2 capital. As of December 31, 2002, all of the
$13.5 million in trust preferred securities outstanding qualified as Tier I Capital.

A
banking organization's total qualifying capital includes two components: core capital (Tier 1 capital) and supplementary capital (Tier 2 capital). Core capital, which must comprise at
least half of total capital, includes common shareholders' equity, qualifying perpetual preferred stock, trust preferred securities and minority interests, less goodwill. Supplementary capital
includes the allowance for loan losses (subject to certain limitations), other perpetual preferred stock, trust preferred securities, certain other capital instruments and term subordinated debt. Our
major capital components are shareholders' equity and trust preferred securities in core capital, and the allowance for loan losses in supplementary capital.

At
December 31, 2002, the minimum risk-based capital requirements to be considered adequately capitalized were 4.0% for core capital and 8.0% for total capital.
Federal banking regulators have also adopted leverage capital guidelines to supplement risk-based measures. The leverage ratio is determined by dividing Tier 1 capital as defined under the
risk-based guidelines by average total assets (not risk-adjusted) for the preceding quarter. The minimum leverage ratio is 4.0%, although most banking organizations are
expected to exceed that amount by 1.0% or more, depending on their circumstances.

29

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At
December 31, 2002, we maintained capital levels that exceeded the well-capitalized guidelines. For additional information on capital levels and capital ratios, see
Note 28 A of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

Recent Accounting Developments

Business Combinations

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" ("SFAS No. 141"). SFAS
No. 141 requires that all business combinations within the scope of SFAS No. 141 to be accounted for using the purchase method. Previously, the
pooling-of-interests method was allowed whenever certain criteria were met. Because those criteria did not distinguish economically dissimilar transactions, similar business
combinations were accounted for using different
methods that produced dramatically different financial statement results. SFAS No. 141 requires separate recognition of intangible assets apart from goodwill if they meet one of two criteria,
the contractual-legal criterion or the separability criterion. SFAS No. 141 also requires the disclosure of the primary reasons for a business combination and the allocation of the purchase
price paid to the assets acquired and liabilities assumed by major balance sheet caption.

The
provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001. We adopted SFAS No. 141 on July 1, 2001.

Goodwill and Other Intangible Assets

In June 2001, the FASB also issued SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 142 addresses how
intangible assets that are acquired individually or within a group of assets, but not those acquired in a business combination, should be accounted for in the financial statements upon their
acquisition. SFAS No. 142 adopts a more aggregate view of goodwill and bases the accounting on the units of the combined entity into which an acquired entity is aggregated. SFAS No. 142
also prescribes that goodwill and intangible assets that have indefinite useful lives will not be amortized but rather tested at least annually for impairment. Intangible assets that have definite
lives will continue to be amortized over their useful lives. SFAS No. 142 provides specific guidance for the testing of goodwill for impairment, which may require re-measurement of
the fair value of the reporting unit. Additional ongoing financial statement disclosures are also required.

We
adopted SFAS 142 on January 1, 2002.

Accounting for Asset Retirement Obligations

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"). SFAS No. 143 addresses
financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 requires that
the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.

SFAS
No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. We do not expect adoption of SFAS No. 143 to have a
material impact on our financial condition or operating results.

Accounting for Impairment or Disposal of Long-Lived Assets

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144").
SFAS No. 144 establishes a single accounting model for the impairment or disposal of long-lived assets, including discontinued operations. SFAS No. 144

30

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superseded SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and APB Opinion No. 30 ("APB
No. 30"), "Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions."

We
adopted SFAS No. 144 on January 1, 2002. The implementation of this standard had no material impact on our financial condition or operating results.

Gains and Losses from Extinguishment of Debt

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections" ("SFAS No. 145"). Among other provisions, SFAS No. 145 rescinds SFAS 4, "Reporting Gains and Losses from Extinguishment of Debt." Accordingly, gains or losses from
extinguishment of debt shall not be reported as extraordinary items unless the extinguishment qualifies as an extraordinary item under the criteria of APB No. 30. Gains or losses from
extinguishment of debt that do not meet the criteria of APB No. 30 should be reclassified to income from continuing operations in all prior periods presented.

SFAS
No. 145 is effective for fiscal years beginning after May 15, 2002. We elected early adoption of SFAS No. 145. Gains and losses on the extinguishment of debt
are recorded as other income in the Consolidated Statement of Operations. The implementation of this standard had no material impact on our financial condition or operating results.

Accounting for Costs Associated with Exit or Disposal Activities

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS
No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and nullifies the guidance of EITF
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in Restructuring)", which recognized
a liability for an exit cost at the date of an entity's commitment to an exit plan. SFAS No. 146 requires that the initial measurement of a liability be at fair value.

SFAS
No. 146 will be effective for exit or disposal activities that are initiated after December 31, 2002. We do not expect adoption of SFAS No. 146 to have a
material impact on our financial condition or operating results.

Acquisitions of Certain Financial Institutions

In July 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain Financial Institutions" ("SFAS No. 147"). SFAS No. 147 provides
interpretive guidance on the application of the purchase method to acquisitions of financial institutions. Except for transactions between two or more mutual enterprises, SFAS No. 146 requires
that transactions involving the acquisition of financial institutions be accounted for in accordance with SFAS 141. In addition, SFAS No. 147 amends SFAS No. 144 to include in its
scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets.
Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that SFAS No. 144 requires
for other long-lived assets that are held and used.

Provisions
of SFAS No. 147, which relate to the application of the purchase method of accounting, are effective for acquisitions for which the date of acquisition is on or after
October 1, 2002. The adoption of SFAS No. 147 did not have a material impact on our financial condition or operating results.

31

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Accounting for Stock-Based CompensationTransition and Disclosure

In January 2003, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation" ("SFAS No. 148"). SFAS No. 148 amends SFAS
No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. If awards of stock-based employee compensation were outstanding
and accounted for under the intrinsic value method of APB Opinion No. 25, "Accounting for Stock" ("APB No. 25") issued to employees, certain disclosures have to be made for any period
for which an income statement is presented.

SFAS
No. 148 shall be effective for financial statements for fiscal years ending after December 15, 2002. We continue to apply APB No. 25 in accounting for stock
based compensation and have adopted the disclosure requirements of SFAS No. 123 and SFAS No. 148.

Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Othersan interpretation of FASB Statements
No. 5, 57, and 107 and rescission of FASB Interpretation No. 34

In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Othersan interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34" ("FIN 45"). FIN 45 addresses the
disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. FIN 45 also clarifies the requirements related to the recognition of a
liability by a guarantor at the inception of a guarantee for the obligations the guarantor has undertaken in issuing that guarantee.

The
initial recognition and initial measurement of a liability of a guarantor shall be applied only on a prospective basis to guarantees issued or modified after December 31,
2002, irrespective of the guarantor's fiscal year-end. The guarantor's previous accounting for guarantees issued prior to the date of this Interpretation's initial application shall not be
revised or restated to reflect the effect of the recognition and measurement provisions of the Interpretation.

We
do not expect the full adoption of FIN 45 to have a material impact on our financial condition or operating results.

Consolidation of Variable Interest Entities

In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 explains how to
identify variable interest entities and how an enterprise assesses its interests in a variable interest entity to decide whether to consolidate that entity. FIN 46 requires existing unconsolidated
variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. Variable interest entities that effectively
disperse risks will not be consolidated unless a single party holds an interest or combination of interests that effectively recombines risks that were previously dispersed.

FIN
46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before
February 1, 2003.

32

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FIN
46 may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more
years with a cumulative-effect adjustment as of the beginning of the first year restated.

We
do not expect the adoption of FIN 46 to have a material impact on our financial condition or operating results.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Our financial performance is impacted by, among other factors, interest rate risk and credit risk. We do not utilize derivatives to mitigate our credit risk,
relying instead on an extensive loan review process and our allowance for loan losses.

Interest
rate risk is the degree of change in net interest income and economic value of equity due to changes in interest rates. This risk is addressed by our Investment Committee which
includes senior management representatives. We manage the balance sheet, in part, to maintain the forecasted changes in net interest income and economic value of equity within acceptable ranges
despite changes in overall interest rates.

Our
exposure to interest rate risk is reviewed on at least a quarterly basis by the Investment Committee. Interest rate risk exposure is measured using interest rate sensitivity analysis
to determine our change in net interest income and economic value of equity resulting from changes in overall interest rates. If potential changes to net interest income and economic value of equity
resulting from hypothetical changes in overall interest rates are outside of board-approved limits, then the board may advise management to adjust its asset and liability mix to bring the interest
rate risk to within Board-approved limits.

Net
Interest Income Simulation

The
impact of interest rate changes on net interest income are measured using net interest income simulation. The various products in our balance sheet are modeled to simulate their
income (and cash flow) behavior in relation to changes in interest rates. Net interest income for the next 12 months is calculated for current interest rates and for immediate and sustained
rate shocks.

The
income simulation model includes various assumptions regarding the repricing relationships for each product. Many of our assets are floating rate loans, which are assumed to reprice
immediately, and to the same extent as the change in market rates according to their contracted index. Our non-term deposit products reprice more slowly, usually changing less than the
change in market rates and at our discretion. As of December 31, 2002, our net interest income simulation analysis indicated that our net interest income for the next 12 months would
increase by 6.0% if rates increased 100 basis points, and decrease by 6.2% if rates decreased 100 basis points.

This
analysis calculates changes in net interest income for a given set of market rate changes and assumptions. It assumes the balance sheet grows modestly, but that its composition
remains similar to the composition at year-end. It does not account for all the factors that impact this analysis including changes that management may make in the balance sheet
composition to mitigate the impact of interest rate changes or secondary impacts such as changes to our credit risk profile as interest rates change. Furthermore, loan prepayment rate estimates and
spread relationships change regularly. Interest rate changes create changes in actual loan prepayment rates that will differ from the market estimates incorporated in the analysis. In addition, the
proportion of adjustable-rate loans in our portfolio could decrease in future periods if market interest rates remain at or decrease below current levels. Changes that vary significantly
from the assumptions may have significant effects on our net interest income.

