<PAGE>   1

                            Washington, D.C.  20549

                                  FORM 10-KSB

(Mark one)

   [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
       THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required)

   For the fiscal year ended December 31, 1996

   [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
       SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)

                         Commission file number 2-79912

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

           California                                    95-3764395
 (State or other jurisdiction of                      (I.R.S. Employer
 incorporation or organization)                      Identification No.)


         11 Golden Shore  Long Beach, California           90802
         (Address of Principal Executive Offices)        (Zip Code)

                   Issuer's telephone number: (310) 491-1111

          Securities registered pursuant to Section 12(b) of the Act:
                                      None

          Securities registered pursuant to Section 12(g) of the Act:
                                      None

     Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes   X     No
    -----      -----
    
     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]

State issuer's revenues for its most recent fiscal year: $15,088,089

As of February 28, 1997, the aggregate market value of the common stock held by
non-affiliates of the registrant was: $18,840,036

Number of shares of common stock of the registrant outstanding of February 28,
1997:  1,415,214
<PAGE>   2
                                     PART I


ITEM 1.  BUSINESS.

General

                 Harbor Bancorp (the "Company") is a corporation that was
organized under the laws of the State of California on July 23, 1982 and
commenced business on December 17, 1982 when, pursuant to a reorganization, the
Bancorp acquired all of the voting stock of Harbor Bank (the "Bank").  As a
bank holding company the Company is subject to the Bank Holding Company Act of
1956, as amended (the "BHC Act").  A general description of the business of
each of the Company's subsidiaries is set forth below.

                 The Company's principal business is to serve as a holding
company for the Bank and its subsidiaries and for other banking or
banking-related subsidiaries which the Company may establish or acquire.  The
Company's principal source of income is dividends from its subsidiaries.  Legal
limitations are imposed on the amount of dividends that may be paid and loans
that may be made by the Bank and its subsidiaries to the Company.  As of
December 31, 1996, the Company had total consolidated assets of approximately
$200 million, total consolidated net loans of approximately $141 million, total
consolidated deposits of approximately $183 million and total stockholder's
equity of approximately $16 million.  The Company does not have any industry
segments.

                 Harbor Bank Properties was incorporated under the laws of the
State of California on September 11, 1975 and is a wholly-owned subsidiary of
the Company.  This company is presently inactive.

                 Harbor Bank was incorporated under the laws of the State of
California on December 3, 1973, and was licensed by the California
Superintendent of Banks (the "Superintendent") and commenced operations as a
California state-chartered bank on May 13, 1974.  It currently operates six (6)
offices, two offices in Long Beach, one office in Los Alamitos, one office in
Irvine, one office in Fountain Valley and one office in Huntington Beach,
California.  As of December 31, 1996, the Bank had approximately $200 million
in assets, approximately $141 million in net loans, and approximately $184
million in deposits.

                 H.B.  Funding is a California corporation that was
incorporated on February 17, 1983 and is wholly-owned by the Bank.  H.B.
Funding operates as a mortgage company and currently brokers loans to other
lending institutions on a fee basis.

                 The Bank provides a wide range of commercial banking services
primarily for professionals and small and medium-sized businesses.  Services
include those traditionally offered by commercial banks of similar size and
character in California, such



                                      -1-
<PAGE>   3
as checking, interest-bearing checking ("NOW") and savings accounts, Money
Market Deposit Accounts and Super NOW accounts, commercial, real estate,
personal, home improvement, automobile, and other installment and term loans,
travelers checks, safe deposit boxes, collection services, and telephone
transfers; however, the Bank places special emphasis on services tailored to
meet the needs of the professional and business market, such as Small Business
Administration ("SBA") loans, and payroll and accounting packages and billing
programs.  As part of the Bank's wholesale orientation, it makes few consumer
loans and does not actively solicit personal as opposed to business accounts.
The Bank does not have a trust department; however, the Bank makes arrangements
with correspondent institutions to provide trust services as well as investment
and international banking services.

                 On August 3, 1993, the Bank and FDIC executed a Memorandum of
Understanding ("FDIC Memorandum").  The FDIC Memorandum required the Bank to
take certain actions, including the following:  (i) increase Board of Directors
participation; (ii) maintain Tier 1 capital equal to or exceeding six and
one-half (6.5%) percent of the Bank's total assets; (iii) chargeoff or collect
certain assets classified loss, and reduce certain other assets classified
substandard in accordance with a specified reduction schedule; (iv) restrict
extensions of credit to borrowers who had loans previously charged-off or
classified loss and uncollected, or substandard; (v) revise, adopt, and
implement the following:  lending and collection policies, profit plan,
business/strategic plan, liquidity and funds management policy, and internal
routine and control policy; (vi) review adequacy of the reserve for loan losses
and establish a comprehensive policy for determining the adequacy of the
reserve for loan losses; (vii) eliminate and/or correct any and all violations
of law; (viii) file with the FDIC amended Consolidated Reports of Condition and
Income as of December 31, 1993; and (ix) furnish written progress reports
detailing the compliance with the FDIC Memorandum.

                 As a result of an examination conducted by the FDIC as of
January 8, 1996, the FDIC determined that the Bank was in compliance with the
terms of the FDIC Memorandum, and the FDIC removed the FDIC Memorandum on May
22, 1996.

                 On January 3, 1995, the Bank and the Superintendent executed a
Memorandum of Understanding ("Superintendent's Memorandum").  The
Superintendent's Memorandum required the Bank to take certain actions,
including the following:  (i) retain management acceptable to the
Superintendent; (ii) maintain tangible shareholders equity in an amount which
equals or exceeds six and one-half (6.5%) percent of total tangible assets;
(iii) charge-off or collect all assets classified loss, and reduce certain
other assets classified substandard and doubtful in accordance with a specified
reduction schedule; (iv) maintain an adequate allowance for loan losses, and
review the adequacy of the allowance prior to the end of each calendar quarter;
(v) maintain an adequate valuation allowance for other real estate owned; (vi)
correct all violations





                                     - 2 -
<PAGE>   4
of law; (vii) revise, adopt and implement the following:  lending and
collection policies,  investment policy, internal loan and operations audit
policy, liquidity policy, a profit plan and month-to-month budget for 1995, and
an annual schedule to review and adopt all policies; (viii) avoid distributions
to its shareholder without the prior written consent of the Superintendent; and
(ix) furnish written progress reports to the Superintendent on a quarterly
basis.

                 As a result of a request made by the Board of Directors of
Harbor Bank on May 28, 1996, the Superintendent determined that the Bank was in
compliance with the terms of the Superintendent's Memorandum, and the
Superintendent removed the Superintendent's Memorandum on June 12, 1996.

                 As a result of an examination conducted by the Federal Reserve
Bank of San Francisco ("FRB") as of March 31, 1994, the Company and the FRB
executed a Memorandum of Understanding (the "FRB Memorandum") dated October 25,
1994.  In accordance with the terms of the FRB Memorandum,  the Company agreed
to take certain actions including the following:  (i) declare or pay any
dividends without prior written approval; (ii) submit a written plan to
maintain an adequate capital position;  (iii) submit a written statement
concerning steps to be taken to improve the condition of the Bank and the
Company; (iv)  submit written intercompany tax allocation and payment policies;
(v) shall not enter into any transaction which would result in lending or
collateral violations;  (vi) increase borrowings or debt without prior written
approval; (vii) enter into any agreements to acquire any interest in any
entities or portfolios, or engage in any new line of business without prior
written approval; and (viii) form a committee of board of directors to monitor
compliance with the provisions of the FRB Memorandum.

Based on the Company's overall improved financial condition and the adoption of
certain resolutions by the Company's Board of Directors, the FRB terminated the
FRB Memorandum effective December 3, 1996.


Supervision and Regulation

         Harbor Bancorp

                 The capital stock of the Company is subject to the
registration requirements of the Securities Act of 1933.  The common stock of
the Bank is exempt from such requirements.  The Company is also subject to the
periodic reporting requirements of the Securities Exchange Act of 1934, which
include, but are not limited to, the filing of annual, quarterly and other
reports with the Securities and Exchange Commission.

                 The Company, as a bank holding company, is subject to
regulation under the BHC Act and is registered with and subject to the
supervision of the Federal Reserve Board.  Under the BHC Act, a bank holding
company is defined as any company which directly or





                                     - 3 -
<PAGE>   5
indirectly owns, controls or holds with power to vote, 25% or more of the
voting shares of any bank or company that is or becomes a bank holding company
under the BHC Act or which controls the election of a majority of the directors
of the bank or company.  The Company is required to obtain the prior approval
of the Federal Reserve Board before it may acquire all or substantially all of
the assets of any bank, or ownership or control of voting shares of any bank
if, after giving effect to such acquisition, the Company would own or control,
directly or indirectly, more than 5% of such bank.  The BHC Act prohibits the
Company from acquiring any voting shares of, interest in, or all or
substantially all of the assets of a bank located outside the State of
California unless the laws of such state specifically authorize such
acquisition.

                 Under the BHC Act, the Company may not engage in any business
other than managing or controlling banks or furnishing services to its
subsidiaries, except that it may engage in certain activities which, in the
opinion of the Federal Reserve Board, are so closely related to banking or to
managing or controlling banks as to be a proper incident thereto.  The Company
is also prohibited, with certain exceptions, from acquiring direct or indirect
ownership or control of more than 5% of the voting shares of any company unless
the company is engaged in such activities.  The Federal Reserve Board's
approval must be obtained before the shares of any such company can be acquired
and, in certain cases, before any approved company can open new offices.  In
making such determinations the Federal Reserve Board considers whether the
performance of such activities by a bank holding company would offer advantages
to the public, such as greater convenience, increased competition, or gains in
efficiency, which outweigh possible adverse effects such as undue concentration
of resources, decreased or unfair competition, conflicts of interest, or
unsound banking practices.  Further, the Federal Reserve Board is empowered to
differentiate between activities commenced de novo and activities commenced by
acquisition, in whole or in part, of a going concern.

                 Although the entire scope of permitted activities is uncertain
and cannot be predicted, the major non-banking activities that have been
permitted to bank holding companies with certain limitations are: making,
acquiring or servicing loans that would be made by a mortgage, finance, credit
card or factoring company; operating an industrial loan company leasing real
and personal property; acting as an insurance agent, broker, or principal with
respect to insurance that is directly related to the extension of credit by the
bank holding company or any of its subsidiaries and limited to repayment of the
credit in the event of death, disability or involuntary unemployment; issuing
and selling money orders, savings bonds and travelers checks; performing
certain trust company services; performing appraisals of real estate and
personal property; providing investment and financial advice; providing data
processing services; providing courier services; providing management
consulting advice to nonaffiliated depository institutions; arranging
commercial real estate equity financing; providing certain securities brokerage
services; underwriting and





                                     - 4 -
<PAGE>   6
dealing in government obligations and money market instruments; providing
foreign exchange advisory and transactional services; acting as a futures
commission merchant; providing investment advice on financial futures and
options on futures; providing consumer financial counseling; providing tax
planning and preparation services; providing check guaranty services; engaging
in collection agency activities; and operating a credit bureau.

                 The Company's primary source of income (other than interest
income earned on Company capital) is the receipt of dividends and management
fees from its subsidiaries.  The Bank's ability to make such payments to the
Company is subject to certain statutory and regulatory restrictions.

                 As a bank holding company, the Company is required to file
reports with the Federal Reserve Board and to provide such additional
information as the Federal Reserve Board may require.  The Federal Reserve
Board also has the authority to examine the Company and each of its
subsidiaries with the cost thereof to be borne by the Company.

                 In addition, banking subsidiaries of bank holding companies
are subject to certain restrictions imposed by federal law in dealings with
their holding companies and other affiliates.  Subject to certain exceptions
set forth in the Federal Reserve Act, a bank can loan or extend credit to an
affiliate, purchase or invest in the securities of an affiliate, purchase
assets from an affiliate, accept securities of an affiliate as collateral
security for a loan or extension of credit to any person or company or issue a
guarantee, acceptance or letter of credit on behalf of an affiliate only if the
aggregate amount of the above transactions of the Bank and its subsidiaries
does not exceed 10% of the Bank's capital stock and surplus on a per affiliate
basis or 20% of the Bank's capital stock and surplus on an aggregate affiliate
basis.  In addition, such transaction must be on terms and conditions that are
consistent with safe and sound banking practices.  A bank and its subsidiaries
generally may not purchase a low-quality asset, as that term is defined in the
Federal Reserve Act, from an affiliate.  Such restrictions also prevent a
holding company and its other affiliates from borrowing from a banking
subsidiary of the holding company unless the loans are secured by collateral.

                 The BHC Act also prohibits a bank holding company or any of
its subsidiaries from acquiring voting shares or substantially all the assets
of any bank located in a state other than the state in which the operations of
the bank holding company's banking subsidiaries are principally conducted
unless such acquisition is expressly authorized by statutes of the state in
which the bank to be acquired is located.  Legislation recently adopted in
California permits out-of-state bank holding companies to acquire California
banks.  See "Effect of Governmental Policies and Recent Legislation" later in
this section.

                 The Company and its subsidiaries are prohibited from





                                     - 5 -
<PAGE>   7
engaging in certain tie-in arrangements in connection with any extension of
credit, sale or lease of property or furnishing of services.  For example, with
certain exceptions the Bank may not condition an extension of credit on a
customer's obtaining other services provided by it, the Company or any other
subsidiary or on a promise by the customer not to obtain other services from a
competitor.

                 The BHC Act and regulations of the Federal Reserve Board also
impose certain constraints on the redemption or purchase by a bank holding
company of its own shares of stock.

                 The Federal Reserve Board has cease and desist powers to cover
parent bank holding companies and nonbanking subsidiaries where action of a
parent bank holding company or its non-financial institutions represent an
unsafe or unsound practice or violation of law.  The Federal Reserve Board has
the authority to regulate debt obligations (other than commercial paper) issued
by bank holding companies by imposing interest ceilings and reserve
requirements on such debt obligations.

                 The ability of the Company to pay dividends to its
shareholders is subject to the restrictions set forth in the California General
Corporation Law (the "Corporation Law").  The Corporation Law provides that a
corporation may make a distribution to its shareholders if the corporation's
retained earnings equal at least the amount of the proposed distribution.  The
Corporation Law further provides that, in the event that sufficient retained
earnings are not available for the proposed distribution, a corporation may
nevertheless make a distribution to its shareholders if it meets two
conditions, which generally are as follows: (i) the corporation's assets equal
at least 1-1/4 times its liabilities; and (ii) the corporation's current assets
equal at least its current liabilities or, if the average of the corporation's
earnings before taxes on income and before interest expense for the two
preceding fiscal years was less than the average of the corporation's interest
expense for such fiscal years then the corporation's current assets equal at
least 1-1/4 times its current liabilities.

Harbor Bank

                 Banks are extensively regulated under both federal and state
law.  The Bank, as a California state chartered bank, is subject to primary
supervision, periodic examination and regulation by the Superintendent and the
FDIC.

                 The Bank is insured by the FDIC, which currently insures
deposits of each member bank to a maximum of $100,000 per depositor.  For this
protection, the Bank, as is the case with all insured banks, pays a semi-annual
statutory assessment and is subject to the rules and regulations of the FDIC.
Although the Bank is not a member of the Federal Reserve System, it is
nevertheless subject to certain regulations of the Federal Reserve Board.





                                     - 6 -
<PAGE>   8
         Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of the Bank.  State and
federal statutes and regulations relate to many aspects of the Bank's
operations, including reserves against deposits, interest rates payable on
deposits, loans, investments, mergers and acquisitions, borrowings, dividends
and locations of branch offices.  Further, the Bank is required to maintain
certain levels of capital.

                 There are statutory and regulatory limitations on the amount
of dividends which may be paid to the stockholders by the Bank.  California law
restricts the amount available for cash dividends by state-chartered banks to
the lesser of retained earnings or the bank's net income for its last three
fiscal years (less any distributions to stockholders made during such period).
In the event a bank has no retained earnings or net income for its last three
fiscal years, cash dividends may be paid in an amount not exceeding the net
income for such bank's last preceding fiscal year only after obtaining the
prior approval of the Superintendent.

                 The FDIC also has authority to prohibit the Bank from engaging
in what, in the FDIC's opinion, constitutes an unsafe or unsound practice in
conducting its business.  It is possible, depending upon the financial
condition of the bank in question and other factors, that the FDIC could assert
that the payment of dividends or other payments might, under some
circumstances, be such an unsafe or unsound practice.

                 Banks are 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 its 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 such affiliates.  Such restrictions prevent
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 in any other affiliate is limited to 10% 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 other controlling
persons of the Bank.  Additional restrictions on transactions with affiliates
may be imposed on the Bank under the prompt corrective action provisions of the
FDIC Improvement Act.

         Potential and Existing Enforcement Actions

                 Commercial banking organizations, such as the Bank, may be
subject to potential enforcement actions by the FDIC and the Superintendent 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.  Enforcement actions may include the
imposition of





                                     - 7 -
<PAGE>   9
a conservator or receiver, the issuance of a cease-and-desist order that can be
judicially enforced, the termination of insurance of deposits, the imposition
of civil money penalties, the issuance of directives to increase capital, the
issuance of formal and informal agreements, the issuance of removal and
prohibition orders against institution-affiliated parties and the imposition of
restrictions and sanctions under the prompt corrective action provisions of the
FDIC Improvement Act.

                 The regulations of these various agencies govern most aspects
of the Bank's business, including required reserves on deposits, investments,
loans, certain of their check clearing activities, issuance of securities,
payment of dividends, opening of branches, and numerous other areas.  As a
consequence of the extensive regulation of commercial banking activities in the
United States, the Bank's business is particularly susceptible to changes in
California and the Federal legislation and regulations which may have the
effect of increasing the cost of doing business, limiting permissible
activities, or increasing competition.

Effect of Governmental Policies and Recent Legislation

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

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

                 From time to time, legislation is enacted which has the effect
of increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial intermediaries.  Proposals to change the laws and regulations
governing the operations and





                                     - 8 -
<PAGE>   10
taxation of banks, bank holding companies and other financial intermediaries
are frequently made in Congress, in the California legislature and before
various bank regulatory and other professional agencies.  The likelihood of any
major changes and the impact such changes might have on the Bank are impossible
to predict.  Certain of the potentially significant changes which have been
enacted and proposals which have been made recently are discussed below.

         Federal Deposit Insurance Corporation Improvement Act of 1991

                 On December 19, 1991, the FDIC Improvement Act was enacted
into law.  Set forth below is a brief discussion of certain portions of this
law and implementing regulations that have been adopted or proposed by the
Federal Reserve Board, the Comptroller of the Currency ("Comptroller"), the
Office of Thrift Supervision ("OTS") and the FDIC (collectively, the "federal
banking agencies").

         Standards for Safety and Soundness

                 The FDIC Improvement Act requires the federal banking agencies
to prescribe, by regulation, standards for all insured depository institutions
and depository institution holding companies relating to internal controls,
loan documentation, credit underwriting, interest rate exposure and asset
growth.  Standards must also be prescribed for classified loans, earnings and
the ratio of market value to book value for publicly traded shares.  The FDIC
Improvement Act also requires the federal banking agencies to issue uniform
regulations prescribing standards for real estate lending that are to consider
such factors as the risk to the deposit insurance fund, the need for safe and
sound operation of insured depository institutions and the availability of
credit.  Further, the FDIC Improvement Act requires the federal banking
agencies to establish standards prohibiting compensation, fees and benefit
arrangements that are excessive or could lead to financial loss.

                 In July 1992, the federal banking agencies issued a joint
advance notice of proposed rule making requesting public comment on the safety
and soundness standards required to be prescribed by the FDIC Improvement Act.
The purpose of the notice is to assist the federal banking agencies in the
development of proposed regulations.  In accordance with the FDIC Improvement
Act, final regulations must become effective no later than December 1, 1993.

                 In December 1992, the federal banking agencies issued final
regulations prescribing uniform guidelines for real estate lending.  The
regulations, which became effective March 19, 1993, require insured depository
institutions to adopt written policies establishing standards, consistent with
such guidelines, for extensions of credit secured by real estate.  The policies
must address loan portfolio management, underwriting standards and
loan-to-value limits that do not exceed the supervisory limits prescribed by
the regulations.





                                     - 9 -
<PAGE>   11
         Prompt Corrective Regulatory Action

                 The FDIC Improvement Act requires each federal banking agency
to take prompt corrective action to resolve the problems of insured depository
institutions that fall below one or more prescribed minimum capital ratios.
The purpose of this law is to resolve the problems of insured depository
institutions at the least possible long-term cost to the appropriate deposit
insurance fund.

                 The law required each federal banking agency to promulgate
regulations defining the following five categories in which an insured
depository institution will be placed, based on the level of its capital
ratios: well capitalized (significantly exceeding the required minimum capital
requirements), adequately capitalized (meeting the required capital
requirements), undercapitalized (failing to meet any one of the capital
requirements), significantly undercapitalized (significantly below any one
capital requirement) and critically undercapitalized (failing to meet all
capital requirements).

                 In September 1992, the federal banking agencies issued uniform
final regulations implementing the prompt corrective action provisions of the
FDIC Improvement Act.  Under the regulations, an insured depository institution
will be deemed to be:

         o       "well capitalized" if it (i) has total risk-based capital of
                 10% or greater, Tier 1 risk-based capital of 6% or greater and
                 a leverage capital ratio of 5% or greater and (ii) is not
                 subject to an order, written agreement, capital directive or
                 prompt corrective action directive to meet and maintain a
                 specific capital level for any capital measure;

         o       "adequately capitalized" if it has total risk-based capital of
                 8% or greater, Tier 1 risk-based capital of 4% or greater and
                 a leverage capital ratio of 4% or greater (or a leverage
                 capital ratio of 3% or greater if the institution is rated
                 composite 1 under the applicable regulatory rating system in
                 its most recent report of examination);

         o       "undercapitalized" if it has total risk-based capital that is
                 less than 8%, Tier 1 risk-based capital that is less than 4%
                 or a leverage capital ratio that is less than 4% (or a
                 leverage capital ratio that is less than 3% if the institution
                 is rated composite 1 under the applicable regulatory rating
                 system in its most recent report of examination);

         o       "significantly undercapitalized" if it has total risk-based
                 capital that is less than 6%, Tier 1 risk-based capital that
                 is less than 3% or a leverage capital ratio that is less than
                 3%; and





                                     - 10 -
<PAGE>   12
         o       "critically undercapitalized" if it has a ratio of tangible
                 equity to total assets that is equal to or less than 2%.

                 An institution that, based upon its capital levels, is
classified as well capitalized, adequately capitalized or undercapitalized may
be reclassified to the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, (i) determines that
the institution is an unsafe or unsound condition or (ii) deems the institution
to be engaging in an unsafe or unsound practice and not to have corrected the
deficiency.  At each successive lower capital category, an insured depository
institution is subject to more restrictions and federal banking agencies are
given less flexibility in deciding how to deal with it.

                 The law prohibits insured depository institutions from paying
management fees to any controlling persons or, with certain limited exceptions,
making capital distributions if after such transaction the institution would be
undercapitalized.  If an insured depository institution is undercapitalized, it
will be closely monitored by the appropriate federal banking agency, subject to
asset growth restrictions and required to obtain prior regulatory approval for
acquisitions, branching and engaging in new lines; of business.  Any
undercapitalized depository institution must submit an acceptable capital
restoration plan to the appropriate federal banking agency 45 days after
becoming undercapitalized.  The appropriate federal banking agency cannot
accept a capital plan unless, among other things, it determines that the plan
(i) specifies the steps the institution will take to become adequately
capitalized, (ii) is based on realistic assumptions and (iii) is likely to
succeed in restoring the depository institution's capital.  In addition, each
company controlling an undercapitalized depository institution must guarantee
that the institution will comply with the capital plan until the depository
institution has been adequately capitalized on an average basis during each of
four consecutive calendar quarters and must otherwise provide adequate
assurances of performance.  The aggregate liability of such guarantee is
limited to the lesser of (a) an amount equal to 5% of the depository
institution's total assets at the time the institution became undercapitalized
or (b) the amount which is necessary to bring the institution into compliance
with all capital standards applicable to such institution as of the time the
institution fails to comply with its capital restoration plan.  Finally, the
appropriate federal banking agency may impose any of the additional
restrictions or sanctions that it may impose on significantly undercapitalized
institutions if it determines that such action will further the purpose of the
prompt correction action provisions.

                 An insured depository institution that is significantly
undercapitalized, or is undercapitalized and fails to submit, or in a material
respect to implement, an acceptable capital restoration plan, is subject to
additional restrictions and sanctions.  These include, among other things: (i)
a forced sale of voting shares to





                                     - 11 -
<PAGE>   13
raise capital or, if grounds exist for appointment of a receiver or
conservator, a forced merger; (ii) restrictions on transactions with
affiliates; (iii) further limitations on interest rates paid on deposits; (iv)
further restrictions on growth or required shrinkage; (v) modification or
termination of specified activities; (vi) replacement of directors or senior
executive officers, subject to certain grandfather provisions for those elected
prior to enactment of the FDIC Improvement Act; (vii) prohibitions on the
receipt of deposits from correspondent institutions; (viii) restrictions on
capital distributions by the holding companies of such institutions; (ix)
required divestiture of subsidiaries by the institution; or (x) other
restrictions as determined by the appropriate federal banking agency.  Although
the appropriate federal banking agency has discretion to determine which of the
foregoing restrictions or sanctions it will seek to impose, it is required to
force a sale of voting shares or merger, impose restrictions on affiliate
transactions and impose restrictions on rates paid on deposits unless it
determines that such actions would not further the purpose of the prompt
corrective action provisions.  In addition, without the prior written approval
of the appropriate federal banking agency, a significantly undercapitalized
institution may not pay any bonus to its senior executive officers or provide
compensation to any of them at a rate that exceeds such officer's average rate
of base compensation during the 12 calendar months preceding the month in which
the institution became undercapitalized.

                 Further restrictions and sanctions are required to be imposed
on insured depository institutions that are critically undercapitalized.  For
example, a critically undercapitalized institution generally would be
prohibited from engaging in any material transaction other than in the ordinary
course of business without prior regulatory approval and could not, with
certain exceptions, make any payment of principal or interest on its
subordinated debt beginning 60 days after becoming critically undercapitalized.
Most importantly, however, except under limited circumstances, the appropriate
federal banking agency, not later than 90 days after an insured depository
institution becomes critically undercapitalized, is required to appoint a
conservator or receiver for the institution.  The board of directors of an
insured depository institution would not be liable to the institution's
shareholders or creditors for consenting in good faith to the appointment of a
receiver or conservator or to an acquisition or merger as required by the
regulator.

                 The FDIC has 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





                                     - 12 -
<PAGE>   14
assets with relatively high credit risk, such as business loans.

                 In addition to the risk-based guidelines, the FDIC requires
banks to maintain a minimum amount of Tier 1 capital to total assets, referred
to as the leverage ratio.  For a bank rated in the highest of the five
categories used by the FDIC to rate banks, the minimum leverage ratio of Tier 1
capital to total assets is 3%.  For all banks not rated in the highest
category, the minimum leverage ratio must be at least 100 to 200 basis points
above the 3% minimum, or 4% to 5%.  In addition to these uniform risk-based
capital guidelines and leverage ratios that apply across the industry, the FDIC
has the discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.

                 In August 1995, the federal banking agencies adopted final
regulations specifying that the agencies will include, in their evaluations of
a bank's capital adequacy, an assessment of the exposure to declines in the
economic value of the bank's capital due to changes in interest rates.  The
final regulations, however, do not include a measurement framework for
assessing the level of a bank's exposure to interest rate risk, which is the
subject of a proposed policy statement issued by the federal banking agencies
concurrently with the final regulations.  The proposal would measure interest
rate risk in relation to the effect of a 200 basis point change in market
interest rates on the economic value of a bank.  Banks with high levels of
measured exposure or weak management systems generally will be required to hold
additional capital for interest rate risk.  The specific amount of capital that
may be needed would be determined on a case-by-case basis by the examiner and
the appropriate federal banking agency.  Because this proposal has only recently
been issued, the Bank currently is unable to predict the impact of the proposal
on the Bank if the policy statement is adopted as proposed.

                 In January 1995, the federal banking agencies issued a final
rule relating to capital standards and the risks arising from the concentration
of credit and nontraditional activities.  Institutions which have significant
amounts of their assets concentrated in high risk loans or nontraditional
banking activities and who fail to adequately manage these risks, will be
required to set aside capital in excess of the regulatory minimums.  The
federal banking agencies have not imposed any quantitative assessment for
determining when these risks are significant, but have identified these issues
as important factors they will review in assessing an individual bank's capital
adequacy.

                 In December 1993, the federal banking agencies issued an
interagency policy statement on the allowance for loan and lease losses which,
among other things, establishes certain benchmark ratios of loan loss reserves
to classified assets.  The benchmark set forth by such policy statement is the
sum of (a) assets classified loss; (b) 50 percent of assets classified
doubtful; (c) 15 percent of assets classified substandard; and (d) estimated





                                     - 13 -
<PAGE>   15
credit losses on other assets over the upcoming 12 months.

         Other Items

                 The FDIC Improvement Act also, among other things, (i) limits
the percentage of interest paid on brokered deposits and limits the
unrestricted use of such deposits to only those institutions that are well
capitalized; (ii) requires the FDIC to charge insurance premiums based on the
risk profile of each institution; (iii) eliminates "pass through" deposit
insurance for certain employee benefit accounts unless the depository
institution is well capitalized or, under certain circumstances, adequately
capitalized; (iv) prohibits insured state chartered banks from engaging as
principal in any type of activity that is not permissible for a national bank
unless the FDIC permits such activity and the bank meets all of its regulatory
capital requirements; (v) directs the appropriate federal banking agency to
determine the amount of readily marketable purchased mortgage servicing rights
that may be included in calculating such institution's tangible, core and
risk-based capital; and (vi) provides that, subject to certain limitations, any
federal savings association may acquire or be acquired by any insured
depository institution.

                 In addition, the FDIC has issued final and proposed
regulations implementing provisions of the FDIC Improvement Act relating to
powers of insured state banks.  Final regulations issued in October 1992
prohibit insured state banks from making equity investments of a type, or in an
amount, that are not permissible for national banks.  In general, equity
investments include equity securities, partnership interests and equity
interests in real estate.  Under the final regulations, non-permissible
investments must be divested by no later than December 19, 1996.  The Bank has
no such non-permissible investments.

                 Regulations issued in December 1993 prohibit insured state
banks from engaging as principal in any activity not permissible for a national
bank, without FDIC approval.  The proposal also provides that subsidiaries of
insured state banks may not engage as principal in any activity that is not
permissible for a subsidiary of a national bank, without FDIC approval.

                 The impact of the FDIC Improvement Act on the Bank is
uncertain, especially since many of the regulations promulgated thereunder have
only been recently adopted and certain of the law's provisions still need to be
defined through future regulatory action.  Certain provisions, such as the
recently adopted real estate lending standards and the limitations on
investments and powers of state banks and the rules to be adopted governing
compensation, fees and other operating policies, may affect the way in which
the Bank conducts its business, and other provisions, such as those relating to
the establishment of the risk-based premium system, may adversely affect the
Bank's results of operations.  Furthermore, the actual and potential
restrictions and sanctions





                                     - 14 -
<PAGE>   16
that apply to or may be imposed on undercapitalized institutions under the
prompt corrective action and other provisions of the FDIC Improvement Act may
significantly adversely affect the operations and liquidity of the Bank, the
value of its Common Stock and its ability to raise funds in the financial
markets.

         Capital Adequacy Guidelines

                 The FDIC has issued guidelines to implement the risk-based
capital requirements.  The guidelines are intended to establish a systematic
analytical framework that makes regulatory capital requirements more sensitive
to differences in risk profiles among banking organizations, takes off-balance
sheet items into account in assessing capital adequacy and minimizes
disincentives to holding liquid, low-risk assets.  Under these guidelines,
assets and credit equivalent amounts of off-balance sheet items, such as
letters of credit and outstanding loan commitments, are assigned to one of
several risk categories, which range from 0% for risk-free assets, such as cash
and certain U.S.  Government securities, to 100% for relatively high-risk
assets, such as loans and investments in fixed assets, premises and other real
estate owned.  The aggregated dollar amount of each category is then multiplied
by the risk-weight associated with that category.  The resulting weighted
values from each of the risk categories are then added together to determine
the total risk-weighted assets.

                 A banking organization's qualifying total capital consists of
two components: Tier 1 capital (core capital) and Tier 2 capital (supplementary
capital).  Tier 1 capital consists primarily of common stock, related surplus
and retained earnings, qualifying noncumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries.
Intangibles, such as goodwill, are generally deducted from Tier 1 capital;
however, purchased mortgage servicing rights and purchase credit card
relationships may be included, subject to certain limitations.  At least 50% of
the banking organization's total regulatory capital must consist of Tier 1
capital.

                 Tier 2 capital may consist of (i) the allowance for possible
loan and lease losses in an amount up to 1.25% of risk-weighted assets; (ii)
perpetual preferred stock, cumulative perpetual preferred stock and long-term
preferred stock and related surplus; (iii) hybrid capital instruments
(instruments with characteristics of both debt and equity), perpetual debt and
mandatory convertible debt securities; and (iv) eligible term subordinated debt
and intermediate-term preferred stock with an original maturity of five years
or more, including related surplus, in an amount up to 50% of Tier 1 capital.
The inclusion of the foregoing elements of Tier 2 capital are subject to
certain requirements and limitations of the federal banking agencies.