33

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The
results of this sensitivity analysis should not be relied upon as indicative of actual future results.

Economic Value of Equity

The economic value of equity is computed by estimating the changes in economic, or market, value of equity over a range of potential changes in overall interest
rates. The economic value of equity is the market value of our assets minus the market value of our liabilities. The market value of each asset and liability is the net present value of the expected
future cash flows discounted at market rates after adjustment for rate changes. We measure the impact on market value for an immediate and sustained 100 basis point increase and decrease ("shock") in
interest rates. As of December 31, 2002, our economic value of equity analysis indicated that our economic value of equity would decrease by 2.3% if rates increased 100 basis points, and
increase by 1.9% if rates decreased 100 basis points.

The
economic value of equity is based on the net present values of each product in the portfolio, which in turn is based on cash flows factoring in recent market prepayment estimates.
The discount rates are based on recently observed spread relationships and adjusted for the assumed interest rate changes.

Item 8. Financial Statements and Supplementary Data.

34

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BUSINESS BANCORP AND SUBSIDIARIES        DECEMBER 31, 2002, 2001, AND 2000

Contents

|                                           |                                                                                                                 | Page
|------------------------------------------ | --------------------------------------------------------------------------------------------------------------- | ----
|Independent Auditors' Report               |                                                                                                                 | 36  
|Financial Statements                       |                                                                                                                 |     
|                                           | Consolidated Balance Sheets
December 31, 2002 and 2001                                                          |     
|                                           | Consolidated Statements of Income
For the Years Ended December 31, 2002, 2001, and 2000                         |     
|                                           | Consolidated Statement of Changes in Stockholders' Equity
For the Years Ended December 31, 2002, 2001, and 2000 |     
|                                           | Consolidated Statements of Cash Flows
For the Years Ended December 31, 2002, 2001, and 2000                     |     
|Notes to Consolidated Financial Statements |                                                                                                                 | 42  

35

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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, 2002 and 2001, 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, 2002. 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, 2002 and 2001, 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, 2002, in conformity with accounting principles generally accepted in the United States of America.

/s/VAVRINEK, TRINE, DAY & CO., LLP

Rancho
Cucamonga, California
February 25, 2003

36

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BUSINESS BANCORP AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS        DECEMBER 31, 2002 and 2001

|                                                                          |                                                                                                                                                | 2002                |                                            | 2001        |            
|------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------- | ------------------- | ------------------------------------------ | ----------- | -----------
|Assets                                                                    |                                                                                                                                               
|Cash and due from banks                                                   |                                                                                                                                                | $                   | 32,480,830                                 |             | $          
|Interest-bearing deposits in other financial institutions                 |                                                                                                                                                |                     | 50,000                                     |             |            
|Investment securities                                                     |                                                                                                                                                |                     |                                            |             |            
|                                                                          | Available-for-sale                                                                                                                             |                     |                                            | 179,179,885 |            
|                                                                          | Held-to-maturity                                                                                                                               |                     |                                            |            |            
|Federal Home Loan Bank and Federal Reserve Bank restricted stock, at cost |                                                                                                                                                |                     | 2,640,700                                  |             |            
|Loans, net of unearned income                                             |                                                                                                                                                |                     | 378,100,244                                |             |            
|                                                                          | Less Allowance for Loan Losses                                                                                                                 |                     |                                            | (5,441,897  | )          
|                                                                          |                                                                                                                                                |                     |                                            |             |            
|                                                                          |                                                                                                                                                |                     | Net Loans                                  |             |            
|Premises and equipment                                                    |                                                                                                                                                |                     | 12,360,962                                 |             |            
|Accrued interest receivable                                               |                                                                                                                                                |                     | 2,714,708                                  |             |            
|Deferred tax asset                                                        |                                                                                                                                                |                     | 634,439                                    |             |            
|Other real estate owned, net                                              |                                                                                                                                                |                     | 995,441                                    |             |            
|Goodwill                                                                  |                                                                                                                                                |                     | 20,121,477                                 |             |            
|Intangible assets                                                         |                                                                                                                                                |                     | 1,789,703                                  |             |            
|Other assets                                                              |                                                                                                                                                |                     | 5,305,108                                  |             |            
|                                                                          |                                                                                                                                                |                     |                                            |             |            
|                                                                          |                                                                                                                                                |                     | Total Assets                               |             | $          
|                                                                          |                                                                                                                                                |                     |                                            |             |            
|Liabilities and Stockholders' Equity                                      |                                                                                                                                               
|Liabilities                                                               |                                                                                                                                                |                     |                                            |             |            
|                                                                          | Deposits                                                                                                                                       |                     |                                            |             |            
|                                                                          |                                                                                                                                                | Noninterest-bearing |                                            |             | 184,728,355
|                                                                          |                                                                                                                                                | Interest-bearing    |                                            |             | 346,110,975
|                                                                          |                                                                                                                                                |                     |                                            |             |            
|                                                                          |                                                                                                                                                |                     | Total Deposits                             |             |            
|                                                                          | Borrowed funds                                                                                                                                 |                     |                                            | 23,625,000  |            
|                                                                          | Bancorp Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures                |                     |                                            | 13,462,293  |            
|                                                                          | Accrued interest and other liabilities                                                                                                         |                     |                                            | 4,558,542   |            
|                                                                          |                                                                                                                                                |                     |                                            |             |            
|                                                                          |                                                                                                                                                |                     | 572,485,165                                |             |            
|                                                                          |                                                                                                                                                |                     |                                            |             |            
|Commitments and Contingencies (Note #12)                                  |                                                                                                                                                |                     |                                           |             |            
|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, 3,944,899 and 4,102,255 shares in 2002 and 2001, respectively |                     |                                            | 36,528,583  |            
|                                                                          | Retained earnings                                                                                                                              |                     |                                            | 19,487,159  |            
|                                                                          | Accumulated other comprehensive income, net of taxes                                                                                           |                     |                                            | 2,430,693   |            
|                                                                          |                                                                                                                                                |                     |                                            |             |            
|                                                                          |                                                                                                                                                |                     | Total Stockholders' Equity                 |             |            
|                                                                          |                                                                                                                                                |                     |                                            |             |            
|                                                                          |                                                                                                                                                |                     | Total Liabilities and Stockholders' Equity |             | $          
|                                                                          |                                                                                                                                                |                     |                                            |             |            

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

37

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BUSINESS BANCORP AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF INCOME        FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, and 2000

|                           |                                         | 2002                            |                                                     | 2001       |           | 2000       |           
|-------------------------- | --------------------------------------- | ------------------------------- | --------------------------------------------------- | ---------- | --------- | ---------- | ----------
|Interest Income            |                                         |                                 |                                                     |            |           |            |           
|                           | Interest and fees on loans              |                                 | $                                                   | 30,592,674 |           | $          | 18,255,378
|                           | Interest on investment securities       |                                 |                                                     |            |           |            |           
|                           |                                         | Taxable                         |                                                     |            | 6,339,467 |            |           
|                           |                                         | Exempt from Federal taxes       |                                                     |            | 1,109,628 |            |           
|                           | Interest on deposits                    |                                 |                                                     | 8,516      |           |            | 81,557    
|                           | Interest on Federal funds sold          |                                 |                                                     | 37,307     |           |            | 100,726   
|                           |                                         |                                 |                                                     |            |           |            |           
|                           |                                         |                                 | Total Interest Income                               |            |           | 38,087,592 |           
|                           |                                         |                                 |                                                     |            |           |            |           
|Interest Expense           |                                         |                                 |                                                     |            |           |            |           
|                           | Interest on deposits                    |                                 |                                                     |            |           |            |           
|                           |                                         | NOW and money market accounts   |                                                     |            | 3,141,611 |            |           
|                           |                                         | Savings                         |                                                     |            | 222,223   |            |           
|                           |                                         | Time deposits $100,000 and over |                                                     |            | 1,305,354 |            |           
|                           |                                         | Time deposits under $100,000    |                                                     |            | 1,042,407 |            |           
|                           | Interest on Trust Preferred Securities  |                                 |                                                     | 1,372,480  |           |            | 1,081,111 
|                           | Interest on other borrowings            |                                 |                                                     | 705,364    |           |            | 1,216,412 
|                           |                                         |                                 |                                                     |            |           |            |           
|                           |                                         |                                 | Total Interest Expense                              |            |           | 7,789,439  |           
|                           |                                         |                                 |                                                     |            |           |            |           
|                           |                                         |                                 | Net Interest Income                                 |            |           | 30,298,153 |           
|Provision for Loan Losses  |                                         |                                 | 1,000,000                                           |            |           | 225,000    |           
|                           |                                         |                                 |                                                     |            |           |            |           
|                           |                                         |                                 | Net Interest Income After Provision for Loan Losses |            |           | 29,298,153 |           
|Other Income               |                                         |                                 |                                                     |            |           |            |           
|                           | Service fees                            |                                 |                                                     | 3,272,221  |           |            | 2,409,960 
|                           | Gain on sale of SBA loans               |                                 |                                                     | 281,791    |           |            | 39,779    
|                           | Gain on sale of other real estate owned |                                 |                                                     |           |           |            | 52,779    
|                           | Gain on sale of investments             |                                 |                                                     | 265,681    |           |            | 816,836   
|                           | Other income                            |                                 |                                                     | 1,028,180  |           |            | 750,969   
|                           |                                         |                                 |                                                     |            |           |            |           
|                           |                                         |                                 | Total Other Income                                  |            |           | 4,847,873  |           
|                           |                                         |                                 |                                                     |            |           |            |           
|Other Expenses             |                                         |                                 |                                                     |            |           |            |           
|                           | Salaries and employee benefits          |                                 |                                                     | 12,543,825 |           |            | 8,480,565 
|                           | Occupancy, net                          |                                 |                                                     | 2,372,110  |           |            | 1,072,065 
|                           | Furniture and equipment                 |                                 |                                                     | 1,714,517  |           |            | 1,062,620 
|                           | Other operating expenses                |                                 |                                                     | 8,260,189  |           |            | 5,912,653 
|                           |                                         |                                 |                                                     |            |           |            |           
|                           |                                         |                                 | Total Other Expenses                                |            |           | 24,890,641 |           
|                           |                                         |                                 |                                                     |            |           |            |           
|Income Before Income Taxes |                                         |                                 | 9,255,385                                           |            |           | 3,901,939  |           
|                           |                                         |                                 |                                                     |            |           |            |           
|Income Taxes               |                                         |                                 |                                                     |            |           |            |           
|                           | Current                                 |                                 |                                                     | 4,301,267  |           |            | 1,395,900 
|                           | Deferred                                |                                 |                                                     | (797,208   | )         |            | (884      
|                           |                                         |                                 |                                                     |            |           |            |           
|                           |                                         |                                 | 3,504,059                                           |            |           | 1,395,016  |           
|                           |                                         |                                 |                                                     |            |           |            |           
|Net Income                 |                                         | $                               | 5,751,326                                           |            | $         | 2,506,923  |           
|                           |                                         |                                 |                                                     |            |           |            |           
|Earnings Per Share         |                                         |                                 |                                                     |            |           |            |           
|                           | Basic                                   |                                 | $                                                   | 1.46       |           | $          | 1.18      
|                           |                                         |                                 |                                                     |            |           |            |           
|                           | Diluted                                 |                                 | $                                                   | 1.39       |           | $          | 1.14      
|                           |                                         |                                 |                                                     |            |           |            |           