                 The FDIC has also adopted a minimum leverage capital ratio of
Tier 1 capital to average total assets of 3% for the highest rated banks.  This
leverage capital ratio is only a minimum.





                                     - 15 -
<PAGE>   17
Institutions experiencing or anticipating significant growth or those with
other than minimum risk profiles are expected to maintain capital well above
the minimum level.  Furthermore, higher leverage capital ratios are required to
be considered well capitalized or adequately capitalized under the prompt
corrective action provisions of the FDIC Improvement Act.

         Safety and Soundness Standards

                 In February 1995, the federal banking agencies adopted final
guidelines establishing standards for safety and soundness, as required by
FDICIA.  The guidelines set forth operational and managerial standards relating
to internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth and
compensation, fees and benefits.  Guidelines for asset quality and earnings
standards will be adopted in the future.  The guidelines establish the safety
and soundness standards that the agencies will use to identify and address
problems at insured depository institutions before capital becomes impaired.
If an institution fails to comply with a safety and soundness standard, the
appropriate federal banking agency may require the institution to submit a
compliance plan.  Failure to submit a compliance plan or to implement an
accepted plan may result in enforcement action.

                 In December 1992, the federal banking agency issued final
regulations prescribing uniform guidelines for real estate lending.  The
regulations require insured depository institutions to adopt written policies
establishing standards, consistent with such guidelines, for extensions of
credit secured by real estate.  The policies must address loan portfolio
management, underwriting standards and loan to value limits that do not exceed
the supervisory limits prescribed by the regulations.

                 Appraisals for "real estate related financial transactions"
must be conducted by either state-certified or state-licensed appraisers for
transactions in excess of certain amounts.  State-certified appraisers are
required for all transactions with a transaction value of $1,000,000 or more;
for all nonresidential transactions valued at $250,000 or more; and for
"complex" 1-4 family residential properties of $250,000 or more.  A
state-licensed appraiser is required for all other appraisals.  However,
appraisals performed in connection with "federally related transactions" must
now comply with the agencies' appraisal standards.  Federally related
transactions include the sale, lease, purchase, investment in, or exchange of,
real property or interests in real property, the financing of real property,
and the use of real property or interests in real property as security for a
loan or investment, including mortgage backed securities.

         Premiums for Deposit Insurance

                 Federal law has established several mechanisms to increase
funds to protect deposits insured by the Bank Insurance Fund ("BIF")





                                     - 16 -
<PAGE>   18
administered by the FDIC.  The FDIC is authorized to borrow up to $30 billion
from the United States Treasury; up to 90% of the fair market value of assets
of institutions acquired by the FDIC as receiver from the Federal Financing
Bank; and from depository institutions that are members of the BIF.  Any
borrowings not repaid by asset sales are to be repaid through insurance
premiums assessed to member institutions.  Such premiums must be sufficient to
repay any borrowed funds within 15 years and provide insurance fund reserves of
$1.25 for each $100 of insured deposits.  The FDIC also has authority to impose
special assessments against insured deposits.

                 The FDIC implemented a final risk-based assessment system, as
required by FDICIA, effective January 1, 1994, under which an institution's
premium assessment is based on the probability that the deposit insurance fund
will incur a loss with respect to the institution, the likely amount of any
such loss, and the revenue needs of the deposit insurance fund.  As long as
BIF's reserve ratio is less than a specified "designated reserve ratio," 1.25%,
the total amount raised from BIF members by the risk-based assessment system
may not be less than the amount that would be raised if the assessment rate for
all BIF members were .023% of deposits.  The FDIC, effective September 15,
1995, lowered assessments from their rates of $.23 to $.31 per $100 of insured
deposits to rates of $.04 to $.31, depending on the condition of the bank, as a
result of the recapitalization of the BIF.  On November 15, 1995, the FDIC
voted to drop its premiums for well capitalized banks to zero effective January
1, 1996.  Other banks will be charged risk-based premiums up to $.27 per $100
of deposits.

                 Governor Pete Wilson recently signed Assembly Bill 3351 (the
"Banking Consolidation Bill"), authored by Assemblyman Ted Weggeland and
sponsored by the California State Banking Department (the"Department"),
effective July 1, 1997, which creates the California Department of Financial
Institutions ("DFI") to be headed by a Commissioner of Financial Institutions
out of the existing Department which regulates state chartered commercial banks
and trust companies in California.

                 The Banking Consolidation Bill, among other provisions, also
(i) transfers regulatory jurisdiction over state chartered savings and loan
associations from the Department of Savings and Loans ("DSL") to the newly
created DFI and abolishes the DSL; (ii) transfers regulatory jurisdiction over
state chartered industrial loan companies and credit unions from the Department
of Corporations to the newly- created DFI; and (iii) establishes within the DFI
separate divisions for credit unions, commercial banks, industrial loan
companies and savings and loans.  As the Banking Consolidation Bill has only
recently been enacted, it is impossible to predict with any degree of certainty
what impact it will have on the banking industry in general and the Bank in
particular.

                 Congress has recently passed, and the President has signed
into law provisions to strengthen the Savings Association Insurance





                                     - 17 -
<PAGE>   19
Fund (the "SAIF") and to repay outstanding bonds that were issued to
recapitalize the SAIF's successor as  result of payments made due to insolvency
of savings and loan associations and other federally insured savings
institutions in the late 1980's and early 1990's.  The new law will require
savings and loan associations to bear the cost of recapitalizing the SAIF and,
after January 1, 1997, banks will contribute towards paying off the financing
bonds, including interest.  In 2000, the banking industry will assume the bulk
of the payments.  The new law also aims to merge the Bank Insurance Fund and
SAIF by 1999 but not until the bank and savings and loan charters are combined.
The Treasury Department has until March 31, 1997 to deliver to Congress on
combining the charters.  Additionally, the new law also provides "regulatory 
relief" for the banking industry by effecting approximately 30 laws and 
regulations.  The costs and benefits of the new law to the Bank can not 
currently be accurately
predicted.

         Interstate Banking and Branching

                 On September 29, 1994, the President signed in law the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Act").  Under the Interstate Act, beginning one year after the date
of enactment, a bank holding company that is adequately capitalized and managed
may obtain regulatory approval to acquire an existing bank located in another
state without regard to state law.  A bank holding company would not be
permitted to make such an acquisition if, upon consummation, it would control
(a) more than 10% of the total amount of deposits of insured depository
institutions in the United States or (b) 30% or more of the deposits in the
state in which the bank is located.  A state may limit the percentage of total
deposits that may be held in that state by any one bank or bank holding company
if application  of such limitation does not discriminate against out-of-state
banks.  An out-of-state bank holding company may not acquire a state bank in
existence for less than a minimum length of time that may be prescribed by
state law except that a state may not impose more than a five year existence
requirement.

                 The Interstate Act also permits, beginning June 1, 1997,
mergers of insured banks located in different states and conversion of the
branches of the acquired bank into branches of the resulting bank.  Each state
may permit such combinations earlier than June 1, 1997, and may adopt
legislation to prohibit interstate mergers after that date in that state or in
other states by that state's banks.  The same concentration limits discussed in
the preceding paragraph apply.  The Interstate Act also permits a national or
state bank to establish branches in a state other than its home state if
permitted by the laws of that state, subject to the same requirement and
conditions as for a merger transaction.  Effective October 2, 1995, California
adopted legislation which "opts California into" the Interstate Act.  However,
the California Legislation restricts out of state banks from purchasing
branches or starting a de novo branch to enter the California banking market.
Such banks may proceed only by way of purchases of whole banks.





                                     - 18 -
<PAGE>   20
                 The Interstate Act is likely to increase competition in the
Bank's market areas especially from larger financial institutions and their
holding companies.  It is difficult to asses the impact such likely increased
competition will have on the Bank' operations.

                 In 1986, California adopted an interstate banking law.  The
law allows California banks and bank holding companies to be acquired by
banking organizations in other states on a "reciprocal" basis (i.e., provided
the other state's law permit California banking organizations to acquire
banking organizations in that state on substantially the same terms and
conditions applicable to banking organizations solely within that state).  The
law took effect in two states.  The first state allowed acquisitions on a
"reciprocal" basis within a region consisting of 11 western states.  The second
stage, which became effective January 1, 1991, allows interstate acquisitions
on a national "reciprocal" basis.  California has also adopted similar
legislation applicable to savings associations and their holding companies.

                 On September 28, 1995, Governor Wilson signed Assembly Bill
No. 1482, the Caldera, Weggeland, and Killea California Interstate Banking and
Branching Act of 1995 (the "1995 Act").  The 1995 Act, which was filed with the
Secretary of State as Chapter 480 of the Statutes of 1995, became operative on
October 2, 1995.

                 The 1995 Acts opts in early for interstate branching, allowing
out-of-state banks to enter California by merging or purchasing a California
bank or industrial loan company which is at least five years old.  Also, the
1995 Act repeals the California Interstate (National) Banking Act of 1986,
which regulated the acquisition of California banks by out-of-state bank
holding companies.  In addition, the 1995 Act permits California state banks,
with the approval of the Superintendent of Banks, to establish agency
relationships with FDIC-insured banks and savings associations.  Finally, the
1995 Act provides for regulatory relief, including (i) authorization for the
Superintendent to exempt banks from the requirement of obtaining approval
before establishing or relocating a branch office or place of business, (ii)
repeal of the requirement of directors' oaths (Financial Code Section 682), and
(iii) repeal of the aggregate limit on real estate loans (Financial Code
Section 1230).

         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 ("CRA") activities.  The CRA generally requires the federal
banking agencies to evaluate the record of financial institutions in meeting
the credit needs of their local community, including low and moderate income
neighborhoods.  In addition to substantial penalties and corrective measures
that may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with





                                     - 19 -
<PAGE>   21
such laws and CRA into account when regulating and supervising other
activities.

                 In May 1995, the federal banking agencies issued final
regulations which change the manner in which they measure a bank's compliance
with its CRA obligations.  The final regulations adopt a performance-based
evaluation system which bases CRA ratings on an institutions' actual lending
service and investment performance rather than the extent to which the
institution conducts needs assessments, documents community outreach or
complies with other procedural requirements.  In March 1994, the Federal
Interagency Tax Force on Fair lending issued a policy statement on
discrimination in lending.  The policy statement describes the three methods
that federal agencies will use to prove discrimination:  overt evidence of
discrimination, evidence of disparate treatment and evidence of disparate
impact.

                 In February 1995, the federal banking agencies adopted final
safety and soundness standards for all insured depository institutions.  The
standards, which were issued in the form of guidelines rather than regulations,
relate to internal controls, information systems, internal audit systems, loan
underwriting and documentation, compensation and interest rate exposure.  In
general, the standards are designed to assist the federal banking agencies in
identifying and addressing problems at insured depository institutions before
capital becomes impaired.  If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan.  Failure to submit a compliance plan may result in enforcement
proceedings.  Additional standards on earnings and classified assets are
expected to be issued in the near future.





                                     - 20 -
<PAGE>   22
         Changes in Accounting Principles

                 In March of 1995, the FASB issued SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
of.  SFAS No. 121 establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of.  The statement does not apply to
financial instruments long-term customer relationships of a financial
institution (core deposits), mortgage and other servicing rights, and tax
deferred assets.  SFAS 121 requires the review of long-lived assets and certain
identifiable intangibles for impairment whenever events or changes in
circumstances include, for example, a significant decrease in market value of
an assets, a significant change in use of an asset, or an adverse change in a
legal factor that could affect the value of an asset.  If such an event occurs
and it is determined that the carrying value of the asset may not be
recoverable, an impairment loss should be recognized as measured by the amount
by which the carrying amount of the asset exceeds the fair value of the asset.
Fair value can be determined by a current transaction, quoted market prices, or
present value of estimated expected future cash flows discounted at the
appropriate rate.  The statement is effective for fiscal years beginning after
December 15, 1995.  The implementation of SFAS No. 121 did not have a material
impact on its results of operations or financial position.

                 In May of 1995, the FASB issued SFAS 122, Accounting for
Mortgage Servicing Rights.  SFAS No. 122 eliminates distinctions between
servicing rights that were purchased and those that were retained upon the sale
of loans.  The statement requires mortgage servicers to recognize as separate
assets rights to service loans, no matter how the rights were acquired.
Institutions who sell loans and retain the servicing rights will be required to
allocate the total cost of the loans to servicing rights and loans based on
their relative fair values if the value can be estimated.  SFAS No. 122 is
effective for fiscal years beginning after December 15, 1995.  Further, SFAS
No. 122 requires that all capitalized mortgage servicing rights be periodically
evaluated for impairment based upon the current fair value of these rights.
This Statement which is superseded by SFAS No. 125, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, did not
have a material effect on the Company's or the Bank's financial condition and
results of operations.

                 In October of 1995, the FASB issued SFAS No. 123, Accounting
for Stock-Based Compensation, establishing financial accounting and reporting
standards for stock-based employee compensation plans.  This statement
encourages all entities to adopt a new method of accounting to measure
compensation cost of all employee stock compensation pans based on the
estimated fair value of the award at the date it is granted.  Companies are,
however, allowed to continue to measure compensation cost for those plans using
the intrinsic value based method of accounting, which





                                     - 21 -
<PAGE>   23
generally does not result in compensation expense recognition for most plans.
Companies that elect to remain with the existing accounting are required to
disclose in a footnote to the financial statements pro forma net income and, if
presented, earnings per share, as if this statement had been adopted.  The
accounting requirements of this statement are effective for transactions
entered into in fiscal years that begin after December 15, 1995;  however,
companies are required to disclose information for awards granted in their
first fiscal year beginning after December 15, 1994.  The proforma earnings per
share disclosure required by SFAS 123 are not shown in the Company's notes to
Consolidated Financial Statements as the pro forma impact of applying SFAS 123
is insignificant in 1996.

                 In June of 1996, the FASB issued SFAS No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
and in December, 1996 issued SFAS No. 127, Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125 (an amendment of FASB Statement
No. 125) establishing accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of the financial-components approach.  This approach
requires the recognition of financial assets and servicing assets that are
controlled by the reporting entity, the derecognition of financial assets when
control is surrendered, and the derecognition of liabilities when they are
extinguished.  Specific criteria are established for determining when control
has been surrendered in the transfer of financial assets.  Liabilities and
derivatives incurred or obtained by transferors in conjunction with the
transfer of financial assets are required to be measured at fair value, if
practicable.  Servicing assets and other retained interests in transferred
assets are required to be measured by allocating the previous carrying amount
between the assets sold, if any, and the interest that is retained, if any,
based on the relative fair values of the assets on the date of the transfer.
Servicing assets retained are subsequently subject to amortization and
assessment for impairment.  Management believes the implementation of this
statement will not have a material effect on the Company's or its subsidiary
banks financial condition or results of operations.

         Hazardous Waste Clean-Up Costs

                 Management is aware of recent legislation and cases relating
to hazardous waste clean-up costs and potential liability.  Based on a general
survey of the loan portfolio of the Bank, conversations with local authorities
and appraisers, and the type of lending currently and historically done by the
Bank  (the Bank has generally not made the types of loans generally associated
with hazardous waste contamination problems), management is not aware of any
potential liability for hazardous waste contamination.

         Other Regulations and Policies





                                     - 22 -
<PAGE>   24
                 The federal regulatory agencies have adopted regulations that
implement Section 304 of FDICIA which requires federal banking agencies to
adopt uniform regulations prescribing standards for real estate lending.  Each
insured depository institution must adopt and maintain a comprehensive written
real estate lending policy, developed in conformance with prescribed
guidelines, and each agency has specified loan-to-value limits in guidelines
concerning various categories of real estate loans.

                 Various requirements and restrictions under the laws of the
United States and the State of California affect the operations of the Bank.
Federal regulations include requirements to maintain non-interest bearing
reserves against deposits, limitations on the nature and amount of loans which
may be made, and restrictions on payment of dividends.  The California
Superintendent of Banks approves the number and locations of the branch offices
of a bank.  California law exempts banks from the usury laws.

Market Area

                 The Bank and the Company provide a solution-oriented approach
to meeting the banking needs of individuals and businesses through six branches
located in Los Angeles and Orange Counties.

                 The Company's market areas in the past five years have felt
the full impact of the national recession that continued in California through
all of 1996.  The recession has been most felt through the progressive loss of
jobs as defense contractors cut back and restructure; in declines in
construction activity; cutbacks in the aerospace industry and in the closing of
more than the normal number of small businesses.  Real estate values have
substantially declined with some properties dropping by 20% to 30% depending on
location and price range and the increases in unemployment statistics.  On a
positive note, most recent economic reports point to decreases in unemployment
and some increases in both sales volume and prices of real estate.