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

38

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BUSINESS BANCORP AND SUBSIDIARIES        CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY        FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, and 2000

|                           |                                                                                | Number of
Shares
Outstanding                                                 |           | Common
Stock |            | Comprehensive
Income |           | Retained
Earnings |   | Accumulated
Other
Comprehensive
Income |            | Total
Stockholders'
Equity |          
|-------------------------- | ------------------------------------------------------------------------------ | ---------------------------------------------------------------------------- | --------- | ------------ | ---------- | -------------------- | --------- | ----------------- | - | -------------------------------------- | ---------- | -------------------------- | ---------
|Balance, January 1, 2000   |                                                                                | 1,975,961                                                                    |           | $            | 6,256,854  |                      |           |                   |   | $                                      | 13,652,558 |                            | $        
|                           | Stock options exercised, including the realignment of tax benefits of $25,851  |                                                                              | 50,836    |              |            | 389,161              |           |                   |   |                                        |            |                            |          
|                           | Stock issued to 401-K Plan                                                     |                                                                              | 72        |              |            | 611                  |           |                   |   |                                        |            |                            |          
|                           | Comprehensive Income                                                           |                                                                              |           |              |            |                      |           |                   |   |                                        |            |                            |          
|                           |                                                                                | Net income for the period                                                    |           |              |            |                      |           |                   | $ | 2,269,664                              |            |                            | 2,269,664
|                           |                                                                                | Unrealized security holding gains (net of $1,304,866 tax)                    |           |              |            |                      | 1,877,734 |                   |   |                                        |            |                            | 1,877,734
|                           |                                                                                | Reclassification adjustment for realized gains (net of $17,762 tax expense)  |           |              |            |                      |           |                   |   | (25,559                                | )          |                            |          
|                           |                                                                                |                                                                              |           |              |            |                      |           |                   |   |                                        |            |                            |          
|                           |                                                                                | Total comprehensive income                                                   |           |              |            |                      |           |                   | $ | 4,121,839                              |            |                            |          
|                           |                                                                                |                                                                              |           |              |            |                      |           |                   |   |                                        |            |                            |          
|Balance, December 31, 2000 |                                                                                | 2,026,869                                                                    |           |              | 6,646,626  |                      |           |                   |   |                                        | 15,922,222 |                            |          
|                           | Stock options exercised                                                        |                                                                              | 7,200     |              |            | 40,000               |           |                   |   |                                        |            |                            |          
|                           | Stock issued in connection with purchase of MCB Financial Corporation          |                                                                              | 1,873,370 |              |            | 28,454,745           |           |                   |   |                                        |            |                            |          
|                           | Cash dividend paid                                                             |                                                                              |           |              |            |                      |           |                   |   |                                        |            | (40,681                    | )        
|                           | Comprehensive Income                                                           |                                                                              |           |              |            |                      |           |                   |   |                                        |            |                            |          
|                           |                                                                                | Net income for the period                                                    |           |              |            |                      |           |                   | $ | 2,506,923                              |            |                            | 2,506,923
|                           |                                                                                | Unrealized security holding gains (net of $373,029 tax)                      |           |              |            |                      |           |                   |   | 533,381                                |            |                            |          
|                           |                                                                                | Reclassification adjustment for realized gains (net of $336,164 tax expense) |           |              |            |                      |           |                   |   | (480,672                               | )          |                            |          
|                           |                                                                                |                                                                              |           |              |            |                      |           |                   |   |                                        |            |                            |          
|                           |                                                                                | Total comprehensive income                                                   |           |              |            |                      |           |                   | $ | 2,559,632                              |            |                            |          
|                           |                                                                                |                                                                              |           |              |            |                      |           |                   |   |                                        |            |                            |          
|Balance, December 31, 2001 |                                                                                | 3,907,439                                                                    |           |              | 35,141,371 |                      |           |                   |   |                                        | 18,388,464 |                            |          
|                           | Stock dividends paid                                                           |                                                                              | 194,816   |              |            | 2,689,098            |           |                   |   |                                        |            | (2,689,098                 | )        
|                           | Cash paid in lieu of fractional shares                                         |                                                                              |           |              |            |                      |           |                   |   |                                        |            | (5,423                     | )        
|                           | Stock options exercised, including the realignment of tax benefits of $268,463 |                                                                              | 198,456   |              |            | 1,745,704            |           |                   |   |                                        |            |                            |          
|                           | Cash dividend paid                                                             |                                                                              |           |              |            |                      |           |                   |   |                                        |            | (154,337                   | )        
|                           | Stock repurchased                                                              |                                                                              | (355,812  | )            |            | (3,047,590           | )         |                   |   |                                        |            | (1,803,773                 | )        
|                           | Comprehensive Income                                                           |                                                                              |           |              |            |                      |           |                   |   |                                        |            |                            |          
|                           |                                                                                | Net income for the period                                                    |           |              |            |                      |           |                   | $ | 5,751,326                              |            |                            | 5,751,326
|                           |                                                                                | Unrealized security holding gains (net of $1,091,107 tax)                    |           |              |            |                      |           |                   |   | 1,560,150                              |            |                            |          
|                           |                                                                                | Reclassification adjustment for realized gains (net of $109,339 tax expense) |           |              |            |                      |           |                   |   | (156,342                               | )          |                            |          
|                           |                                                                                |                                                                              |           |              |            |                      |           |                   |   |                                        |            |                            |          
|                           |                                                                                | Total comprehensive income                                                   |           |              |            |                      |           |                   | $ | 7,155,134                              |            |                            |          
|                           |                                                                                |                                                                              |           |              |            |                      |           |                   |   |                                        |            |                            |          
|Balance, December 31, 2002 |                                                                                | 3,944,899                                                                    |           | $            | 36,528,583 |                      |           |                   |   | $                                      | 19,487,159 |                            | $        
|                           |                                                                                |                                                                              |           |              |            |                      |           |                   |   |                                        |            |                            |          

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

39

---



BUSINESS BANCORP AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS        FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, and 2000

|                                     |                                                                                   | 2002                                                                      |                                           | 2001         |           | 2000       |             
|------------------------------------ | --------------------------------------------------------------------------------- | ------------------------------------------------------------------------- | ----------------------------------------- | ------------ | --------- | ---------- | ------------
|Cash Flows From Operating Activities |                                                                                   |                                                                           |                                           |              |           |            |             
|                                     | Net Income                                                                        |                                                                           | $                                         | 5,751,326    |           | $          | 2,506,923   
|                                     | Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities  |                                                                           |                                           |              |           |            |             
|                                     |                                                                                   | Depreciation and amortization of premises and equipment                   |                                           |              | 1,304,439 |            |             
|                                     |                                                                                   | Amortization of intangibles                                               |                                           |              | 341,335   |            |             
|                                     |                                                                                   | Amortization of premium on trust preferred securities                     |                                           |              | (33,020   | )          |             
|                                     |                                                                                   | Provision for loan losses                                                 |                                           |              | 1,000,000 |            |             
|                                     |                                                                                   | Provision for losses on other real estate owned                           |                                           |              | 67,209    |            |             
|                                     |                                                                                   | Net gain on sale of assets                                                |                                           |              | (288,763  | )          |             
|                                     |                                                                                   | Decrease/(increase) in accrued interest receivable                        |                                           |              | 170,866   |            |             
|                                     |                                                                                   | (Increase)/decrease in deferred assets                                    |                                           |              | (489,998  | )          |             
|                                     |                                                                                   | Net amortization/accretion of premiums/discounts on investment securities |                                           |              | 3,263,511 |            |             
|                                     |                                                                                   | FHLB stock dividend                                                       |                                           |              | (113,300  | )          |             
|                                     |                                                                                   | Net increase in cash surrender value of life insurance policies           |                                           |              | (126,905  | )          |             
|                                     |                                                                                   | Increase in other assets                                                  |                                           |              | (557,446  | )          |             
|                                     |                                                                                   | (Decrease)/increase in interest payable and other liabilities             |                                           |              | (329,290  | )          |             
|                                     |                                                                                   | (Increase)/decrease in prepaid taxes                                      |                                           |              |          |            |             
|                                     |                                                                                   |                                                                           |                                           |              |           |            |             
|                                     |                                                                                   |                                                                           | Net Cash Provided By Operating Activities |              |           | 9,959,964  |             
|                                     |                                                                                   |                                                                           |                                           |              |           |            |             
|Cash Flows From Investing Activities |                                                                                   |                                                                           |                                           |              |           |            |             
|                                     | Net change in interest-bearing deposits in other financial institutions           |                                                                           |                                           |             |           |            | 3,314,000   
|                                     | Proceeds from maturities of available-for-sale securities                         |                                                                           |                                           | 22,100,000   |           |            | 100,000     
|                                     | Proceeds from sales of investment securities available-for-sale                   |                                                                           |                                           | 8,420,328    |           |            | 34,734,683  
|                                     | Proceeds from maturities of held-to-maturity securities                           |                                                                           |                                           | 1,000,000    |           |            | 1,000,000   
|                                     | Principal reduction of mortgage-backed securities                                 |                                                                           |                                           | 60,581,383   |           |            | 29,071,973  
|                                     | Purchase of investment securities available-for-sale                              |                                                                           |                                           | (101,966,354 | )         |            | (115,379,319
|                                     | Purchase of investment securities held-to-maturity                                |                                                                           |                                           |             |           |            | (1,034,609  
|                                     | Purchase of Valley Merchants Bank (net of cash and cash equivalents acquired)     |                                                                           |                                           |             |           |            |            
|                                     | Purchase of MCB Financial Corporation (net of cash and cash equivalents acquired) |                                                                           |                                           | (577,498     | )         |            | 16,909,655  
|                                     | Purchase of Federal Home Loan Bank and Federal Reserve Bank stock                 |                                                                           |                                           | (1,303,400   | )         |            | (2,288,750  
|                                     | Redemption of Federal Home Loan Bank stock                                        |                                                                           |                                           | 1,888,800    |           |            | 852,600     
|                                     | Purchase of life insurance policies                                               |                                                                           |                                           | (182,000     | )         |            |            
|                                     | Net decrease/(increase) in loans to customers                                     |                                                                           |                                           | 9,148,706    |           |            | (24,518,327 
|                                     | Recoveries of loans previously written-off                                        |                                                                           |                                           | 92,612       |           |            | 209,886     
|                                     | Capital expenditures                                                              |                                                                           |                                           | (3,960,666   | )         |            | (1,895,339  
|                                     | Proceeds from sale of equipment                                                   |                                                                           |                                           | 43,600       |           |            | 28,282      
|                                     | Proceeds from sale of other real estate owned                                     |                                                                           |                                           |             |           |            | 175,838     
|                                     |                                                                                   |                                                                           |                                           |              |           |            |             
|                                     |                                                                                   |                                                                           | Net Cash Used In Investing Activities     |              |           | (4,714,489 | )           
|                                     |                                                                                   |                                                                           |                                           |              |           |            |             

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

40

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|                                                     |                                                                                                                                             | 2002                                                                  |                                                     | 2001        |         | 2000       |           
|---------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------- | --------------------------------------------------- | ----------- | ------- | ---------- | ----------
|Cash Flows From Financing Activities                 |                                                                                                                                             |                                                                       |                                                     |             |         |            |           
|                                                     | Net increase in demand deposits, NOW accounts, savings accounts, and money market deposits                                                  |                                                                       | $                                                   | 30,564,294  |         | $          | 22,438,277
|                                                     | Net (decrease)/increase in certificates of deposit                                                                                          |                                                                       |                                                     | (17,810,988 | )       |            | 20,272,073
|                                                     | Net (decrease)/increase in FHLB borrowing                                                                                                   |                                                                       |                                                     | (16,598,796 | )       |            | 29,499,132
|                                                     | Issuance of Bancorp obligated mandatorily redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures |                                                                       |                                                     |            |         |            |          
|                                                     | Stock options exercised, net of tax effect                                                                                                  |                                                                       |                                                     | 1,477,241   |         |            | 40,000    
|                                                     | Cash dividends paid                                                                                                                         |                                                                       |                                                     | (154,337    | )       |            | (40,681   
|                                                     | Stock repurchased                                                                                                                           |                                                                       |                                                     | (4,851,363  | )       |            |          
|                                                     | Stock issued through 401(K) plan                                                                                                            |                                                                       |                                                     |            |         |            |          
|                                                     | Cash paid in lieu of fractional shares                                                                                                      |                                                                       |                                                     | (5,423      | )       |            |          
|                                                     |                                                                                                                                             |                                                                       |                                                     |             |         |            |           
|                                                     |                                                                                                                                             |                                                                       | Net Cash (Used In)/Provided By Financing Activities |             |         | (7,379,372 | )         
|                                                     |                                                                                                                                             |                                                                       |                                                     |             |         |            |           
|Net (Increase)/Decrease in Cash and Cash Equivalents |                                                                                                                                             |                                                                       | (2,133,897                                          | )           |         | 17,693,613 |           
|Cash and Cash Equivalents,Beginning of Year          |                                                                                                                                             |                                                                       | 34,614,727                                          |             |         | 16,921,114 |           
|                                                     |                                                                                                                                             |                                                                       |                                                     |             |         |            |           
|Cash and Cash Equivalents,End of Year                |                                                                                                                                             | $                                                                     | 32,480,830                                          |             | $       | 34,614,727 |           
|                                                     |                                                                                                                                             |                                                                       |                                                     |             |         |            |           
|Supplemental Disclosure of Cash Flows Information    |                                                                                                                                             |                                                                       |                                                     |             |         |            |           
|                                                     | Interest paid                                                                                                                               |                                                                       | $                                                   | 7,680,138   |         | $          | 6,144,374 
|                                                     |                                                                                                                                             |                                                                       |                                                     |             |         |            |           
|                                                     | Income taxes paid                                                                                                                           |                                                                       | $                                                   | 2,455,000   |         | $          | 1,450,000 
|                                                     |                                                                                                                                             |                                                                       |                                                     |             |         |            |           
|Non-Cash Investing Activities                        |                                                                                                                                             |                                                                       |                                                     |             |         |            |           
|                                                     | Net change in accumulated other comprehensive income                                                                                        |                                                                       | $                                                   | 1,403,808   |         | $          | 52,709    
|                                                     |                                                                                                                                             |                                                                       |                                                     |             |         |            |           
|                                                     | Transfer from loans to OREO                                                                                                                 |                                                                       | $                                                   | 990,066     |         | $          |          
|                                                     |                                                                                                                                             |                                                                       |                                                     |             |         |            |           
|                                                     | Origination of loans to facilitate OREO                                                                                                     |                                                                       | $                                                   |            |         | $          | 304,111   
|                                                     |                                                                                                                                             |                                                                       |                                                     |             |         |            |           
|Non-Cash Financing Activities                        |                                                                                                                                             |                                                                       |                                                     |             |         |            |           
|                                                     | Tax effect of stock options exercised                                                                                                       |                                                                       | $                                                   | 268,463     |         | $          |          
|                                                     |                                                                                                                                             |                                                                       |                                                     |             |         |            |           
|Supplemental Disclosure                              |                                                                                                                                             |                                                                       |                                                     |             |         |            |           
|                                                     | Net change in assets/liabilities due to acquisition                                                                                         |                                                                       |                                                     |             |         |            |           
|                                                     |                                                                                                                                             | Increase in interest-bearing deposits in other financial institutions |                                                     | $           |        |            | $         
|                                                     |                                                                                                                                             |                                                                       |                                                     |             |         |            |           
|                                                     |                                                                                                                                             | Increase in investments                                               |                                                     | $           |        |            | $         
|                                                     |                                                                                                                                             |                                                                       |                                                     |             |         |            |           
|                                                     |                                                                                                                                             | Increase in net loans                                                 |                                                     | $           |        |            | $         
|                                                     |                                                                                                                                             |                                                                       |                                                     |             |         |            |           
|                                                     |                                                                                                                                             | Increase in premises and equipment                                    |                                                     | $           |        |            | $         
|                                                     |                                                                                                                                             |                                                                       |                                                     |             |         |            |           
|                                                     |                                                                                                                                             | Increase in other real estate owned                                   |                                                     | $           |        |            | $         
|                                                     |                                                                                                                                             |                                                                       |                                                     |             |         |            |           
|                                                     |                                                                                                                                             | Increase in goodwill and other intangible assets                      |                                                     | $           | 577,498 |            | $         
|                                                     |                                                                                                                                             |                                                                       |                                                     |             |         |            |           
|                                                     |                                                                                                                                             | Increase in other assets                                              |                                                     | $           |        |            | $         
|                                                     |                                                                                                                                             |                                                                       |                                                     |             |         |            |           
|                                                     |                                                                                                                                             | Increase in demand, money market and savings deposits                 |                                                     | $           |        |            | $         
|                                                     |                                                                                                                                             |                                                                       |                                                     |             |         |            |           
|                                                     |                                                                                                                                             | Increase in certificates of deposit                                   |                                                     | $           |        |            | $         
|                                                     |                                                                                                                                             |                                                                       |                                                     |             |         |            |           
|                                                     |                                                                                                                                             | Increase in other borrowings                                          |                                                     | $           |        |            | $         
|                                                     |                                                                                                                                             |                                                                       |                                                     |             |         |            |           
|                                                     |                                                                                                                                             | Increase in trust preferred securities                                |                                                     | $           |        |            | $         
|                                                     |                                                                                                                                             |                                                                       |                                                     |             |         |            |           
|                                                     |                                                                                                                                             | Increase in other liabilities                                         |                                                     | $           |        |            | $         
|                                                     |                                                                                                                                             |                                                                       |                                                     |             |         |            |           

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

41

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BUSINESS BANCORP AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        DECEMBER 31, 2002, 2001, and 2000

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, which is a Delaware statutory trust, and MCB Statutory Trust I, which is a Connecticut statutory trust, are subsidiaries of Business Bancorp. These trusts were
formed for the exclusive purpose of issuing and selling trust preferred securities. 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 fifteen branches 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 originating 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.