Business Concentrations

                 As of December 31, 1996, the Bank had approximately $200
million in assets and $184 million in deposits.   No individual or single group
of related accounts is considered material in relation to the Bank's totals, or
in relation to its overall business.

Monetary Policy

                 Banking is a business which depends on rate differentials.  In
general, the difference between the interest paid by the Bank on its deposits
and its other borrowings and the interest rate received by the Bank on loans
extended to its customers and securities held in the Bank investment portfolios
will comprise the major portion of the Bank's earnings.





                                     - 23 -
<PAGE>   25
                 The earnings and growth of the Bank will be affected not only
by general economic conditions, both domestic and international, but also by
the monetary and fiscal policies of the United States and its agencies,
particularly the Federal Reserve Board.  The Federal Reserve Board can and does
implement national monetary policy, such as seeking to curb inflation and
combat recession, by its open market operations in U.S.  Government securities,
limitations upon savings and time deposit interest rates, and adjustments to
the discount rates applicable to borrowings by banks which are members of the
Federal Reserve System.  The actions of the Federal Reserve Board influence the
growth of bank loans, investments and deposits and also affect interest rates
charged on loans and paid on deposits.  The nature and impact that future
changes in fiscal or monetary policies or economic controls may have on the
Bank's businesses and earnings cannot be predicted.

Competition

                 The banking business in California generally, and in the
Bank's primary service areas specifically, is highly competitive with respect
to both loans and deposits, and is dominated by a relatively small number of
major banks with many offices and operations over a wide geographic area.
Among the advantages such major banks have over the Bank are their ability to
finance wide-ranging advertising campaigns and to allocate their investment
assets to regions of higher yield and demand.  Such banks offer certain
services such as trust services and international banking which are not offered
directly by the Bank (but which can be offered indirectly by the Bank through
correspondent institutions).  In addition, by virtue of their greater total
capitalization, such banks have substantially higher lending limits than the
Bank.  (Legal lending limits to an individual customer are based upon a
percentage of a bank's total capital accounts.) Other entities, both
governmental and in private industry, seeking to raise capital through the
issuance and sale of debt or equity securities also provide competition for the
Bank in the acquisition of deposits.  Banks also compete with money market
funds and other money market instruments which are not subject to interest rate
ceilings.

                 In order to compete with other competitors in their primary
service areas, the Bank attempts to use to the fullest extent the flexibility
which their independent status permits.  This includes an emphasis on
specialized services, local promotional activity, and personal contacts by
their respective officers, directors and employees.  In particular, each of the
banks offers highly personalized banking services.

Employees

                 At December 31, 1996, the Company and the Bank employed 96
individuals, all on a full-time basis.  The Company believes that its employee
relations are excellent.





                                     - 24 -
<PAGE>   26
Statistical Disclosure

                 The following tables and data set forth, for the respective
periods shown, statistical information relating to the Company and its
subsidiaries.  This statistical data should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations, and the Financial Statements and Notes thereto incorporated by
reference herein from the Company's 1996 Annual Report.  See "ITEM 6.  SELECTED
FINANCIAL DATA, "ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS," and "ITEM 8.  FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA." Average balances in all tables are computed using daily
average balances for each month divided by the number of months in the period.
Unless the context indicates otherwise, all references to the Company in the
following tables and data include the Company and its subsidiaries on a
consolidated basis.





                                     - 25 -
<PAGE>   27


<TABLE>
<CAPTION>
                              YEAR ENDED DECEMBER 31, 1996       YEAR ENDED DECEMBER 31, 1995         YEAR ENDED DECEMBER 31, 1994
                                        INTEREST   AVERAGE                 INTEREST   AVERAGE                   INTEREST   AVERAGE
                              AVERAGE    INCOME     YIELDS       AVERAGE    INCOME     YIELDS         AVERAGE    INCOME     YIELDS
                              BALANCE  OR EXPENSE  OR RATES      BALANCE  OR EXPENSE  OR RATES        BALANCE  OR EXPENSE  OR RATES
                              -----------------------------      -----------------------------        -----------------------------
<S>                           <C>        <C>        <C>          <C>        <C>        <C>            <C>        <C>        <C>
ASSETS
  Interest Earning Deposits   $    495   $    28     5.56%       $    495   $    31     6.26%         $  1,445   $    85     5.88%
  Taxable Securities            24,571     1,436     5.84          28,357     1,739     6.13            20,405       989     4.85
  Non-taxable Securities           369        15     4.18             341        21     6.16               356        22     6.18
  Federal Funds Sold            16,568       859     5.19          14,696       805     5.48            12,996       537     4.13
  Loans (1)                    133,951    12,750     9.52         118,986    11,502     9.67           116,535    10,320     8.86
    TOTAL EARNING ASSETS/     --------   -------    -----        --------   -------    -----          --------   -------    -----
     INTEREST INCOME           175,954    15,088     8.58%        162,875    14,098     8.66%          151,737    11,953     7.88%

 Reserve for Loan Losses        (2,948)                            (3,044)                              (3,228)
 Other Assets                   22,485                             21,539                               25,061
                              --------                           --------                             --------
TOTAL ASSETS                  $195,491                           $181,370                             $173,570
                              --------                           --------                             --------

LIABILITIES
& STOCKHOLDERS' EQUITY
  Savings & Interest-bearing
   Demand Deposits            $ 60,577   $ 1,368     2.26%       $ 65,702   $ 1,413     2.15%         $ 60,854   $ 1,207     1.98%
  Time Deposits                 32,580     1,687     5.18          24,473     1,185     4.84            21,170       727     3.43
  Borrowed Funds                    54         4     6.29             767        44     5.74             1,135        72     6.34 
                              --------   -------    -----        --------   -------    -----          --------   -------    -----
TOTAL INT-BEARING
LIABILITIES/
  INTEREST EXPENSE              93,211     3,059     3.28%         90,942     2,642     2.91%           83,159     2,006     2.41%

   Demand Deposits              86,242                             75,823                               75,253
   Other Liabilities             1,031                                829                                1,818
                              --------                           --------                             --------
TOTAL LIABILITIES              180,484                            167,594                              160,230
STOCKHOLDERS' EQUITY            15,007                             13,776                               13,340
TOTAL LIABILITIES &           --------                           --------                             --------
STOCKHOLDERS' EQUITY          $195,491                           $181,370                             $173,570
                              ========                           ========                             ========

  Net Interest Income                    $12,029                            $11,456                              $ 9,947
  Net Interest Income to Earning Assets  =======     6.84%                  =======     7.03%                    =======     6.56%
                                                    =====                              =====                                =====
                                                 
</TABLE>



(1)  Included in interest income on loans are fees of $173,517 in 1996,
$433,019 in 1995 and $464,313 in 1994.  Note:    Interest income on nonaccrual
loans is not included in interest income.  Interest income on non-taxable
securities is not stated on a tax-equivalent basis.  Due to rounding individual
amounts may not agree to audited statements by $1 - 2.





                                     - 26 -
<PAGE>   28
The following table sets forth changes in interest income and interest expense
and the amount of change attributable to variances in volume and variance in
interest rates.  The change in interest due to both rate and volume has been
allocated to volume and rate changes in proportion to the relationship of the
absolute dollar amounts of the change in each.


<TABLE>
<CAPTION>
                                            1996 OVER 1995                         1995 OVER 1994
                                            --------------                         --------------
                                            AMOUNT OF CHANGE                       AMOUNT OF CHANGE
                                            ATTRIBUTED TO:                         ATTRIBUTED TO:
                                            ----------------                       ----------------   
                                 TOTAL INCREASE                          TOTAL INCREASE
                                  OR (DECREASE)  VOLUME      RATE         OR (DECREASE)  VOLUME    RATE
                                      ------     ------      -----            ------     ------   ------ 
                                      (in thousands)                         (in thousands)
<S>                                   <C>        <C>         <C>              <C>        <C>      <C>
  Interest Income:

  Interest on taxable securities      $ (303)    $ (232)     $ (71)           $  750     $  437   $  313

  Interest on nontaxable securities       (6)         2         (8)               (1)        (1)       -

  Interest on deposits with banks         (3)         -         (3)              (54)       (58)       4

  Federal funds sold                      54        103        (49)              268         82      186

  Interest & fees on loans(1)          1,248      1,447       (199)            1,182        227      955 
                                      ------     ------      -----            ------     ------   ------ 
    TOTAL INTEREST INCOME                990      1,320       (330)            2,145        687    1,458

 Interest Expense:

  Interest on Deposits:
    Savings & Interest bearing demand    (43)       (99)        56               206        100      106

    Other time deposits                  502        393        109               458        137      321
  Interest on short-term borrowing       (41)       (41)         -               (28)         -      (28)
                                      ------     ------      -----            ------     ------   ------
       TOTAL INTEREST EXPENSE            418        253        165               636        237      399

                                      ------     ------      -----            ------     ------   ------
Net Interest Spread                   $  572     $1,067      $(495)           $1,509     $  450   $1,059 
                                      ======     ======      =====            ======     ======   ======
</TABLE>

Note: Individual line items may not agree exactly to changes apparent from the
      audited statements by $1 - 2 due to rounding.
(1)   Included in interest & fees on loans are fees of $173,517 in 1996 and
      $433,019 in 1995.
(2)   The change in interest due to both volume and rate has been allocated to
      volume and rate changes in proportion to the relationship of the dollar
      amounts of the change in each. The following table shows the distribution
      of assets, liabilities and stockholders' equity; interest rates and
      interest differential (dollars in thousands).





                                     - 27 -
<PAGE>   29


                              INVESTMENT PORTFOLIO
                              --------------------


     The Bank positions its investment portfolio to maintain a level of
liquidity considered adequate within the prevailing economic climate.  Under
this policy, purchases of investment securities as well as the sale of federal
funds are made after consideration of liquidity requirements.

         The book value of the investment portfolio by investment category for
the last three years ended December 31, 1996 (in thousands):

<TABLE>
<CAPTION>
                              1996           1995           1994
                             -------        -------        -------                               
<S>                          <C>            <C>            <C>
U.S. gov't
  & agency
  obligations                $23,510        $33,812        $33,721

Obligations of
state/political
 subdivisions                    543            338            341

Mutual funds, net                799            832            757                       
                             -------        -------        -------                               
                             $24,852        $34,982        $34,819
                             =======        =======        =======
</TABLE>


     Maturities of the investment portfolio by investment categories is as
follows at December 31, 1996 (in thousands):


<TABLE>
<CAPTION>
                              --------------------------------------------
                              LESS THAN  ONE YEAR    FIVE THRU    AFTER
                              ONE YEAR     THRU      TEN YEARS   TEN YEARS
                                         FIVE YEARS                           
                              --------------------------------------------
                     BOOK
                     VALUE  
                    -------  
<S>                 <C>       <C>         <C>         <C>         <C>
U.S. gov't
  & agency
  obligations       $23,510   $18,818     $ 2,802     $ 1,619     $   271

Obligations of
state/political
 subdivisions           543       104          25         414           -

Mutual funds, net       799         -           -           -         799
                    -------   -------     -------     -------     -------  
                    $24,852   $18,921     $ 2,827     $ 2,033     $ 1,070
                    =======   =======     =======     =======     =======

Yield-Weighted Average          4.84%       7.53%       6.16%      10.31%
</TABLE>


Note:  Interest income on non-taxable securities is not stated
on a tax-equivalent basis.




                                     - 28 -
<PAGE>   30
                                 LOAN PORTFOLIO
                                 --------------
                                 (in thousands)

<TABLE>
<CAPTION>
                                                        DOMESTIC        
                                           ----------------------------------
                                           COMMERCIAL           REAL ESTATE
                                                                   LOANS             
                                                               (CONSTRUCTION)
                                           ---------------------------------- 
<S>                                        <C>                    <C>
Maturity Distribution:                                                                                 
Due within one year                        $31,008                $   523
Due after one but before five
  years                                     19,114                     -
Due after five years                            37                    266
                                           -------                -------
TOTAL AT DECEMBER 31, 1996                 $50,159                $   789
                                           =======                =======

Interest Sensitivity:  Loans Due
  After One Year
    Fixed-rate loans                       $10,001                $    -
    Prime-tied loans                         9,149                    266
                                           -------                -------
TOTAL AT DECEMBER 31, 1996                 $19,150                $   266
                                           =======                =======
</TABLE>




The composition of the Company's loan portfolio for the last five years ended
December 31, 1996 is as follows (in thousands):

<TABLE>
<CAPTION>
                        1996      1995      1994      1993      1992
  <S>                 <C>       <C>       <C>       <C>       <C>
  Commercial          $ 50,523  $ 51,528  $ 46,502  $ 46,698  $ 66,788
  Commercial - real
    estate secured      69,295    53,434    45,311    39,222     4,738
  Real Estate-secured   17,021    16,127    15,101    18,661    22,721
  Real Estate-
   construction            789     3,412     4,329    12,089    13,286
  Installment            6,360     5,911     3,607     3,838     2,748
                      --------  --------  --------  --------  --------
   TOTAL              $143,988  $130,412  $114,850  $120,508  $110,281
                      ========  ========  ========  ========  ========
</TABLE>





                                     - 29 -
<PAGE>   31

                          LOANS CONTRACTUALLY PAST DUE
                          ----------------------------
                                 (all domestic)

<TABLE>
<CAPTION>
                        
                             TROUBLED      PAST DUE 90 DAYS(2)     
                               DEBT        --------------------    LOANS ON
                            RESTRUCTURING  AMOUNT    % OF TOTAL  NON ACCRUAL(1)
                            ------------------------------------------------
                                             (in thousands)
<S>                           <C>          <C>          <C>        <C>
December 31, 1996:
  Commercial                  $     45     $     87      .17%      $ 1,262
  Real Estate-secured            1,836            -      .00%        2,521
  Real Estate-
   construction                      -            -         -            -
  Installment                        -           83     1.30%            -
                              --------     --------     -----      -------
   TOTAL                      $  1,881     $    170      .12%      $ 3,783
                              ========     ========     =====      =======
December 31, 1995:
  Commercial                  $    769     $     46      .09%      $ 1,190
  Real Estate-secured              335           35      .05%        5,497
  Real Estate-
   construction                     49            -         -            -
  Installment                       12           40      .67%           59
                              --------     --------     -----      -------
    TOTAL                     $  1,165     $    121      .09%      $ 6,746
                              ========     ========     =====      =======
December 31, 1994:
  Commercial                  $      -     $     97      .21%        2,041
  Real Estate-secured                             -      .00%        3,636
  Real Estate-
   construction                                   -      .00%            -
  Installment                                     -      .00%           63
                              --------     --------     -----      -------
    TOTAL                     $            $     97      .08%      $ 5,740
                              ========     ========     =====      =======
December 31, 1993:
  Commercial                  $      -     $    196      .26%          827
  Real Estate-secured                           531     1.84%        3,176
  Real Estate-
   construction                                   -      .00%          833
  Installment                                    14      .27%           34
                              --------     --------     -----      -------
    TOTAL                     $      -     $    741      .61%      $ 4,870
                              ========     ========     =====      =======
December 31, 1992:
  Commercial                  $      -     $    450      .67%      $ 1,865
  Real Estate-secured                             -      .00%        2,875
  Real Estate-
   construction                                   -      .00%            -
  Installment                                     1      .03%          101
                              --------     --------     -----      -------
    TOTAL                     $      -     $    451      .41%      $ 4,841
                              ========     ========     =====      =======
</TABLE>



(1) Interest income which would have been recognized in 1996 and 1995 on
nonperforming loans was approximately $172,713 and $260,264 respectively.  The
amount of interest income on nonperforming loans that was included in net
income in 1996 was none.  (2) Loans on Non Accrual have been excluded from the
Past Due 90 Day column.