42

---

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, 2002.

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

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.

43

---

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.

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 and amortization expense was $1,304,439, $902,069, and $730,220 for the years
ended December 31, 2002, 2001, and 2000, respectively.

J.Goodwill and Other Intangibles

Goodwill
represents the excess of the purchase price over the estimated fair value of the net assets associated with acquisition transactions of the Company accounted for as a purchase.
Core deposit intangibles represent the intangible value of depositor relationships resulting from deposit liabilities assumed in acquisitions and are amortized not more than fifteen years. Goodwill
generated from purchase business combinations consummated prior to the issuance of SFAS No. 142,"Accounting for Goodwill and Other Intangible
Assets,"was amortized on a straight-line basis over a life not to exceed 20 years. Under the new statement, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized, but will be tested for impairment at least annually. The Company adopted SFAS No. 142,"Accounting for Goodwill and Other
Intangible Assets,"effective January 1, 2002. The Statement also requires intangible assets with definite lives to be amortized over their respective estimated useful
lives or to their estimated residual values and reviewed for impairment in accordance with SFAS No. 144,"Accounting for Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of."Amortization of core deposit intangibles charged to operations for 2002, 2001, and 2000 was approximately $341,000,
$130,000, and $130,000, respectively.

44

---

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,
the unguaranteed portion of the loan retained, servicing assets and interest-only strip receivable, 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

Deferred
income taxes are computed using the asset and liability method, which recognizes a liability or asset representing the tax effects, based on current tax law, of future
deductible or taxable amounts attributable to events that have been recognized in the consolidated financial statements. A valuation allowance is established to reduce the deferred tax asset to the
level at which it is "more likely than not" that the tax asset or benefits will be realized. Realization of tax benefits of deductible temporary differences and operating loss carryforwards depends on
having sufficient taxable income of an appropriate character within the carryforward periods.

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.

N.Advertising

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

O.Earnings Per Share (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

45

---

measured as the excess, if any, of the quoted market price of the Bank's stock at the date of the grant over the amount an employee must pay to acquire the stock.

Had
compensation cost for the Bank's stock option plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS
No. 123, the Bank's net income and earnings per share would have been reduced to the pro forma amount indicated below:

2002

2001

2000Net income:As reported

$
5,751,326

$
2,506,923

$
2,269,664Stock-based compensation using the intrinsic value method








Stock-based compensation that would have been reported using the fair value method of SFAS 123


(285,192
)

(184,295
)

(72,467
)Pro forma net income

$
5,466,134

$
2,322,628

$
2,197,197Basic earnings per share:As reported

$
1.46

$
1.18

$
1.08Pro forma


1.39


1.09


1.05Diluted earnings per share:As reported

$
1.39

$
1.14

$
1.07Pro forma


1.32


1.06


1.04


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.Financial Instruments

In
the ordinary course of business, the Bank has entered into off-balance sheet financial instruments consisting of commitments to extend credit, commercial letters of
credit, and standby letters of credit as described in Note #12.

S.Disclosure About Fair Value of Financial Instruments

SFAS
No. 107 specifies the disclosure of the estimated fair value of financial instruments. The Bank's estimated fair value amounts have been determined by the Bank using
available market information and appropriate valuation methodologies.

However,
considerable judgment is required to develop the estimates of fair value. Accordingly, the estimates are not necessarily indicative of the amounts the Bank could have realized
in a current

46

---

market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

Although
management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of
these financial statements since the balance sheet date and, therefore, current estimates of fair value may differ significantly from the amounts presented in the accompanying notes.

T.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.

U.Current Accounting Pronouncements

In
August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 143,"Accounting for Asset Retirement
Obligations,"which requires the Bank to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated
with the retirement of long-term assets. SFAS No. 143 is effective for the Bank in 2003; however, management does not believe adoption will have a material impact on the Bank's
financial statements.

V.Reclassifications

Certain
amounts in the 2001 and 2000 consolidated financial statements have been reclassified to conform with the 2002 presentation.

Note #2Investment Securities

At December 31, 2002 and 2001, the investment securities portfolio was comprised of securities classified as available-for-sale and
held-to-maturity, in accordance 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.

47

---

Available-for-Sale Securities

The amortized cost and estimated fair value of available-for-sale securities at December 31, 2002 and 2001, were as follows:

|                                                |       | December 31, 2002
|----------------------------------------------- | ----- | -----------------
|
|U.S. Treasury obligations                       |       | $                
|Obligations of state and political subdivisions |       |                  
|Mortgage backed securities                      |       |                  
|Corporate bonds                                 |       |                  
|                                                |       |                  
|                                                | Total |                  
|                                                |       |                  

|                                                         |       | December 31, 2001
|-------------------------------------------------------- | ----- | -----------------
|
|U.S. Treasury obligations                                |       | $                
|Obligations of U.S. Government agencies and corporations |       |                  
|Obligations of state and political subdivisions          |       |                  
|Mortgage backed securities                               |       |                  
|Corporate bonds                                          |       |                  
|                                                         |       |                  
|                                                         | Total |                  
|                                                         |       |                  

Held-to-Maturity Securities

The Company had no held-to-maturity securities at December 31, 2002. The amortized cost and estimated fair value of
held-to-maturity securities at December 31, 2001, were as follows:

December 31, 2001Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair ValueU.S. Treasury obligations

$
1,025,758

$
3,617

$


$
1,029,375


48

---

The
amortized cost and fair values of investment securities available-for-sale at December 31, 2002, by contractual maturity are shown below.

Securities
Available-for-SaleAmortized
Cost

Fair ValueAmounts maturing inOne year or less

$
3,033,298

$
3,053,440After one year through five years


99,987


104,791After five years through ten years


10,426,305


10,811,353After ten years


161,489,667


165,210,301$
175,049,257

$
179,179,885


Proceeds
from sales and maturities of investment securities available-for-sale during 2002, 2001, and 2000 were $30,520,328, $34,834,683, and $15,614,593,
respectively. In 2002 gross gains on those sales were $265,681. There were no gross losses. 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. Proceeds from principal reductions of mortgage-backed securities in 2002, 2001, and 2000 were $60,581,383, $29,071,973,
and $8,649,254, respectively.

Included
in stockholders' equity at December 31, 2002 and 2001 are $2,430,693 of net unrealized gains, (net of $1,699,935 estimated tax expense), and $1,026,885 of net unrealized
gains, (net of $718,166 estimated tax expense) respectively, in investment securities available-for-sale.

Securities
having a carrying value and a market value of approximately $107,020,000 and $117,235,000 at December 31, 2002 and 2001, 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, 2002 and 2001, was as follows (certain reclassifications of loans were made during 2002 in
conjunction with our systems conversion. As a
result, the loans shown below at December 31, 2002 are classified differently than the loans shown at December 31, 2001.):

2002

2001Real estate

$
338,909,470

$
287,556,603Commercial


33,440,774


90,194,627Installment


6,187,451


10,100,658All other (including overdrafts)


604,444


1,704,579379,142,139


389,556,467Less: Deferred loan fees


(1,041,895
)

(1,109,120
)Loans, Net of Deferred Loan Fees

$
378,100,244

$
388,447,347


49

---

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:

2002

2001

2000Recorded investment in impaired loans

$
797,000

$
1,947,000

$
Related allowance for loan losses


180,478


223,502


Average recorded investment in impaired loans


2,389,000


1,639,000


198,000Cash receipts applied to reduce principal balance





192,884


9,702Cash receipts recognized as interest income





7,123


269


At
December 31, 2002 and 2001, the Bank had approximately $249,000 and $18,000 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:

2002

2001

2000Balance, Beginning of Year

$
4,557,616

$
1,842,715

$
1,241,733Provision charged to expense


1,000,000


225,000


255,000Allowance on loans acquired from MCB Financial Corporation in 2001 and Valley Merchants Bank in 2000





2,436,400


464,825Loans charged-off


(208,331
)

(156,385
)

(275,812
)Recoveries


92,612


209,886


156,969Balance, End of Year

$
5,441,897

$
4,557,616

$
1,842,715


Note #5Premises and Equipment

Major classifications of premises and equipment are summarized as follows:

2002

2001Buildings and improvements

$
10,656,262

$
8,042,799Furniture, equipment, and software


8,143,293


7,246,890Construction in progress


89,694


150,56818,889,249


15,440,257Less: accumulated depreciation and amortization


(8,513,522
)

(7,358,329
)10,375,727


8,081,928Land


1,985,235


1,643,325$
12,360,962

$
9,725,253


50

---

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 $1,384,471 and $506,600 at
December 31, 2002 and 2001, respectively, and is included in other assets. 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, 2002 and
2001, are summarized as follows:

December 31,2002

2001Condensed Results of OperationsRevenues

$
4,599,655

$
3,201,144Expenses


(4,108,818
)

(3,141,156
)Net income

$
490,837

$
59,988Condensed Financial PositionTotal assets

$
3,966,514

$
2,265,060Total liabilities

$
1,141,800

$
1,231,183


Note #7Goodwill and Other Intangible Assets

The Company adopted SFAS 142 on January 1, 2002. Upon adoption, the Company no longer amortizes goodwill. The following table presents the effect
the adoption of SFAS 142 would have had on the period ended December 31, 2001 had SFAS 142 been applied retroactively:

Twelve months ended December 31,2002

2001Net income

$
5,751,326

$
2,506,923Addback: Goodwill amortization





524,508Adjusted net income

$
5,751,326

$
3,031,431Basic earnings per share:Net income

$
1.46

$
1.18Goodwill amortization





0.24Adjusted net income

$
1.46

$
1.42Diluted earnings per share:Net income

$
1.39

$
1.14Goodwill amortization





0.24Adjusted net income

$
1.39

$
1.38


51

---

The
following is a summary of core deposit intangibles as of December 31:

2002

2001Gross carrying amount

$
2,799,000

$
2,799,000Accumulated amortization


(1,009,297
)

(667,962
)$
1,789,703

$
2,131,038


Amortization
of core deposit intangible assets for each of the next five years is estimated to be approximately $341,000 per year.

SFAS
No. 142 also requires an analysis of impairment of goodwill annually, or more frequently, upon the occurrence of certain events. During 2002, the Company completed the
required impairment tests of goodwill. Based upon this evaluation, the Company's goodwill was not impaired at December 31, 2002. The Company has no indefinite-lived intangible assets.

Note #8Income Taxes

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

2002

2001

2000Federal Income TaxCurrent

$
3,098,144

$
960,600

$
1,002,920Deferred


(611,478
)

(29,938
)

(286,560
)2,486,666


930,662


716,360State Franchise TaxCurrent


1,203,123


435,300


444,630Deferred


(185,730
)

29,054


(66,190
)1,017,393


464,354


378,440Total

$
3,504,059

$
1,395,016

$
1,094,800


As
a result of the following items, the total tax expense for 2002, 2001, and 2000, was different than the amount computed by applying the statutory U.S. Federal income
tax rate to income before taxes and extraordinary item:

|                                                               |  | 2002 |           | 2001 |      | 2000 |  
|-------------------------------------------------------------- |  | ---- | --------- | ---- | ---- | ---- | -
|
|Federal rate                                                   |  | $    | 3,146,831 |      | 34.0 | %    | $
|Changes due to State Franchise tax, net of Federal tax benefit |  |      | 671,479   |      | 7.3  |      |  
|Exempt interest                                                |  |      | (335,849  | )    | (3.6 | )    |  
|Other                                                          |  |      | 21,598    |      | 0.2  |      |  
|                                                               |  |      |           |      |      |      |  
|                                                               |  | $    | 3,504,059 |      | 37.9 | %    | $
|                                                               |  |      |           |      |      |      |  

52

---

Net deferred tax assets are determined from the following cumulative timing differences between book and tax return recognition as of December 31, 2002 and 2001:

2002

2001Deferred Tax AssetsAllowance for loan losses

$
1,753,000

$
1,275,000Other real estate


50,000


30,000Deferred income


587,000


393,000Accruals not currently deductible


815,000


880,000Other


63,374


6,7103,268,374


2,584,710Deferred Tax LiabilitiesFixed assets


215,000


129,000Intangible assets


719,000


532,500Valuation allowance for investment securities


1,699,935


797,0002,633,935


1,458,500Net Deferred Tax Assets

$
634,439

$
1,126,210


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

Note #9Certificates of Deposit

The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2002 and 2001 was $64,510,326 and $52,364,608, respectively.

At
December 31, 2002, the scheduled maturities of time deposits are as follows:

Year Ending December 31,2003

$
97,519,8322004


3,345,0202005


569,3072006


108,7352007


75,766Thereafter


128,810Total

$
101,747,470


Note #10Borrowings

Pursuant to collateral agreements with the Federal Home Loan Bank ("FHLB"), advances are secured by all capital stock in the FHLB and certain mortgage-backed
securities. Of the FHLB advances of $23,625,000 at December 31, 2002, $20,025,000 mature in 2003 and $3,600,000 mature in 2004. The combined advances bear a weighted average interest rate of
2.75%. Of the FHLB advances

53

---

of $39,624,132 at December 31, 2001, $30,199,132 mature in 2002, $4,825,000 mature in 2003 and $3,600,000 mature in 2004. The combined advances bear interest at a weighted average rate of
3.48%.

At
December 31, 2001, the Bank had a $599,664 in Treasury Tax and loan note option with the Federal Reserve Bank. Approximately $1,064,000 in securities is pledged as collateral.
The note option was repaid during 2002. The interest rate was an average of the weekly Federal funds rate less 25 basis points.

Note #11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.

On
December 31, 2001, the Bancorp completed the acquisition of 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.

54

---

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, 2002, $13.5 million outstanding of trust preferred securities qualified as Tier 1 capital.

Note #12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,

Amount2003

$
1,142,4632004


1,044,0202005


919,2572006


843,7132007


697,321Thereafter


2,602,248Total

$
7,249,022


The
total rental expenditure by the Bank was approximately $1,184,000, $362,000, and $230,000 for 2002, 2001, and 2000, 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 credit 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, 2002 and 2001, the Bank had commitments to extend credit of approximately $90,931,000 and $103,244,000, including standby letters of
credit of approximately $1,577,000 and $3,310,000, respectively.

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

55

---

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 #13Dividends

During 2002, the Board of Directors declared $0.01 per share quarterly cash dividends as follows:

Date Declared

Record Date

Payable Date

Total DividendFebruary 28, 2002

March 15, 2002

March 29, 2002

$
38,715May 23, 2002

June 28, 2002

June 12, 2002

$
36,263August 22, 2002

September 13, 2002

September 27, 2002

$
39,516November 21, 2002

December 13, 2002

December 27, 2002

$
39,843


On
May 23, 2002, the Board of Directors declared a 5% stock dividend payable on June 28, 2002 to shareholders of record on June 14, 2002. Cash was paid in lieu of
fractional shares at a rate of $14.50 and amounted to $5,423. All references in the financial statements and notes to financial statements to number of shares and per share amounts of the Bancorp's
stock have been restated to give retroactive effect to this dividend.

Note #14Stockholder Rights Plan

In January 2002, the Company adopted a Stockholder Rights Plan designed to maximize the long-term value of the Company and to protect the
Company's stockholders from improper takeover tactics and takeover bids that are not fair to all shareholders.

In
accordance with the Plan, preferred share purchase rights were distributed as a dividend at the rate of one right for each common share held of record as of the close of business on
February 15, 2002. Each preferred share purchase right will entitle stockholders 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, 2015.

Note #15Stock Repurchase

In January 2002, the Board of Directors authorized the Company to repurchase up to $5,000,000 of the Company's common stock in the open market or in
private transactions. As of December 31, 2002, the Company repurchased 266,387 shares under the 2002 repurchase program for a total purchase of $3,618,145.

During
January 2002, the Company repurchased 89,425 shares (after giving retroactive effect for a 5% stock dividend in 2002) of the Company's common stock, for a total purchase
price of $1,233,218

56

---

from stockholders who did not vote in favor of the merger between Business Bancorp and MCB Financial Corporation. In order to qualify for dissenters' rights, a stockholder must not have voted in
favor of the merger and must have made a written demand on the Bancorp within 30 days after stockholders were mailed the notice of approval of the merger.

Note #16Stock Option Plan

Under the terms of the stock option agreement, the Bancorp's incentive stock option and nonqualified plan ratified by the stockholders in 1994 and amended in 1997
was terminated due to the merger with MCB Financial Corporation. All options previously granted under the plan remained in full force and effect.

During
2002, the Company adopted the Business Bancorp 2002 Stock Option Plan. The plan provides for issuance of up to 840,000 shares of the Company's unissued common stock to officers,
employees and nonemployee directors and consultants at not less than the fair market value of such shares on the date the option is granted. The Plan will terminate on January 24, 2012 unless
the Board of Directors terminate the Plan earlier. Options granted vest at a rate of not less than 20 percent per year and expire no later than ten years from the date of grant.

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 2002, 2001, and 2000,
respectively; risk-free rates of 3.39%, 4.30%, and 5.14%, dividend yield of .28% for 2002, .34% for 2001, volatility of 20%, 17%, and 40%, and expected life of 7.5 years for 2002,
five years for 2001 and seven years for 2000.

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

|                                                               |  | 2002     |   | 2001 |          | 2000
|-------------------------------------------------------------- |  | -------- | - | ---- | -------- | ----
|
|
|
|Outstanding, beginning of year                                 |  | 0        |   |      | 562,865  |     
|Additional options authorized                                  |  | 840,000  |   |      |         |     
|Issued in connection with merger                               |  |         |   |      |         |     
|Granted                                                        |  | (275,250 | ) |      | 275,250  |     
|Exercised                                                      |  |         |   |      | (198,456 | )   
|Forfeited                                                      |  | 10,500   |   |      | (39,557  | )   
|                                                               |  |          |   |      |          |     
|Outstanding, end of year                                       |  | 575,250  |   |      | 600,102  |     
|                                                               |  |          |   |      |          |     
|Options exercisable at year-end                                |  |          |   |      | 471,731  |     
|Weighted-average fair value of options granted during the year |  |          |   | $    | 3.84     |     

57

---

A summary of the options outstanding and exercisable as of December 31, 2002 is presented below:

Options OutstandingOptions ExercisableWeighted
Average
Exercise
PriceRange of Exercise Price

Number
Outstanding
12/31/02

Average
Life In
Years

Number
Outstanding
12/31/02

Average
Price$  2.63 - $  6.17

106,240

5.64

$
5.29

106,240

$
5.29$  7.43 - $11.44

239,612

5.35

$
9.25

239,612

$
8.45$12.38 - $14.91

254,250

9.24

$
12.76

125,879

$
12.44600,102

7.05

$
10.04

471,731

$
9.21


Note #17Employee Benefit Plans

In 2002, the Company established an Employee Stock Ownership Plan (ESOP) to provide an ownership interest in the Company and retirement benefits to substantially
all full-time employees. The amount of the annual contributions is at the discretion of the Board of Directors. Expense for 2002 totaled $100,000.