                                     - 30 -
<PAGE>   32

                        SUMMARY OF LOAN LOSS EXPERIENCE
                        -------------------------------

<TABLE>
<CAPTION>
                                                                     (in thousands)
                                              1996          1995          1994          1993          1992
                                             ---------      --------      --------      --------      --------
<S>                                          <C>            <C>           <C>           <C>           <C>
Loans outstanding at year-end, net of 
  unearned interest income
                                             $143,988       $130,412      $114,850      $120,508      $110,281
                                             ========       ========      ========      ========      ========
Average loans outstanding, net of
  unearned interest income
                                             $133,951       $118,986      $116,535      $112,023      $108,226
                                             ========       ========      ========      ========      ========

Reserve balance, beginning of year           $  3,003       $  3,224      $  3,667      $  1,355      $  1,029

Recoveries:
  Commercial                                       77             17            20            39            19
  Installment                                       2              2            24             5            12 
                                             --------       --------      --------      --------      -------- 
    TOTAL                                          79             19            44            44            31

Loans charged off:
  Commercial                                     (672)          (393)       (1,401)       (1,143)         (126)
  Real Estate-mortgage                           (781)          (137)         (126)          -0-           -0-
  Installment                                     (51)           (22)          (48)         (153)          (63)
                                             --------       --------      --------      --------      -------- 
    TOTAL                                      (1,504)          (552)       (1,575)       (1,296)         (189)
                                             --------       --------      --------      --------      -------- 
Net loans charged off                          (1,425)          (533)       (1,531)       (1,252)         (158)

Provision charged to expense                    1,159            312         1,088         2,958           484

Acquired from Bank of San Diego                                                              606

                                             --------       --------      --------      --------      --------
Allowance balance, end of year               $  2,737       $  3,003      $  3,224      $  3,667      $  1,355
                                             ========       ========      ========      ========      ========
Ratio of net loans charged off to
  average loans outstanding                     1.06%          0.45%         1.31%         1.12%          .15%
                                             ========       ========      ========      ========      ========
Ratio of allowance for loan
  losses to loans at year end                   1.90%          2.30%         2.81%         3.04%         1.23%
                                             ========       ========      ========      ========      ========
</TABLE>

The Company does not anticipate charge-offs in 1997 for any loan categories,
however, the Company gives no assurance that charge-offs will not occur in
1997.





                                     - 31 -
<PAGE>   33


                          Policy for Non-Accrual Loans

         The policy of Harbor Bank is that all loans that are past due for
ninety (90) days must be placed on a non-accrual status.  In addition, loans in
which it is probable that full collection of principal will not occur are
placed on non-accrual status.


                        Risk Elements in Loan Portfolio
                                      and
                Determination of the Allowances for Loan Losses


         The allowance for loan losses represents management's recognition of
the quality of the loan portfolio.  The allowance is maintained at a level
considered to be adequate for potential loan losses based on management's
assessment of various factors affecting the loan portfolio, which includes a
review of problem loans, business conditions and the overall quality of the
loan portfolio.

         The allowance is increased by the provision for loan losses charged to
operations and reduced by loans charged off to the allowance, net of recoveries.
During 1996, $1,159,269 was provided for loan losses compared to $312,596
provided during 1995 and $1,088,000 provided in 1994.  The substantial provision
for loan losses in 1994 was necessitated by high levels of non-performing and
classified loans and loan charge-offs.  The increase in the provision from 1995
to 1996 was primarily due to problem asset resolution which is reflected in the
reduction of non-performing assets.





                                     - 32 -
<PAGE>   34
         The following table shows an allocation of the allowance for loan
losses as of the end of 1995 and 1996.

<TABLE>
<CAPTION>
                                                PERCENT OF
                                               LOANS IN EACH
                                                CATEGORY TO
                               AMOUNT           TOTAL LOANS
                              --------         -------------
<S>                           <C>                 <C>
December 31, 1996:
  Commercial                  $  2,006             83.2%
  Real Estate-secured              704             11.8
  Real Estate-construction           9              0.6
  Installment                       19              4.4
                              --------            ------
                              $  2,738            100.0%
                              ========            ======
December 31, 1995:
  Commercial                  $  1,059             39.5%
  Real Estate-secured            1,795             53.3
  Real Estate-construction         116              2.6
  Installment                       33              4.5
                              --------            ------
                              $  3,003            100.0%
                              ========            ======
December 31, 1994:
  Commercial                  $  1,863             59.7%
  Real Estate-secured            1,151             31.7
  Real Estate-construction         165              4.2
  Installment                       45              4.4
                              --------            ------
                              $  3,224            100.0%
                              ========            ======
December 31, 1993:
  Commercial                  $  2,415             62.4%
  Real Estate-secured              954             23.9
  Real Estate-construction         220              9.4
  Installment                       78              4.3
                              --------            ------
                              $  3,667            100.0%
                              ========            ======
December 31, 1992:
  Commercial                  $    995             60.6%
  Real Estate-secured              207             23.9
  Real Estate-construction         100             12.0
  Installment                       54              3.5
                              --------            ------
                              $  1,356            100.0%
                              ========            ======
</TABLE>

Management believes that the allowance for loan and lease losses is adequate
for potential loan losses.  In addition, the Bank has undertaken a number of
actions including restructuring loan administration, developing and adopting
new or revised policies, procedures and systems that are designed to improve
the credit, review and classification processes, and reduction of classified
assets and nonperforming assets.





                                     - 33 -
<PAGE>   35

                          RETURN ON EQUITY AND ASSETS
                          ---------------------------
                                 (in thousands)


<TABLE>
<CAPTION>
                                    YEAR ENDED DECEMBER 31
                                    ----------------------
                                 1996         1995         1994 
                               --------     --------     --------
<S>                            <C>         <C>
Net Income                     $  1,197     $  1,238     $    158
Average Total Assets            195,491      181,370      173,570

RETURN ON AVERAGE ASSETS           0.61%        0.68%        0.09%

Net Income                     $  1,197     $  1,238     $    158
Average Equity                   15,007       13,776       13,340

RETURN ON AVERAGE EQUITY           7.98%        8.99%        1.18%

Average Total Equity           $ 15,077     $ 13,776     $ 13,340
Average Total Assets            195,491      181,370      173,570

AVERAGE TOTAL EQUITY TO
 ASSET RATIO                       7.71%        7.60%        7.69%

Dividend Declared Per Share       $   -        $   -        $   -
Net Income Per Share              $0.83        $0.88        $0.11

DIVIDEND PAYOUT RATIO                 -            -
</TABLE>

The FDIC, based upon their examination dated January 8, 1996 believes that
capital levels have been maintained above prescribed regulatory minimums for
well capitalized banks.





                                     - 34 -
<PAGE>   36


                                    DEPOSITS
                                    --------

The following table sets forth by time remaining to maturity, domestic time
certificates of deposit in amounts of $100,000 or more at December 31, 1996 (in
thousands):

<TABLE>
         <S>                               <C>
         Less than three months            $11,556
         Three to six months                10,550
         Six to twelve months                1,320
         Over twelve months                    402
                                           -------
                                           $23,828
                                           =======
</TABLE>




The following table sets forth the average amount of and average rate paid on
each of the following deposit categories for the last three years ended
December 31, 1996:



<TABLE>
<CAPTION>
                           AVERAGE DEPOSITS               AVERAGE RATES
                           ----------------               -------------
                        1996      1995      1994        1996   1995   1994
                        ----      ----      ----        ----   ----   ----
<S>                   <C>       <C>       <C>           <C>    <C>    <C>
Non-interest bearing
  demand deposits     $ 86,242  $ 75,823  $ 75,253         -      -      -

Interest bearing
  demand deposits       49,503    53,125    44,883      3.86%  3.65%  3.25%

Savings deposits        11,074    12,577    15,971      2.20%  2.18%  2.22%

Time deposits           32,580    24,473    21,170      5.18%  4.81%  3.43%
                      --------  --------  --------
     Total deposits   $179,399  $165,998  $157,277
</TABLE>





                                     - 35 -
<PAGE>   37
ITEM 2. PROPERTIES


      The Company's Corporate offices and the Bank's Main office are located at
11 Golden Shore, Long Beach, California, 90802, within a six-story modern
free-standing structure.  The banking facilities are located on the main floor
and contain 7,500 square feet.  The premises include three walk-up windows, a
vault, safe deposit boxes and a parking lot for approximately 60 cars.  The
administrative offices are located on the sixth floor and use approximately
12,000 square feet of that floor.  The Bank has under lease the remaining 4,000
square feet of the sixth floor, which has been subleased to other tenants.  The
office building is named and signed Harbor Bank.  There are two levels of
parking below ground which provide adequately for Bank personnel and other
personnel within the building.

      In connection with its Golden Shore office, the Bank entered into a Lease
Agreement for a term of ten years, renewable by the Bank for an additional ten
year term to expire December 2002.  The Lease Agreement (lease) is a triple net
lease, and the Bank is responsible for nearly every cost and expense associated
with renting its premises.  The annual cost of the lease in 1997 is expected to
be $805,000.  Annual increases in the Bank's rental obligations under the Lease
will not exceed 7% or the cost of living index each year, and will be reviewed
every three years.


      The Bank's Marina office is located in a one-story, free-standing
structure with approximately 7,500 square feet of area located at 6265 E. Second
Street, Long Beach, California 90803.  The building was converted in part for
the Bank's use of approximately 16,000 square feet, of which 6,000 is currently
leased to R.B. Williams & Associates and 2,400 square feet is leased to Bancap
Investment Group.  The facility is located within a retail business complex with
all parking as joint use.  The premises include a vault, safe deposit boxes, a
two-lane drive-up facility and two walk-up windows.   The lease term expires in
December 2000 and the expected annual cost in 1997 is $295,000.

      The Bank's Los Alamitos office is located in a one-story, modern
free-standing structure with approximately 7,500 square feet of area located at
5252 Katella Avenue, Los Alamitos, California 90720.  The Bank leases the land
at a monthly cost of $6,360 (for an annual rental of $76,320) and the lease
expires in 1999.  There is parking for approximately 35 cars.  These premises
also include a vault, safe deposit boxes, a four-lane drive-up facility and a
walk-up window.





                                     - 36 -
<PAGE>   38
     The Bank's Huntington Harbour office is located within a retail shopping
and business complex, and has approximately 3,700 square feet of area at 16400
Pacific Coast Highway, Huntington Beach, California  92649.  The space is
leased with an annual cost of $102,000 and an expiration date of November 1999.
There is ample parking which is shared with other tenants.  The premises
include a vault, safe deposit boxes, a two-lane drive-up facility and two
walk-up windows.

     The Bank's Fountain Valley office is located in a free-standing, modern,
two-story structure located at 10760 Warner Avenue, Fountain Valley, California
92708.  The Bank owns the building and land which has a fair market value of
approximately $850,000.  The Bank occupies 4,000 square feet of the ground
floor and has approximately 3,400 square feet of rental space available.  The
Bank premises include a vault, safe deposit boxes, three drive-up tellers and a
walk-up teller.

     The Bank's South Coast office is located in a free-standing, modern
building and is part of a business complex at 9 Executive Circle, Irvine,
California 92714.  The bank leases the ground floor of the building which is
approximately 22,940 square feet and occupies approximately 13,870 square feet
which includes a branch office and also a Service Center operation at a monthly
cost of $40,000 (for an annual rental of $ 480,000).  The lease expires in
March of 2005.  The Bank premises include a vault, safe deposit boxes, two
drive-up tellers and a walk-up teller window.  The remaining 9,073 square feet
is subleased to Opera Pacific and the Building Industry Association of Orange
County.





                                     - 37 -
<PAGE>   39

ITEM 3. LEGAL PROCEEDINGS.

         Due to the nature of their business, the Company, the Bank, and their
subsidiaries are subject to legal actions threatened or filed which arise from
the normal course of their business.  Management believes that such litigation
is incidental to the business of the Company and the Bank and the eventual
outcome of all currently pending legal proceedings against the Bank will not be
material to the Company's or the Bank's financial position or results of
operations.





                                     - 38 -
<PAGE>   40

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

       No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders.





                                     - 39 -
<PAGE>   41




ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
         STOCKHOLDER MATTERS
 
     The common stock of Harbor Bancorp is not listed on any stock exchange nor
with the NASDAQ. Although there is a relatively limited trading market in the
common stock of Harbor Bancorp, management is aware that Everen Securities,
Inc., Smith Barney, Ryan, Beck & Co., Elmer E. Powell & Company, Burford
Capital, Jim Alexander Securities,Inc. and Hoefer and Arnett make a market in
the Company's stock.  The number of stockholders of record on December 31, 1996
was approximately 418.

     The following table, which summarizes stock activity during the Company's
two fiscal years is based upon information provided by Everen Securities and
Hoefer & Arnett.

<TABLE>
<CAPTION>
                                           SALES PRICE
                                           -----------
QUARTER ENDED:                 HIGH          LOW        DIVIDEND
-----------------------------------------------------------------                    
<S>                           <C>          <C>            <C>
March 31, 1995                $ 7.75       $ 6.50
June 30, 1995                   8.50         7.00
September 30, 1995             10.00         7.50
December 31, 1995              11.00         8.875

March 31, 1996                $10.797      $ 9.82
June 30, 1996                  10.375        9.75         (1)
September 30, 1996             11.00         9.00
December 31, 1996              12.75        10.625
</TABLE>



(1)  5% stock dividend at 4/19/96





                                     - 40 -
<PAGE>   42
ITEM 6.  SELECTED FINANCIAL DATA


<TABLE>
<CAPTION>
                                                   AT OR FOR THE YEAR ENDED DECEMBER 31,

                                      1996          1995          1994          1993          1992
                                      ----          ----          ----          ----          ----
<S>                               <C>           <C>           <C>           <C>           <C>
Operating results:

Net interest income               $ 12,029,588  $ 11,456,120  $  9,946,446  $ 10,341,090  $ 10,167,942

Provision for loan losses            1,159,269       312,596     1,088,000     2,958,359       484,000
Net income                           1,196,546     1,238,534       157,940      (660,710)      842,828

Earnings per share                        0.83          0.88          0.11         (0.49)         0.64

Cash dividends                               -             -             -             -       291,259

Balance sheet total:

Total assets                      $200,103,495  $195,092,129  $176,465,496  $191,051,914  $168,115,137

Net loans                          141,250,271   127,408,913   111,625,771   116,840,943   108,925,048

Deposits                           183,431,500   179,204,795   162,111,914   176,001,561   153,397,098

Total stockholders'equity           15,699,982    14,556,427    13,134,930    13,095,952    13,750,862
</TABLE>





                                     - 41 -
<PAGE>   43


Item 7.  MANAGEMENT DISCUSSION AND ANALYSIS OF 
         FINANCIAL CONDITION AND RESULTS OF OPERATIONS


     Management's discussion and analysis of financial condition and results of
operations is intended to provide a better understanding of the significant
changes and trends relating to the financial condition, results of operations,
capital resources, liquidity and interest rate sensitivity of the Company
during the three-year period ended December 31, 1996.  The following discussion
will focus on Harbor Bancorp's goals in conjunction with current events and
trends.  Reference should be made to the accompanying Consolidated Financial
Statements of the Company and related notes for an understanding of the
following discussion and analysis.


FINANCIAL CONDITION

     Assets

     Total assets increased $5,011,366, or 2.6%,  from $195,092,129 at December
31, 1995 to $200,103,495 at December 31, 1996.  The net increase in total
assets results primarily from an  increase in loans, offset by a decline in
investment securities.  Total earning assets also experienced an increase of
$6,645,359, or 3.9%, from $171,089,797 at December 31, 1995 to $177,735,156 at
December 31, 1996.  The increase in total assets and total earning assets from
December 31, 1995 to December 31, 1996, is primarily the result of strong
growth in loans and a modest  increase in core deposits.

     Total loans increased by $13,575,643, or 10.4%, from $130,412,144 at
December 31, 1995 to $143,987,787 at December 31, 1996.  In 1996, the Company
benefited from a continued consolidation in the banking industry in Southern
California due to bank mergers, acquisitions and closures.  The increase in the
loan portfolio is primarily a result of additional volume generated due to the
industry consolidation.  Management continues to emphasize  funding only the
best credits and there has been no change in the Company's philosophy of no
growth for growth's sake.  Cash and cash equivalents increased $2,378,627,  or
9.1%, from $26,164,212 at December 31, 1995 to $28,542,839 at December 31,
1996.  The increase in cash and cash equivalents is primarily due to an
increase in federal funds sold and securities purchased under resale agreements
which is offset by a decline in investment securities.  Investment securities
declined $10,130,284, or 28.9%, from $34,982,653 at December 31, 1995 to
$24,852,369 at December 31, 1996.  The primary reason for the decline in
investment securities is reallocation into other earning asset categories,
specifically federal funds sold and securities purchased under resale
agreements and loans.





                                     - 42 -
<PAGE>   44
     Sources of Funds

     The Company had total deposits at December 31, 1996, of $183,431,500
compared to $179,204,795 at December 31, 1995.  The principal source of the
increase in total deposits was in interest bearing deposits which increased
$3,241,011, or 3.7%, from $87,201,532 at December 31, 1995, to $90,442,543 at
December 31, 1996.  The primary reason for the overall increase was growth in
core deposits. The Company continues to maintain local commercial deposits by
providing a secure, stable presence in its market area. Substantially all of
the Company's deposits are local, core deposits.  The Company does not have any
out-of-area brokered deposits included in the deposit base.  The Company
continues to emphasize core deposits and has elected not to compete for
volatile deposits with increased rates.


Results of Operations

     Net Interest Income

     Net interest income, the difference between interest and fees earned on
earning assets and interest paid on deposits and other sources of funds, has
continued to be challenged by deregulation through increased competition and
market conditions.  The Company's net interest income is affected by the change
in the amount and mix of interest-earning assets and interest-bearing
liabilities.  It is also affected by changes in yields earned on
interest-earning assets and rates paid on deposits and borrowed funds.    Net
interest income in 1996 was $12,029,588 compared to $11,456,120 in 1995 and
$9,946,446 in 1994.  The Company is consistent in its' ability to maintain a
strong net interest income position with the increase in 1996 a result of an
increase in earning assets. Interest earning assets averaged $175,954,000 in
1996 compared to $162,875,000 in 1995, which represents an increase of
$13,079,000, or 8.03%.  Loans, the largest component of interest earning
assets, averaged $133,951,000 for the year ended December 31, 1996 compared to
$118,986,000 for the year ended December 31, 1995.  Net interest income, when
expressed as a percentage of average total interest earning assets, is referred
to as the net interest margin.  The Company's net interest margin decreased
slightly to 6.84% in 1996 from 7.03% in 1995 and 6.56% in 1994.  Net interest
spread, the effective rate of interest income on earning assets less the
effective rate of interest expense on deposits, decreased to 5.30% in 1996 from
5.75% in 1995 and 5.47% in 1994.





                                     - 43 -
<PAGE>   45




     Allowance and Provision for Loan Losses

     The allowance for loan losses is a general reserve established by
management to absorb potential losses inherent in the entire loan portfolio.
In evaluating the adequacy of the allowance, management gives consideration to
the Company's loan loss experience, the performance of loans in the Company's
portfolio, the quality of the loans in the Company's portfolio, evaluation of
collateral for such loans, the economic conditions affecting collectibility of
loans, the prospects and financial condition of the respective borrowers or
guarantors and such other factors which in management's judgment deserve
recognition in the estimation of loan losses.  During 1996, $1,159,269 was
provided for loan losses compared to $312,596 provided during 1995 and
$1,088,000 provided during 1994.  The substantial provision for loan losses in
1994 compared to 1995 was necessitated by high levels of non-performing and
classified loans and loan charge-offs.  The increase in the provision from 1995
to 1996 is primarily due to problem asset resolution which is reflected in the
reduction of nonperforming assets.  Of the $1,159,269 provided for loan losses
in the year ended December 31, 1996, approximately $435,000 was provided in the
fourth quarter to allow for a $350,000 charge-off.  Net charge-offs for 1996,
1995 and 1994 were approximately $1,424,984, $533,833, and $1,530,355,
respectively.  The allowance for loan losses at December 31, 1996 was
approximately $2,738,000, or 1.9% of total loans, as compared to $3,003,000, or
2.30% of total loans at December 31, 1995.  Non-performing loans, loans which
are no longer accruing interest, decreased $2,963,433, or 43.9%, to $3,782,539
at December 31, 1996 compared to $6,745,972 at December 31, 1995.  Of the
$3,782,539 in non-performing loans at December 31, 1996, there were no loans on
cash basis nonaccrual. At December 31, 1995, of the $6,745,972 in
non-performing loans $2,686,978 were on cash basis nonaccrual with all payments
received as agreed.  The primary reason for the decrease in non-performing
loans was the continued improvement in the overall loan portfolio.

As a result of the Federal Deposit Insurance Corporation ("FDIC") examination
at December 31, 1993, the Bank and FDIC executed a Memorandum of Understanding
("FDIC Memorandum") dated August 3, 1994.

Based upon the January 8, 1996, FDIC examination of the Bank as of November 30,
1995, the Bank was formally notified that the FDIC Memorandum dated August 3,
1994, was removed effective May 22, 1996. Subsequent to the removal of the FDIC
Memorandum, the  Board of Directors of the Bank approved a resolution which
required Bank management to maintain  certain performance standards.

As a result of an examination conducted by the California State Banking
Department (the "Department") as of December 31, 1993, the Bank and the
Department executed a Memorandum of Understanding which was dated January 31,
1995, which was subsequently terminated June 12, 1996.





                                     - 44 -
<PAGE>   46
Based upon an examination as of March 31, 1994, by the Federal Reserve Bank of
San Francisco ("FRB"), the Company and the FRB executed a Memorandum of
Understanding dated October 24, 1994.  Following adoption of certain
resolutions on November 19, 1996, the FRB terminated the Memorandum of
Understanding effective December 3, 1996.

     Other Operating Income

     Other operating income, which includes income derived from service charges
on deposit accounts, loan servicing fees and other fees and charges, and gain
(loss) on sale of securities, overall increased slightly to $1,189,483 in 1996,
from $1,145,756 in 1995 and $1,131,210 in 1994.  Service charges on deposit
accounts improved modestly in 1996 over 1995 and 1994. However, the net
increase from 1994 to 1995 is primarily a result of gains on sale of securities
in 1995 which did not occur in 1994.  The Company recorded gain on sale of
securities of $18,750 and $54,044 in year ended December 31, 1996 and 1995,
respectively, and a loss of $734 in year ended December 31, 1994.  Gain (loss)
on sale of securities is a result of the sale of securities held in the
available for sale category for the purpose of improving liquidity.

     Noninterest Expense

     The 1.85% decrease in total noninterest expense in 1996 to $10,180,256
from $10,371,746 at December 31, 1995, is primarily in other real estate
expense and other operating expense.  Other real estate expense declined in
1996 as a result of the decrease in other real estate which decreased from
$516,431 at December 31, 1995 to $328,952 at December 31, 1996.  Other
operating expense decreased $194,028 to $3,095,603 in 1996 compared to
$3,289,631 in 1995 and $3,087,826 in 1994.  The Company experienced an increase
in other operating expense in 1995 primarily due to a loss of approximately
$295,000 which resulted from the settlement of a lawsuit.   As a percentage of
average total assets, total noninterest expense  declined to 5.21% in 1996,
compared to  5.72% in 1995 and 5.65% in 1994.

     Net Income

     The Company reported net income of $1,196,546 in 1996, or $0.83 per share,
compared to $1,238,534, or $0.88 per share, in 1995 and $157,940, or $0.11 per
share, in 1994.  The share and per share data information has been adjusted for
5% stock dividends issued on April 19, 1996 and October 1, 1994.  Supported by
an expansion economy, the Company's earnings performance in 1996 was primarily
a result of growth in interest earning assets coupled with improved credit
quality and decreasing other noninterest expense.





                                     - 45 -
<PAGE>   47
     Income Taxes

     In 1996, 1995 and 1994, the Company recorded a tax provision of $683,000,
$679,000 and $20,000, respectively.

         Asset - Liability Management

     The Company relies on asset - liability management to assure adequate
liquidity, maintain an appropriate balance between interest sensitive earning
assets and interest bearing liabilities, and plan and control asset and
liability mixes, volumes, maturities, yields and rates for maximization of
interest margins.  Liquidity management and interest rate sensitivity
management are key factors in asset - liability management.  Liquidity
management involves the ability to meet expected and potential  cash flow
requirements of customers who may be either depositors wanting to withdraw
funds or borrowers needing assurances that sufficient funds will be available
to meet their credit needs.  Interest rate sensitivity management seeks to
avoid fluctuating interest margins and to enhance consistent growth of net
interest income through periods of changing interest rates.

     The Company's Asset - Liability Management Committee manages the liquidity
position, the parameters of which are approved by the Board of Directors.  The
liquidity position of the Company is monitored daily and the Company had liquid
assets (cash, federal funds sold, securities purchased under agreements to
resale,  deposits in other financial institutions and investment securities) as
a percent of total deposits of 29.4% and 34.4% as of December 31, 1996 and
1995, respectively. The Company's Investment Committee manages the investment
portfolio, based upon the Investment Policy which is approved by the Board of
Directors.

     The Bank's goal is to maintain federal funds sold at $7 to $10 million
dollars on average with minimum daily investments monitored closely.  Deposits
with other institutions and securities purchased under agreements to resale
will be maintained as alternative short-term investment products.  Management's
intention is to maintain an investment portfolio which contributes an adequate
rate of return with minimal market or credit risk.

     Interest rate sensitivity varies with different types of interest-earning
assets and interest-bearing liabilities.  Harbor Bank intends to maintain
interest-earning assets, comprised of both loans and investments, and
interest-bearing liabilities, comprised primarily of deposits, maturing or
repricing evenly in order to eliminate any impact from interest rate changes.
In the event of a change in interest rates, 40.66% of the loan portfolio at
December 31, 1996 would immediately reprice, with 14.40% repricing within the
next twelve months.  47.7% of the deposit liabilities would reprice immediately
or within twelve months, with the remaining 50.7% of deposit liabilities being
in noninterest bearing demand accounts.





                                     - 46 -
<PAGE>   48
Capital Resources

         Management seeks to maintain a level of capital adequate to support
anticipated asset growth and credit risks and to ensure that the Company is
within established regulatory guidelines and industry standards.  The Company's
capital plan for 1997 contemplates continued growth in stockholders' equity
through the retention of net income.  Minimum capital ratios required under the
risk-based capital regulations are 4.0% for Tier 1 Capital and 8.0% for Total
Capital.  As of December 31, 1996, the Company had Tier 1 Capital of 10.33% and
Total Capital of 11.58%.





                                     - 47 -
<PAGE>   49





                      (THIS PAGE INTENTIONALLY LEFT BLANK)





                                     - 48 -
<PAGE>   50
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



Index to Consolidated Financial Statements and Financial Statement Schedules
Covered by Report of Independent Public Accountants.


<TABLE>
<CAPTION>
                                                                       Page
Reference
---------
<S>                                                                   <C>
Report of Ernst & Young, LLP, Auditors                                   50

Consolidated Balance Sheets at
December 31, 1996 and 1995                                            51-52

Consolidated Statements of Income for the
years ended December 31, 1996, 1995 and 1994                          53-54

Consolidated Statements of Stockholders'
Equity for the years ended December 31, 1996,
1995 and 1994                                                            55

Consolidated Statements of Cash Flows
for the years ended December 31, 1996
1995 and 1994                                                         56-57

Notes to Consolidated Financial Statements                            58-79
</TABLE>





All schedules are omitted since the required information is not present or not
present in amounts sufficient to require submission of the schedule or because
the information required is included in the Consolidated Statements or Notes
thereto.





                                     - 49 -
<PAGE>   51





                         REPORT OF INDEPENDENT AUDITORS





The Board of Directors and Stockholders
Harbor Bancorp


We have audited the accompanying consolidated balance sheets of Harbor Bancorp
and subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1996.  These financial statements are
the responsibility of the Company's management.  Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Harbor Bancorp
and subsidiaries at December 31, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.


Los Angeles, California                   Ernst & Young LLP
January 31, 1997





                                     - 50 -
<PAGE>   52

                        HARBOR BANCORP AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                 DECEMBER 31,

                                            1996            1995
                                            ----            ----
<S>                                     <C>             <C>
ASSETS
------
Cash and due from banks                 $ 20,142,839    $ 20,964,212
Federal funds sold and securities
  purchased under resale agreements        8,400,000       5,200,000
                                        ------------    ------------
   Cash and cash equivalents              28,542,839      26,164,212

Time certificates of deposit                 495,000         495,000

Investment securities:
   Held to maturity (fair value of
    $6,094,994 in 1996 and
    $10,190,673 in 1995)(Notes 1 and 2)    6,064,736      10,187,147

   Available for sale                     18,787,633      24,795,506


Loans (Notes 1 and 3)                    143,987,787     130,412,144
  Less allowance for
    loan losses (Notes 1 and 4)            2,737,516       3,003,231
                                        ------------    ------------
          Net loans                      141,250,271     127,408,913

Bank premises and equipment (Note 1):
  Land                                       159,000         159,000
  Buildings and improvements               4,249,367       4,068,049
  Furniture, fixtures and equipment        3,571,799       3,427,932 
                                        ------------    ------------
                                           7,980,166       7,654,981
  Less accumulated depreciation
    and amortization                       6,131,924       5,726,982
                                        ------------    ------------
                                           1,848,242       1,927,999

Other real estate                            328,952         516,431
Accrued interest receivable                  856,536         997,564
Other assets                               1,929,286       2,599,357
                                        ------------    ------------
          Total assets                  $200,103,495    $195,092,129
                                        ============    ============
</TABLE>





                                     - 51 -
<PAGE>   53
                        HARBOR BANCORP AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                                  (Continued)


<TABLE>
<CAPTION>

                                                December 31,

                                            1996            1995
                                            ----            ----
<S>                                     <C>             <C>
 LIABILITIES AND STOCKHOLDERS' EQUITY
 ------------------------------------

Deposits:
  Interest bearing (Notes 1 and 5)       $ 90,442,543   $ 87,201,532
  Noninterest bearing                      92,988,957     92,003,263
                                         ------------   ------------
        Total deposits                    183,431,500    179,204,795

Accrued expenses and other liabilities        972,013      1,330,907
                                         ------------   ------------
        Total liabilities                 184,403,513    180,535,702

Commitments and contingencies (Note 9)              -              -

Stockholders' equity (Notes 1, 7, and 8):
  Common stock, no par value; 5,000,000
    shares authorized; issued and out-
    standing, 1,415,214 shares in 1996
    and 1,348,021 shares in 1995           13,963,517     13,257,875

Retained earnings                           1,870,619      1,381,899

  Unrealized losses on securities
    available for sale, net of tax          ( 134,154)       (83,347)
                                         ------------   ------------
        Total stockholders' equity         15,699,982     14,556,427
                                         ------------   ------------
          Total liabilities and
            stockholders' equity         $200,103,495   $195,092,129
                                         ============   ============
</TABLE>


                See notes to consolidated financial statements.





                                     - 52 -
<PAGE>   54
                        HARBOR BANCORP AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF INCOME

                            Years ended December 31,

<TABLE>
<CAPTION>
                                 1996          1995          1994
                                 ----          ----          ----
<S>                           <C>           <C>           <C>
Interest income:
  Interest and fees on loans  $12,749,764   $11,502,305   $10,319,644
  Interest on investment
    securities                  1,397,555     1,760,002     1,010,920
  Other interest                  940,770       835,458       621,999
                              -----------   -----------   -----------
      Total interest income    15,088,089    14,097,765    11,952,563

Interest expense:
  Interest on deposits          3,055,081     2,597,912     1,933,993
  Interest on other
    borrowed funds                  3,420        43,733        72,124
                              -----------    ----------   -----------
      Total interest expense    3,058,501     2,641,645     2,006,117
                              -----------   -----------   -----------
Net interest income            12,029,588    11,456,120     9,946,446
Provision for loan
  losses (Notes 1 and 4)        1,159,269       312,596     1,088,000
                              -----------   -----------   -----------
Net interest income after
  provision for loan
  losses                       10,870,319    11,143,524     8,858,446
Other operating income:
  Service charges on deposit
    accounts                      964,664       920,240       905,017
  Loan servicing fees and other
    fees and charges              206,069       171,472       226,927
  Gain (loss) on sale of
    securities                     18,750        54,044          (734)
                               ----------   -----------   ----------- 
      Total other operating
        income                  1,189,483     1,145,756     1,131,210
</TABLE>





                                     - 53 -
<PAGE>   55
                        HARBOR BANCORP AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF INCOME

                                  (Continued)

                            Years ended December 31,

<TABLE>
<CAPTION>
                                     1996         1995        1994
                                     ----         ----        ----
<S>                             <C>          <C>           <C>
Noninterest expense:

  Salaries, wages and employee
    benefits                      3,781,418    3,605,859    3,244,680
  Occupancy expenses              2,177,900    2,152,163    1,969,795
  Equipment expenses                396,256      306,689      331,410
  Data processing expenses          555,108      630,077      585,606
  Other real estate expenses        173,971      387,327      592,399
  Other operating expenses        3,095,603    3,289,631    3,087,826
                                -----------  -----------   ----------
          Total noninterest
            expense              10,180,256   10,371,746    9,811,716
                                -----------  -----------   ----------

Income before income taxes        1,879,546    1,917,534      177,940

Income taxes (Notes 1 and 6)        683,000      679,000       20,000
                                -----------  -----------   ----------
Net income                      $ 1,196,546  $ 1,238,534   $  157,940
                                ===========  ===========   ==========


Weighted average number of
  common shares and common
  share equivalents               1,434,245    1,415,214    1,415,214
                                ===========   ==========   ==========

Net income per common
  share (Note 1)                   $0.83        $0.88        $0.11
                                   =====        =====        =====
</TABLE>



                See notes to consolidated financial statements.