Note #18Other Operating Expenses

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

2002

2001

2000Data processing

$
1,629,671

$
1,198,417

$
946,958Legal and other professional fees


1,184,515


381,321


530,045Telephone, postage and supplies


1,258,071


914,958


853,362Marketing and promotion


416,971


471,551


490,746Amortization of intangibles


341,335


654,471


400,845FDIC insurance and regulatory assessments


152,051


97,751


82,422Other expense


3,277,575


2,194,184


1,723,374$
8,260,189

$
5,912,653

$
5,027,752


Note #19Deferred Directors' Fees

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

58

---

Note #20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:

|                                                     |                      | 2002 |           | 2001      |           | 2000      |  
|---------------------------------------------------- | -------------------- | ---- | --------- | --------- | --------- | --------- | -
|
|Net Income as Reported                               |                      | $    | 5,751,326 |           |           |           | $
|Shares Outstanding at Year End                       |                      |      |           |           | 3,944,899 |           |  
|Impact of Weighting Shares Purchased During the Year |                      |      |           |           | (4,236    | )         |  
|                                                     |                      |      |           |           |           |           |  
|                                                     | Used in Basic EPS    |      |           | 5,751,326 |           | 3,940,663 |  
|Dilutive Effect of Outstanding Stock Options         |                      |      |           |           | 202,126   |           |  
|                                                     |                      |      |           |           |           |           |  
|                                                     | Used in Dilutive EPS |      | $         | 5,751,326 |           | 4,142,789 |  
|                                                     |                      |      |           |           |           |           |  

Note #21Profit Sharing Plan

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 25% of each participant's eligible contribution for the plan year not to exceed 3% of the employee's compensation. Future contributions are at the discretion of management and the
board of directors. The Bank contributed approximately $149,000, $162,000, and $135,000 to the Plan for 2002, 2001, and 2000, respectively.

Note #22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:

2002

2001Balance, Beginning of Year

$
72,584

$
504,754Additions


990,066


Sales





(427,170
)Valuation adjustment and other reductions


(67,209
)

(5,000
)Balance, End of Year

$
995,441

$
72,584


The
balances at December 31, 2002 and 2001 are shown net of reserve.

59

---

Note #23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:

2002

2001

2000Balance, Beginning of Year

$
54,889

$
208,665

$
203,696Provision charged to other expense


67,209


5,000


64,586Charge-offs and other reductions





(158,776
)

(59,617
)Balance, End of Year

$
122,098

$
54,889

$
208,665


Note #24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.

An
analysis of loans to directors and officers is as follows:

Outstanding Balance, January 1, 2002

$
6,175,000Additional loans made


698,000Repayments


(2,958,000
)Outstanding Balance, December 31, 2002

$
3,915,000


Undisbursed
loan amounts to related parties amounted to approximately $2,477,000 and $1,740,000 at December 31, 2002 and 2001, respectively.

At
December 31, 2002 and 2001, the Bank held deposits from related parties of approximately $5,187,000 and $5,790,000, respectively.

Note #25Servicing Assets

A summary of the changes in servicing assets follows:

2002

2001Balance, Beginning of Year

$
62,011

$
62,320Increase from loan sales


102,978


13,786Amortization and other decreases charged to income


(21,526
)

(14,095
)Balance, End of Year

$
143,463

$
62,011


The
estimated fair value of the servicing assets approximated book value at December 31, 2002. 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.

60

---

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 $20,169,358 and $25,164,125 for the years ended
December 31, 2002 and December 31, 2001, respectively.

Note #26Salary Continuation Plan

On August 31, 2000 and December 4, 1997, the Company acquired all of the assets and liabilities of Valley Merchants Bank and High Desert National
Bank, respectively. As a result of the acquisitions, the Company 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 approximately $27,000, $32,000, and $25,000 for the years ended December 31, 2002,
2001, and 2000, respectively. The Company is committed to pay $400,000 and $520,000, (on a future value basis) over the pay out periods on the plans.

On
December 31, 2001, the Company acquired all of the assets and liabilities of MCB Financial Corporation and Subsidiaries. As a result of the acquisition, the Company has a
Deferred Compensation Plan for an executive officer. Under the terms of the Plan, participant may defer a portion of their cash compensation and receive a minimum of 50% matching contribution from the
Company, which vests over the employee's remaining years of employment to retirement. The Company has guaranteed the participant a certain minimum return on their contributions and on the Company's
matching contributions. The net expense incurred by the Company for the year ended December 31, 2002 was $18,383.

Note #27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.

The
following table presents the carrying amounts and fair values of financial instruments at December 31, 2002 and 2001. SFAS No. 107 defines the fair value of a financial
instrument as the

61

---

amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.

|                              |                                                                                                                                 | 2002 |   | 2001       
|----------------------------- | ------------------------------------------------------------------------------------------------------------------------------- | ---- | - | -----------
|
|Assets                        |                                                                                                                                 |      |   |            
|                              | Cash and cash equivalents                                                                                                       |      | $ | 32,480,830 
|                              | Interest-bearing deposits in other banks                                                                                        |      |   | 50,000     
|                              | Investment securities                                                                                                           |      |   | 179,179,855
|                              | Federal Home Loan Bank and Federal Reserve Bank restricted stock, at cost                                                       |      |   | 2,640,700  
|                              | Loans                                                                                                                           |      |   | 378,100,244
|                              | Accrued interest receivable                                                                                                     |      |   | 2,714,708  
|Liabilities                   |                                                                                                                                 |      |   |            
|                              | Non-interest bearing deposits                                                                                                   |      |   | 184,728,355
|                              | Interest bearing deposits                                                                                                       |      |   | 346,110,975
|                              | Accrued interest payable                                                                                                        |      |   | 1,175,495  
|                              | Other borrowings                                                                                                                |      |   | 23,625,000 
|                              | Bancorp obligated mandatorily redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures |      |   | 13,462,293 
|
|Off-balance Sheet Instruments |                                                                                                                                 |      |   |            
|                              | Commitments to extend credit and standby letters of credit                                                                      |      | $ | 90,931,000 

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









62

---





Note #28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,
2002, that the Bancorp and Bank exceed all capital adequacy requirements to which they are subject.

As
of December 31, 2002, 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 Bancorp
must maintain

63

---

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):

Amount of Capital RequiredActual Capital

To Be Adequately
Capitalized

To Be
Well CapitalizedAmount

Ratio

Amount

Ratio

Amount

RatioAs of December 31, 2002Total capital to risk-weighted assetsBusiness Bancorp

$
52,705

12.0
%
$
35,100

8.0
%
$
43,874

10.0
%Business Bank of California


50,577

11.6
%
$
35,039

8.0
%
$
43,799

10.0
%Tier 1 capital to risk-weighted assetsBusiness Bancorp


47,263

10.8
%
$
17,550

4.0
%
$
26,325

6.0
%Business Bank of California


45,135

10.3
%
$
17,519

4.0
%
$
26,279

6.0
%Tier 1 capital to average assetsBusiness Bancorp


47,263

7.8
%
$
24,160

4.0
%
$
30,199

5.0
%Business Bank of California


45,135

7.5
%
$
24,140

4.0
%
$
30,175

5.0
%As of December 31, 2001Total capital to risk-weighted assetsBusiness 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 assetsBusiness 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 assetsBusiness 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
%


B.Dividend Restrictions

The
FDIC and the DFI 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 #29Acquisition

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 and was being amortized over fifteen years on a straight-line basis. The results of VMB's operations are included in those reported by the
Bancorp beginning on September 1, 2000.

64

---

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

1999Revenues

$
27,456

$
27,456Net income attributable to common shareholders


2,726


2,726Earnings per common share:Basic

$
1.37

$
1.37Diluted


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 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 been included in the consolidated financial statements beginning January 1, 2002. Goodwill arising from the transaction totaled
$12,424,951.

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.

65

---

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

$
16,657Investments


27,219Loans


180,977Premises and equipment


3,223Intangible assets


1,294Goodwill


13,490Other assets


2,380Total Assets Acquired


245,240Noninterest-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.

During
2002, the Company incurred additional costs in connection with the acquisition of MCB Financial Corporation totaling $577,498. This amount has been added to the balance of the
reported goodwill as of December 31, 2002.

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

For the Year Ended
December 31,2001

2000Revenues

$
47,627

$
42,942Net Income


5,282


5,100Earnings per common shareBasic

$
1.33

$
1.33Diluted

$
1.28

$
1.28


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.