                                     - 54 -
<PAGE>   56
                        HARBOR BANCORP AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                  Years ended December 31, 1996, 1995 and 1994


<TABLE>
<CAPTION>
                                                          UNREALIZED
                                                         GAINS (LOSSES)
                 NUMBER OF                               ON SECURITIES
                SHARES OUT-      COMMON      RETAINED    AVAILABLE FOR
                 STANDING        STOCK       EARNINGS   SALE, NET OF TAX  TOTAL
                 -----------------------------------------------------------------
<S>              <C>          <C>           <C>           <C>          <C>
Balance at    
  January
  1, 1994        1,284,023    $12,841,888   $  402,733    $(148,669)   $13,095,952
Adjustment to
  beginning
  balance for
  change in
  accounting
  method,
  net of tax          -              -             -         11,175         11,175
5% stock
  dividend          63,998        415,987     (417,308)         -           (1,321)
Change in
  unrealized
  gains (losses)
  on securities
  available for
  sale, net of
  tax                 -              -             -       (128,816)      (128,816)
Net income            -              -         157,940          -          157,940
                 ---------    -----------   ----------    ---------    -----------
Balance at
  December
  31, 1994       1,348,021    $13,257,875   $  143,365    $(266,310)   $13,134,930

Change in
  unrealized
  gains (losses)
  on securities
  available for
  sale, net of
  tax                -                 -           -        182,963        182,963
Net income           -                 -     1,238,534          -        1,238,534
                 ---------    -----------   ----------    ---------    -----------
Balance at 
  December
  31, 1995       1,348,021    $13,257,875   $1,381,899    $ (83,347)   $14,556,427

5% stock
  dividend          67,193        705,642     (707,826)         -           (2,184)
Change in
  unrealized
  gains (losses)
  on securities
  available for
  sale, net of
  tax                 -                 -          -        (50,807)       (50,807)
Net income            -                 -    1,196,546          -        1,196,546
                 ---------    -----------   ----------    ---------    -----------
Balance at    
  December
  31, 1996       1,415,214    $13,963,517   $1,870,619    $(134,154)   $15,699,982
                 =========    ===========   ==========    =========    ===========
</TABLE>


                See notes to consolidated financial statements.





                                     - 55 -
<PAGE>   57

                        HARBOR BANCORP AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                            Years ended December 31,


<TABLE>
<CAPTION>
                                        1996          1995          1994
                                        ----          ----          ----     
<S>                                  <C>           <C>           <C>
Operating activities:
  Net income                         $ 1,196,546   $ 1,238,534   $   157,940
  Adjustments to reconcile net
    income to net cash provided
    by operating activities:
    Provision for depreciation and
      amortization                       483,609       480,108       539,259
    Provision for loan losses          1,159,269       312,596     1,088,000
    (Gain) loss on sale of
     investment securities               (18,750)      (54,044)          734
    Decrease (increase) in
      interest receivable                141,028       (25,237)        1,542
    (Decrease ) increase in
      interest payable                    (4,772)       (4,023)       38,649
    Provision for deferred income
      taxes                              210,000         1,000       (10,000)
    Other                                (47,378)     (494,554)     (812,220)
                                     -----------   -----------   ----------- 
      Net cash provided by operating
        activities                     3,119,552     1,454,380     1,003,904


Investing activities:
  Investment securities held to
    maturity:
     Purchases                        (2,212,780)  (16,295,523)   (1,598,633)
     Proceeds from maturities          6,272,169    15,688,858             -
  Investment securities available
    for sale:
     Purchases                       (34,905,252)  (34,877,417)  (38,324,772)
     Proceeds from sale                3,018,750     6,995,550     4,978,000
     Proceeds from maturities         38,000,000    29,000,000    42,274,008
  Net decrease in short-
    term securities                            -             -       396,000
  Net (increase) decrease
    in loans                         (15,000,627)  (16,095,734)    4,127,171
  Capital expenditures                  (325,185)     (473,184)     (230,240)
  Sales of other real estate             187,479     2,297,854       770,403 
                                     -----------   -----------   -----------
     Net cash (used in) provided by
        investing activities          (4,965,446)  (13,759,596)   12,391,937
</TABLE>





                                     - 56 -
<PAGE>   58
                        HARBOR BANCORP AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                            Years ended December 31,



<TABLE>
<CAPTION>
                                        1996         1995            1994
                                        ----         ----            ----
<S>                                 <C>           <C>             <C>
  Financing activities:
    Net increase (decrease) in
      commercial and other demand
      deposits, savings, money
      market deposits, and
      certificates of deposit         4,226,705    17,092,881     (13,889,647)

  Cash dividends and cash paid
    in lieu of fractional shares         (2,184)            -          (1,321)
                                    -----------   -----------     -----------
      Net cash provided by (used
        in) financing activities      4,224,521    17,092,881     (13,890,968)

      Increase (decrease) in cash
        and cash equivalents          2,378,627     4,787,665        (495,127)

Cash and cash equivalents at
  beginning of year                  26,164,212    21,376,547      21,871,674
                                    -----------   -----------     -----------
Cash and cash equivalents at
  end of year                       $28,542,839   $26,164,212     $21,376,547
                                    ===========   ===========     ===========




                                       1996          1995            1994      
                                    -----------   -----------     -----------
Supplemental disclosures of
  cash flow information:
    Cash paid for:
      Interest                      $ 3,063,273   $ 2,645,668     $ 1,967,468
      Income taxes                      460,260       700,000         244,211

Supplemental disclosures of
  noncash transactions:
    Acquisition of real estate
      acquired through
      foreclosure                   $ 1,597,000   $   725,000     $ 1,377,593
    Unrealized (losses) gains
      on securities available
      for sale, net of tax              (50,807)      182,963        (117,641)
</TABLE>





                See notes to consolidated financial statements.





                                     - 57 -
<PAGE>   59
                        HARBOR BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1996



1.  Summary of significant accounting policies

Principles of consolidation

The consolidated financial statements include all the accounts of Harbor
Bancorp ("Company") and its wholly owned subsidiaries, Harbor Bank ("Bank") and
Harbor Bank Properties.  All significant intercompany accounts and transactions
have been eliminated upon consolidation.

Certain prior year amounts have been reclassified to conform with the current
year's presentation.

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial statements and
accompanying notes.  Actual results could differ from those estimates.

Investment securities

The Company adopted Statement of Financial Accounting Standard No. 115
"Accounting for Certain Investments in Debt and Equity Securities" as of
January 1, 1994.

Investment securities held to maturity are securities which the Company has the
positive intent and ability to hold until maturity.  Accordingly, these
securities are carried at amortized cost.   Unrealized holding gains and losses
are not recognized in the financial statements until realized or until a
decline in fair value below cost is deemed to be other than temporary.

Investment securities available for sale include debt securities and mutual
funds. These securities are stated at fair value with unrealized holding gains
and losses reflected as a separate component of stockholders' equity, net of
income taxes.  Gains and losses are determined on the specific indentification
method.  Any decline in the fair value of the investments which is deemed to be
other than temporary is charged against current earnings.





                                     - 58 -
<PAGE>   60

                        HARBOR BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1996


1.  Summary of significant accounting policies (Cont'd)

Loans

Loans receivable that management has the positive intent and ability to hold
for the foreseeable future or until maturity or pay-off are reported at their
outstanding principal adjusted for any charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans and unamortized
premiums or discounts on purchased loans.

Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield of the related loan.

Nonaccrual loans

Nonaccrual loans are loans on which accrual of interest has been suspended.
Interest is suspended on all real estate loans when, in management's judgement,
the interest will not be collectible in the normal course of business or when
the loan is 90 days or more past due or full collection of principal is not
assured.  When a loan is placed on nonaccrual, interest accrued is reversed
against interest income.

Impaired loans

The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan," ("SFAS 114") as amended, effective January 1, 1995.  This statement
requires that impaired loans be measured based on the present value of expected
future cash flows discounted at the loan's effective interest rates or the fair
value of the underlying collateral, and specifies alternative methods for
recognizing interest income on loans that are impaired or for which there are
credit concerns.  For purposes of applying this standard, impaired loans have
been defined as all nonaccrual loans.  The Company's policy for income
recognition was not affected by adoption of the standard.  The adoption of SFAS
114 did not have any effect on the total allowance for loan losses or related
provision.





                                     - 59 -
<PAGE>   61
                        HARBOR BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1996


1.  Summary of significant accounting policies (Cont'd)


Allowance for loan losses

The allowance for loan losses represents management's evaluation of the quality
of the loan portfolio.  The allowance is maintained at a level considered to
be adequate for potential loan losses based on management's assessment of
various factors affecting the loan portfolio, which includes a review of
problem loans and general business conditions. The allowance is increased by
the provision for loan losses charged to operations and reduced by loans
charged off to the allowance, net of recoveries.

Other Real Estate 

Other real estate ("ORE") is stated at the lower of cost or fair market value,
net of estimated selling costs.

Income taxes

Income tax expense is the current and deferred tax consequence, of events that
have been recognized in the financial statements, as measured by the provisions
of enacted tax law.  The Company files consolidated federal and state tax
returns with all its subsidiaries.

Bank premises and equipment

Bank premises and equipment are stated at cost, less accumulated depreciation
and amortization.  Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the related assets
which range from 10 to 30 years for buildings and improvements and 3 to 10
years for furniture, fixtures and equipment.

Net income per common share

Net income per common share is based on average shares outstanding during each
year plus the net effect of dilutive stock options.





                                     - 60 -
<PAGE>   62
                        HARBOR BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1996

1.  Summary of significant accounting policies (Cont'd.)


Time certificates of deposit

Time certificates of deposit of $100,000 or more totaled  $23,828,595 at
December 31, 1996 and $15,278,000 at December 31, 1995.

Reserve requirements

The Bank is required to maintain a balance with the Federal Reserve Bank based
on a percentage of deposit liabilities.  At December 31, 1996, the required
balance was $4,653,000.

Cash and cash equivalents

Cash equivalents include amounts due from banks, federal funds sold and
securities purchased under resale agreements.  Generally, federal funds are
purchased and sold for one-day periods.  Securities purchased under resale
agreements generally have a contracted term of one day.

Fair values of financial instruments

The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:

Cash and cash equivalents:  The carrying amounts reported in the balance sheet
for cash and short-term instruments approximate those assets' fair values.

Investment securities:  Estimated fair values are based on quoted market
prices.

Loans:  For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values.  The fair
values for other loans (e.g., commercial real estate and commercial and
industrial loans) are estimated using discounted cash flow analysis, using
interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality.  The carrying amount of accrued interest
approximates its fair value.





                                     - 61 -
<PAGE>   63
                        HARBOR BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1996


1.  Summary of significant accounting policies (Cont'd.)

Deposits:  The fair values disclosed for demand deposits (e.g., interest and
non-interest checking, passbook savings, and certain types of money market
accounts) are, by definition, equal to the amount payable on demand at the
reporting date (i.e., their carrying amounts).  The carrying amounts for
variable-rate, fixed-term money market accounts and certificates of deposits
approximate their fair values at the reporting date.  Fair values for
fixed-rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on certificates
to a schedule of aggregated expected monthly maturities on time deposits.





                                     - 62 -
<PAGE>   64
                        HARBOR BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1996

2.  Investment securities

The amortized cost and estimated fair values of investment securities held to
maturity are as follows:

<TABLE>
<CAPTION>
                                                 1996
                          -----------------------------------------------------
                                           GROSS        GROSS
                          AMORTIZED     UNREALIZED    UNREALIZED       FAIR
                             COST          GAINS        LOSSES         VALUE    
                          -----------   -----------   ----------    -----------
<S>                       <C>           <C>           <C>           <C>
US Treasury
  securities and
  obligations of
  US government
  corporations
  and agencies            $ 5,521,161   $    41,370   $   12,862    $ 5,549,669

Obligations of
  states and
  political
  subdivisions                543,575         6,533        4,783        545,325 
                          -----------   -----------   ----------    -----------
    Totals                $ 6,064,736   $    47,903   $   17,645    $ 6,094,994
                          ===========   ===========   ==========    ===========
</TABLE>



<TABLE>
<CAPTION>
                                                 1995                      
                          -----------------------------------------------------
                                           GROSS        GROSS
                           AMORTIZED    UNREALIZED    UNREALIZED       FAIR
                             COST          GAINS        LOSSES         VALUE   
                          -----------   -----------   ----------    -----------
<S>                       <C>           <C>           <C>           <C>
US Treasury
  securities and
  obligations of
  US government
  corporations
  and agencies            $ 9,848,726   $    46,677   $   43,320    $ 9,852,083

Obligations of
  states and
  political
  subdivisions                338,421         7,343        7,174        338,590        
                          -----------   -----------   ----------    -----------
    Totals                $10,187,147   $    54,020   $   50,494    $10,190,673
                          ===========   ===========   ==========    ===========
</TABLE>





                                     - 63 -
<PAGE>   65
                        HARBOR BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1996




2.  Investment securities (Cont'd.)


The amortized cost and estimated fair value of investment securities held to
maturity at December 31, 1996, by contractual maturity, are shown below.

<TABLE>
<CAPTION>
                                               AMORTIZED       FAIR           
                                                 COST          VALUE
                                              -----------   -----------
<S>                                           <C>           <C>  
Due in one year or less                       $   934,070   $   933,098

Due after one year through five years           2,229,844     2,245,518

Due after five years through ten years            414,130       418,319

Due after ten years                             2,486,692     2,498,059
                                              -----------   -----------
                                              $ 6,064,736   $ 6,094,994
                                              ===========   ===========
</TABLE>




There were no sales of investment securities held to maturity in 1996, 1995 and
1994.





                                     - 64 -
<PAGE>   66

                        HARBOR BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1996

2. Investment securities (Cont'd.)

The amortized cost and estimated fair values of investment securities available
for sale are as follows:



<TABLE>
<CAPTION>
                                                    1996         
                          -----------------------------------------------------
                                          GROSS         GROSS
                           AMORTIZED    UNREALIZED    UNREALIZED       FAIR
                             COST         GAINS         LOSSES         VALUE        
                          -----------   ----------    -----------   -----------
<S>                       <C>           <C>           <C>           <C>
US Treasury
  securities and
  obligations of
  US government
  corporations
  and agencies            $17,990,897   $        -    $     2,580   $17,988,317

Mutual funds                1,000,000            -        200,684       799,316
                          -----------   ----------    -----------   -----------
    Totals                $18,990,897   $        -    $   203,264   $18,787,633
                          ===========   ==========    ===========   ===========
</TABLE>



<TABLE>
<CAPTION>
                                                    1995                                
                          -----------------------------------------------------
                                          GROSS          GROSS
                           AMORTIZED    UNREALIZED    UNREALIZED       FAIR
                             COST         GAINS         LOSSES         VALUE          
                          -----------   ----------    -----------   -----------
<S>                       <C>           <C>           <C>           <C>
US Treasury
  securities and
  obligations of
  US government
  corporations
  and agencies            $23,921,790   $   53,059    $    12,271   $23,962,578

Mutual funds                1,000,000            -        167,072       832,928
                          -----------   ----------    -----------   -----------
    Totals                $24,921,790   $   53,059    $   179,343   $24,795,506
                          ===========   ==========    ===========   ===========
</TABLE>





                                     - 65 -
<PAGE>   67
                        HARBOR BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1996


2. Investment securities (Cont'd.)

The amortized cost and estimated fair value of investment  securities available
for sale at December 31, 1996, by contractual maturity, are shown below.


<TABLE>
<CAPTION>
                                            AMORTIZED        FAIR
                                              COST           VALUE           
                                           -----------    -----------          
<S>                                        <C>            <C>
Due in one year or less                    $17,990,897    $17,988,317
Due after one year through five years                -              -

Mutual funds                                 1,000,000        799,316
                                           -----------    -----------          
                                           $18,990,897    $18,787,633 
                                           ===========    ============
</TABLE>


Gross gains of $18,750 were realized on those investment securities available
for sale sold in 1996, (taxes related to investment securities available for
sale gains in 1996 were $6,948).  Gross gains of $54,044 were realized on those
investment securities available for sale sold in 1995, (taxes related to
investment securities available for sale gains in 1995 were $24,320).  Gross
losses of $734 were realized on those investment securities available for sale
sold in 1994, (taxes related to investment securities available for sale losses
in 1994 were $303).  Proceeds from the sale of investment securities available
for sale were $3,018,750 in 1996, $6,995,550 in 1995 and $4,978,000 in 1994.

Maturities of mortgage-backed securities are classified in accordance with the
contractual repayment schedules.  Expected maturities differ from the
contractual maturities reported above because investment security issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.

The Company has pledged certain investment securities with a fair value of
$1,459,983 to secure treasury, tax and loan, bankruptcy and public deposits at
December 31, 1996.





                                     - 66 -
<PAGE>   68
                        HARBOR BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1996

3.  Loans

The composition of the Company's loan portfolio at December 31, 1996 and 1995
is as follows (rounded to nearest thousand):

<TABLE>
<CAPTION>
                                               1996            1995
                                               ----            -----
<S>                                        <C>             <C>
Commercial                                 $ 50,523,000    $ 51,528,000
Commercial - real estate secured             69,295,000      53,434,000
Real estate - mortgage                       17,021,000      16,127,000
Real estate - construction                      789,000       3,412,000
Installment                                   6,360,000       5,911,000
                                           ------------    ------------
                                           $143,988,000    $130,412,000
                                           ============    ============
</TABLE>


The majority of loans, excluding installment loans, have variable interest
rates related to the prime interest rate.  Installment loans have fixed
interest rates.