66

---

Note #30Condensed Financial Information of Parent Company Only

|                                        |                            | 2002              |            | 2001       |           
|--------------------------------------- | -------------------------- | ----------------- | ---------- | ---------- | ----------
|Condensed Balance Sheet                 |                           
|Assets                                  |                            |                   |            |            |           
|                                        | Cash and cash equivalents  |                   | $          | 1,786,592  |           
|                                        | Investment in subsidiaries |                   |            | 69,077,977 |           
|                                        | Other assets               |                   |            | 1,937,052  |           
|                                        |                            |                   |            |            |           
|                                        |                            | Total Assets      |            | $          | 72,801,621
|                                        |                            |                   |            |            |           
|Liabilities and Stockholders' Equity    |                            |                   |            |            |           
|                                        | Trust preferred securities |                   |            | 13,865,293 |           
|                                        | Other liabilities          |                   |            | 489,893    |           
|                                        | Stockholders' equity       |                   |            | 58,446,435 |           
|                                        |                            |                   |            |            |           
|                                        |                            | Total Liabilities |            | $          | 72,801,621
|                                        |                            |                   |            |            |           
|Condensed Statement of Income           |                           
|Equity in undistributed income of Bank  |                            | $                 | 6,736,203  |            | $         
|Equity in undistributed income of Trust |                            |                   |           |            |           
|Other income                            |                            |                   | 25,624     |            |           
|Interest on Trust Preferred Securities  |                            |                   | (1,416,051 | )          |           
|Other expenses                          |                            |                   | (283,398   | )          |           
|                                        |                            |                   |            |            |           
|Income Before Income Taxes              |                            |                   | 5,062,378  |            |           
|Income Tax Benefit                      |                            |                   | 688,948    |            |           
|                                        |                            |                   |            |            |           
|Net Income                              |                            | $                 | 5,751,326  |            | $         
|                                        |                            |                   |            |            |           

67

---

|                                             |                                                                                   | 2002                                                                  |                                           | 2001       |           
|-------------------------------------------- | --------------------------------------------------------------------------------- | --------------------------------------------------------------------- | ----------------------------------------- | ---------- | ----------
|Statements of Cash Flows                     |                                                                                  
|Cash Flows from Operating Activities         |                                                                                   |                                                                       |                                           |            |           
|                                             | Net income                                                                        |                                                                       | $                                         | 5,751,326  |           
|                                             | Adjustments to reconcile net income to net cash used by operating activities:     |                                                                       |                                           |            |           
|                                             |                                                                                   | Equity in undistributed income of Bank                                |                                           |            | (6,736,203
|                                             |                                                                                   | Equity in undistributed income of Trust                               |                                           |            |          
|                                             |                                                                                   | Amortization of premium on trust preferred securities                 |                                           |            | (33,020   
|                                             |                                                                                   | Amortization of deferred issuance costs on trust preferred securities |                                           |            | 16,000    
|                                             |                                                                                   | Net change in assets and liabilities                                  |                                           |            | (230,507  
|                                             |                                                                                   |                                                                       |                                           |            |           
|                                             |                                                                                   |                                                                       | Net cash used by operating activities     |            |           
|                                             |                                                                                   |                                                                       |                                           |            |           
|Cash Flows from Investing Activities         |                                                                                   |                                                                       |                                           |            |           
|                                             | Purchase of MCB Financial Corporation (net of cash and cash equivalents acquired) |                                                                       |                                           |           |           
|                                             | Dividends from subsidiaries                                                       |                                                                       |                                           | 5,710,000  |           
|                                             | Investment in subsidiaries                                                        |                                                                       |                                           | (88,687    | )         
|                                             |                                                                                   |                                                                       |                                           |            |           
|                                             |                                                                                   |                                                                       | Net cash provided by investing activities |            |           
|                                             |                                                                                   |                                                                       |                                           |            |           
|Cash Flows from Financing Activities         |                                                                                   |                                                                       |                                           |            |           
|                                             | Proceeds from sale of common stock                                                |                                                                       |                                           | 1,477,241  |           
|                                             | Cash dividends paid                                                               |                                                                       |                                           | (154,337   | )         
|                                             | Stock repurchased                                                                 |                                                                       |                                           | (4,851,363 | )         
|                                             | Cash paid in lieu of fractional shares                                            |                                                                       |                                           | (5,423     | )         
|                                             |                                                                                   |                                                                       |                                           |            |           
|                                             |                                                                                   |                                                                       | Net cash used in financing activities     |            |           
|                                             |                                                                                   |                                                                       |                                           |            |           
|Net Increase in Cash and Cash Equivalents    |                                                                                   |                                                                       | 855,027                                   |            |           
|Cash and Cash Equivalents, Beginning of Year |                                                                                   |                                                                       | 931,565                                   |            |           
|                                             |                                                                                   |                                                                       |                                           |            |           
|Cash and Cash Equivalents, End of Year       |                                                                                   | $                                                                     | 1,786,592                                 |            | $         
|                                             |                                                                                   |                                                                       |                                           |            |           

Note #31Subsequent Event

On February 27, 2003, the Board of Directors approved a plan to expand its stock repurchase program providing for the Company to repurchase 10% of its
common stock outstanding in open market and private transactions. The repurchase will be financed using its available cash. This program is in addition to the $5 million repurchase program
announced in February of 2002.

On
February 27, 2003, the Board of Directors declared a cash dividend of $0.01 per share payable March 28, 2003 to shareholders of record on March 14, 2003.

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Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.

None.

PART III

Item 10. Directors and Executive Officers of the Registrant

The information required to be furnished pursuant to this item will be set forth under the captions "Election of Directors" and "Executive Officers" 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 2003 Annual Meeting of
Shareholders to be held on May 22, 2003, and is incorporated herein by reference.

Item 11. Executive Compensation

The information required to be furnished pursuant to this item will be set forth under the caption "Executive Compensation" of the Proxy Statement, and is
incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The following table summarizes information as of December 31, 2002 relating to equity compensation plans of Business Bancorp pursuant to which grants of
options to acquire shares may be granted from time to time.

|Plan category                                              |  | Number of securities
to be issued upon
exercise of outstanding
options (a) |  | Weighted-average
exercise price of
outstanding
options (b) |       | Number of securities
remaining available for future
issuance under equity compensation
plans (excluding securities
reflected in column (a))
|---------------------------------------------------------- |  | -------------------------------------------------------------------------- |  | ---------------------------------------------------------- | ----- | -------------------------------------------------------------------------------------------------------------------------------------------
|Equity compensation plans approved by security holders     |  | 600,102                                                                    |  | $                                                          | 10.04 |                                                                                                                                            
|Equity compensation plans not approved by security holders |  | 0                                                                          |  |                                                            |      |                                                                                                                                            

The
security ownership information required to be furnished pursuant to this item will be set forth under the captions "Security Ownership of Certain Beneficial Owners" and "Security
Ownership of Management" of the Proxy Statement, and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions.

The information required to be furnished pursuant to this item will be set forth under the caption "Certain Relationships and Related Transactions Regarding The
Company" of the Proxy Statement, and is incorporated herein by reference.

Item 14. Controls and Procedures

Within the 90 days prior to the date of filing this report, we carried out an evaluation under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to
Rule 13a-14(c) under the Securities Exchange Act of 1934, as amended. Based
on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective.

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There
have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of our evaluation including any
corrective actions with regard to significant deficiencies and material weaknesses.

PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.





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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 31st day of March, 2003.

| |  | By | /s/ALAN J. LANEAlan J. Lane President and Chief Executive
Officer
(Principal Executive Officer);
Director                                                     
| |  | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |    |                                                                                                                                                               
| |  | By | /s/PATRICK E. PHELANPatrick E. Phelan Executive Vice
President / Chief Financial Officer
(Principal Financial Officer)
(Principal Accounting Officer)
Director

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 31st day of March, 2003.

|Name                                    |  | Title   
|--------------------------------------- |  | --------
|                                        |  |         
|/s/D. WILLIAM BADERD. William Bader     |  | Director
|/s/NEAL T. BAKERNeal T. Baker           |  | Director
|/s/JOHN E. DUCKWORTHJohn E. Duckworth   |  | Director
|/s/CHARLES O. HALLCharles O. Hall       |  | Director
|/s/TIMOTHY J. JORSTADTimothy J. Jorstad |  | Director
|                                        |  |         

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|/s/ALAN J. LANEAlan J. Lane                     |  | Director
|----------------------------------------------- |  | --------
|/s/CATHERINE H. MUNSONCatherine H. Munson       |  | Director
|/s/PATRICK E. PHELANPatrick E. Phelan           |  | Director
|/s/GARY T. RAGGHIANTIGary T. Ragghianti         |  | Director
|/s/JOHN L. RIDDELLJohn L. Riddell               |  | Director
|/s/ARNOLD H. STUBBLEFIELDArnold H. Stubblefield |  | Director
|/s/JOHN L. STUBBLEFIELDJohn L. Stubblefield     |  | Director
|/s/RANDALL J. VERRUERandall J. Verrue           |  | Director

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CERTIFICATIONS UNDER  SECTION 302 OF  THE SARBANES OXLEY ACT OF 2002

I,
Alan J. Lane, certify that:





Date:
March 31, 2003

|    |                                                     |  | 
|--- | --------------------------------------------------- |  | 
|By: | /s/ALAN J. LANEAlan J. Lane Chief Executive
Officer |  | 

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CERTIFICATIONS UNDER  SECTION 302 OF  THE SARBANES OXLEY ACT OF 2002

I,
Patrick E. Phelan, certify that:





Date:
March 31, 2003

|    |                                                                                            |  | 
|--- | ------------------------------------------------------------------------------------------ |  | 
|By: | /s/PATRICK E. PHELANPatrick E. Phelan Executive Vice
President and
Chief Financial Officer |  | 

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Exhibit Index

|Exhibit |  | Description                                                                                                                                                                                                                   
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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                                                                                                                                                                                                     
|3.2     |  | Bylaws                                                                                                                                                                                                                        
|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    |  | Business Bank of California 1994 Stock Option Plan(3)                                                                                                                                                                         
|10.2    |  | MCB Financial Corporation 1999 Stock Option Plan(5)                                                                                                                                                                           
|10.3    |  | Marin Community Bank, N.A. 1989 Stock Option Plan(6)                                                                                                                                                                          
|10.4    |  | Business Bancorp 2002 Stock Option Plan(7)                                                                                                                                                                                    
|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                                                                                                                                                                                    
|99.1    |  | Certification of Registrant's Chief Executive Officer Pursuant to 18 U.S.C. Section 1350                                                                                                                                      
|99.2    |  | Certification of Registrant's Chief Financial Officer Pursuant to 18 U.S.C. Section 1350                                                                                                                                      

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