All of the Company's business is conducted in Southern California, with
individuals and small and medium-sized businesses.  These relationships are
targeted to the geographic area in which management is familiar with real
estate and economic trends.

In the normal course of business, the Company has made loans to directors and
employees.  Such loans were made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with others.  Loans outstanding to directors and employees at
December 31, 1995 totaled approximately $2,519,617.  During 1996, new loans of
approximately $193,573 were made and principal payments approximating $325,960
were received resulting in a balance outstanding at December 31, 1996 of
approximately $2,387,230.

Loan commitments are made to accommodate the financial needs of the Company's
customers.  Letters of credit commit the Company to make payments on behalf of
customers when certain specified events occur.  Both arrangements have credit
risk essentially the same as that involved in extending loans to customers and
are subject to the Company's normal credit policies and review.  Collateral is
obtained based on management's credit assessment of the borrower.  The amount
of credit risk is represented by the face amount of the commitments and letters
of credit.





                                     - 67 -
<PAGE>   69
                        HARBOR BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1996


3.  Loans (Cont'd.)

At December 31, 1996, the Company had outstanding commitments to its customers
on letters of credit of approximately $1,801,214 and unfunded nonrevolving loan
commitments of $1,644,941.

The recorded investment in loans considered impaired under SFAS 114 was
$5,663,729 at December 31, 1996, with a valuation reserve of $895,466 and was
$6,745,972 at December 31, 1995 with a valuation reserve of $858,962.  For the
year ended December 31, 1996, the average recorded investment in impaired loans
was approximately $6,923,705 and, for year ended December 31, 1995, the average
recorded investment in impaired loans was approximately $4,888,800.  Cash basis
interest income recognized on those loans during the year was immaterial for
1995 and 1996.

At December 31, 1996, 1995 and 1994,  the Company had $3,782,539,  $6,745,972,
and $5,739,511, respectively, of loans which were considered to be
nonperforming loans and on which the Company ceased its accrual of interest.
Interest income which would have been recognized in 1996, 1995 and 1994 on
nonperforming loans was $172,713, $260,264, and $166,308, respectively.  At
December 31, 1996, approximately 59.19%, or $2,238,829, of nonaccrual loans
were part of a single lending relationship.  Although income is not being
recognized on an accrual or cash basis on the loans within this relationship,
the borrower continues to make all payments as agreed on all but 2% of the
loans.


4.  Allowance for loan losses

Changes in the allowance for loan losses during each of the three years in the
period ended December 31, 1996 are summarized as follows:

<TABLE>
<CAPTION>
                                            1996          1995        1994
                                            ----          ----        ----
<S>                                      <C>           <C>         <C>
Balance at beginning of year             $ 3,003,231   $3,224,468  $ 3,666,823
Provision charged to expense               1,159,269      312,596    1,088,000
Recoveries on loans previously
  charged off                                 79,116       18,620       44,031
Loans charged off                         (1,504,100)    (552,453)  (1,574,386)
                                         -----------   ----------  ----------- 
Balance at end of year                   $ 2,737,516   $3,003,231  $ 3,224,468
                                         ===========   ==========  ===========
</TABLE>





                                     - 68 -
<PAGE>   70
                        HARBOR BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1996

5.  Deposits

Deposits consisted of the following at December 31:

<TABLE>
<CAPTION>
                                               1996           1995
                                               ----           ----
<S>                                        <C>            <C>
NOW and money market                       $ 42,969,400   $ 49,253,838
Savings deposits                             10,696,191     11,514,091
Certificate of deposits                      36,776,952     26,433,603
Demand deposit accounts                      92,988,957     92,003,263
                                           ------------   ------------
                                           $183,431,500   $179,204,795
                                           ============   ============
</TABLE>

Accrued interest payable for the following deposit categories at December 31:

<TABLE>
<CAPTION>
                                                 1996           1995
                                                 ----           ----
<S>                                            <C>            <C>
NOW and money market                           $  6,161       $ 12,849
Savings deposits                                      -          1,421
Certificate of deposits                         170,491        167,782
Demand deposit accounts                               -              -
                                               --------       --------
                                               $176,652       $182,052
                                               ========       ========
</TABLE>

At December 31, 1996, the scheduled maturities of certificates of deposits are
as follows:

<TABLE>
      <S>                           <C>
      1997                          $33,763,707
      1998                            2,997,961
      1999                               15,284
      2000                                    -
      2001 and thereafter                     - 
                                    -----------
                                    $36,776,952
                                    ===========
</TABLE>





                                     - 69 -
<PAGE>   71
                        HARBOR BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1996

6.  Income taxes


The provision (benefit) for income taxes consists of the following:


<TABLE>
<CAPTION>
                           FEDERAL       STATE         TOTAL
                           -------       -----         -----
<S>                       <C>          <C>           <C>
1996:
Current                   $ 470,000    $   3,000     $ 473,000
Deferred                    159,000       51,000       210,000
                          ---------    ---------     ---------
                          $ 629,000    $  54,000     $ 683,000

1995:
Current                   $ 536,000    $ 142,000     $ 678,000
Deferred                    119,000     (118,000)        1,000 
                          ---------    ---------     ---------
                          $ 655,000    $  24,000     $ 679,000

1994:
Current                   $ 105,000    $ (75,000)    $  30,000
Deferred                    (20,000)      10,000       (10,000)
                          ---------    ---------     --------- 
                          $  85,000    $ (65,000)    $  20,000
</TABLE>



The deferred tax expense (benefit) represent the changes in the amounts of
temporary differences from January 1 to December 31 of 1996, 1995 and 1994,
respectively.  The types of temporary differences that give rise to significant
portions of the deferred tax at December 31, 1996, 1995 and 1994, include
reserves for credit losses, other real estate and fixed assets.  The amounts
previously reported as the current and deferred portions of income tax expense
for 1995 have been revised.  Such changes to the components occur because all
tax alternatives available to the Company are not known for a number of months
subsequent to year end.





                                     - 70 -
<PAGE>   72
                        HARBOR BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1996

6.  Income taxes (Cont'd.)

The effective federal income tax rate varies from the statutory rate due to a
number of factors including certain interest exclusions for state income tax
purposes.  A reconciliation of the differences between statutory and effective
tax rates follows:

<TABLE>
<CAPTION>
                             1996         1995         1994
                             ----         ----         ----
<S>                        <C>          <C>          <C>
Federal income tax based
on statutory rate          $ 639,000    $  652,000   $  60,000

State income tax
net of federal income tax     69,000        16,000     (34,000)

Other                        (25,000)       11,000     ( 6,000)
                           ---------    ----------   ---------  
                           $ 683,000    $  679,000   $  20,000
                           =========    ==========   =========
</TABLE>

The tax effects of temporary differences which give rise to significant
elements of deferred tax assets and liabilities as of December 31, 1996 and
1995 are detailed below:

<TABLE>
<CAPTION>
                                          1996        1995
                                          ----        ----
<S>                                    <C>         <C>
Gross deferred assets
  Loan loss reserve                    $  809,000  $  927,000
  Other real estate                        63,000      40,000
  Unrealized securities losses             69,000      43,000
  Fixed assets                             51,000           -
  Other                                    53,000      22,000
                                       ----------  ----------
         Total deferred assets         $1,045,000  $1,032,000

Gross deferred liabilities
         Fixed assets                  $        -     (29,000)
                                       ----------  ---------- 
Net deferred tax asset                 $1,045,000  $1,003,000
                                       ==========  ==========
</TABLE>





                                     - 71 -
<PAGE>   73
                        HARBOR BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1996

7.  Stock Options

The Company sponsors a stock option plan covering directors and officers and
other key full-time salaried employees.  Approximately 90,295 shares have been
authorized under the plan,  44,793 of which were available at December 31, 1996
for future grants. Generally, the options become exercisable one year following
the date of grant in cumulative equal amounts over five years at which time any
options not exercised expire.

The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because the
alternative fair value accounting provided under FASB Statement No.  123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), requires the use of
option valuation models that were not developed for use in valuing employee
stock options.  Under APB 25, because the exercise price of Harbor Bancorp
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.

The Company's stock option activity and related information for the periods
ended December 31, 1996 and December 31, 1995, is summarized below:


<TABLE>
<CAPTION>
                                               DECEMBER 31, 1996              DECEMBER 31, 1995
                                               -----------------              -----------------
                                                           WEIGHTED                          WEIGHTED
                                                           AVERAGE                           AVERAGE
                                                           EXERCISE                          EXERCISE
                                          OPTIONS           PRICE          OPTIONS           PRICE 
                                          -------          --------        -------          --------
<S>                                       <C>               <C>            <C>               <C>
Outstanding at
  beginning of period                     55,100            $ 7.59          41,676           $ 7.34
Granted                                   10,000             10.00          25,000             7.90
Exercised                                      -                                 -
Forfeited/expired                              -                 -         (11,576)            7.34
5% dividend issued
  4/19/96                                  3,253                 -               -                -
Outstanding at                            ------                            ------
  end of period                           68,353            $ 7.59          55,100           $ 7.59
                                          ======                            ======                 
Exercisable at end
  of period                               26,307
                                          ======
</TABLE>


The weighted-average fair value of options granted during 1996 and 1995 were
$4.85 and $3.76, respectively.





                                     - 72 -
<PAGE>   74
                        HARBOR BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1996


7. Stock Options (Cont'd.)

Exercise prices for options outstanding as of December 31, 1996, ranged from
$6.99 to $9.52.  The weighted-average remaining contractual life of these
options is 3.08 years.

The fair value of the options presented above was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1996 and 1995, respectively:  risk-free
interest rates of 6.75% and 6.25%; a volatility factor of the expected market
price of Harbor Bancorp stock of .378; and a weighted-average expected option
life of 6 years.  The pro forma earnings per share disclosure required by SFAS
123 are not shown as the pro forma impact of applying SFAS 123 is insignificant
in 1996.

8.  Employee stock bonus plan

The Company has an employee stock bonus plan which covers substantially all
employees.  The Company may make annual contributions, subject to the approval
of the Board of Directors.  Contributions were $90,000 in 1996, 1995 and 1994.


9.  Commitments and contingencies

The Company conducts a portion of its operations in leased facilities under
noncancellable operating leases expiring at various dates through 2004, at
which time the leases are renewable at the then fair rental value for periods
of five to ten years.  Total future minimum sublease rentals amount to
approximately $445,793 at December 31, 1996.

The minimum rental commitments for operating leases, excluding sublease income,
are approximately as follows:

<TABLE>
<S>                                 <C>
Year ending December 31:
  1997                                1,764,000
  1998                                1,764,000
  1999                                1,710,000
  2000                                1,580,000
  2001                                1,285,000
Thereafter                            2,365,000 
                                    -----------
                                    $10,468,000
                                    ===========
</TABLE>





                                     - 73 -
<PAGE>   75
                        HARBOR BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1996




9.  Commitments and contingencies (Cont'd)


Rental expense for the three years ended December 31, 1996 consists of the
following:

<TABLE>
<CAPTION>
                         1996           1995           1994
                         ----           ----           ----
<S>                   <C>            <C>            <C>
Minimum rentals       $1,884,000     $1,791,000     $1,878,000
Sublease rentals        (298,000)      (259,000)      (333,000)
                      ----------     ----------     ---------- 
                      $1,586,000     $1,532,000     $1,545,000
                      ==========     ==========     ==========
</TABLE>



Due to the nature of their business, the Company, the Bank and their
subsidiaries are subject to legal actions threatened or filed which arise from
the normal course of their business.  Management believes that such litigation
is incidental to the business of the Company and the Bank and the eventual
outcome of all currently pending legal proceedings will not be material to the 
Company's financial position or results of operations.





                                     - 74 -
<PAGE>   76
                        HARBOR BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1996



10.  Regulatory Capital

The Company and its bank subsidiary are subject to various regulatory capital
requirements administered by the federal 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 Bank's financial statements.  Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Bank's 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 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).  Management believes, as of December 31,
1996, that the Company and the Bank meets all capital adequacy requirements to
which it is subject.

As of December 31, 1996, the most recent notification from the Federal Deposit
Insurance Corporation (the "FDIC") categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action.  To be categorized
as well capitalized the Bank must maintain total risk-based, Tier 1 risk-based,
Tier 1 Leverage ratios as set forth in the table.  There are no conditions or
events since that notification that management believes have changed the
institution's category.

The Bank's actual capital amounts and ratios are also presented in the table.
There was no deduction made from capital for interest-rate risk.





                                     - 75 -
<PAGE>   77

                        HARBOR BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1996





10.  Regulatory Capital (Cont'd)

<TABLE>
<CAPTION>
                                                              TO BE WELL
                                                              CAPITALIZED
                                                              UNDER PROMPT
                                                              CORRECTIVE
                                            FOR CAPITAL         ACTION
                               ACTUAL     ADEQUACY PURPOSES   PROVISIONS
                               ------     -----------------   ----------
                           AMOUNT  RATIO   AMOUNT  RATIO    AMOUNT  RATIO
                           -------------   -------------    -------------
<S>                        <C>     <C>     <C>       <C>    <C>      <C>
  As of December 31, 1996:

  Total Capital (to Risk-
    Weighted Assets):
      Company              $17,355 11.58%  $11,986   8.00%  $14,982  10.00%
      Bank                  17,159 11.35%   12,093   8.00%   15,116  10.00%

  Tier 1 Capital (to Risk-
    Weighted Assets):
      Company              $15,472 10.33%  $ 5,993   4.00%  $ 8,989   6.00%
      Bank                  15,270 10.10%    6,046   4.00%    9,070   6.00%

  Tier 1 Capital (to
   Average Assets):
     Company               $15,472  7.63%  $ 8,116   4.00%  $10,145   5.00%
     Bank                   15,270  7.53%    8,112   4.00%   10,140   5.00%

As of December 31, 1995

Total Capital (to Risk-
  Weighted Assets):
    Company                $15,944 11.56%  $11,029   8.00%  $13,787  10.00%
    Bank                    15,748 11.55%   10,903   8.00%   13,629  10.00%

Tier 1 Capital (to Risk-
  Weighted Assets):
    Company                $14,221 10.31%  $ 5,515   4.00%  $ 8,272   6.00%
    Bank                    14,044 10.30%    5,452   4.00%    8,357   6.00%

Tier 1 Capital (to
  Average Assets):
    Company                $14,221  7.09%  $ 8,021   4.00%  $10,026   5.00%
    Bank                    14,044  7.04%    7,980   4.00%    9,975   5.00%
</TABLE>





                                     - 76 -
<PAGE>   78
                        HARBOR BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1996



11.  Condensed Financial Statements

The following are condensed financial statements of Harbor Bancorp (parent
only):

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                         DECEMBER 31,
                                      1996          1995
                                      ----          ----
    <S>                            <C>           <C>
         Assets:
      Cash                         $    14,392   $    20,437
      Investment in Harbor Bank     15,566,287    14,379,680
      Investment in Harbor Bank
        Properties                      25,227        25,052
      Other assets                      94,076       131,258
                                   -----------   -----------
          Total assets             $15,699,982   $14,556,427
                                   ===========   ===========

    Stockholders' equity:
      Common stock, no par value   $13,963,517   $13,257,875
      Retained earnings              1,736,465     1,298,552
                                   -----------   -----------
        Total stockholders' equity $15,699,982   $14,556,427
                                   ===========   ===========
</TABLE>


                                       INCOME STATEMENTS of

<TABLE>
<CAPTION>
                                      YEARS ENDED DECEMBER 31,
                                  1996        1995        1994
                                  ----        ----        ----
   <S>                          <C>         <C>          <C>
   Equity in undistributed
     earnings of subsidiaries   $1,237,589  $1,279,964   $ 162,505
       Miscellaneous income             61         -0-      14,725
                                ----------  ----------   ---------
            Total income        $1,237,650  $1,279,964   $ 177,230

       Operating expense            41,104      41,430      19,290
                                ----------  ----------   ---------
             Net income         $1,196,546  $1,238,534   $ 157,940
                                ==========  ==========  ==========
</TABLE>





                                     - 77 -
<PAGE>   79
                        HARBOR BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1996


11. Condensed Financial Statements (Cont'd.) 


                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                          YEARS ENDED DECEMBER 31,

                                       1996          1995          1994
                                       ----          ----          ----
<S>                                 <C>           <C>            <C>
Operating activities:

  Net income                        $ 1,196,546   $1,238,534     $ 157,940
  Adjustments to reconcile
    net income to net cash
    used in operating
    activities:
      Equity in undistributed
         income of
         subsidiaries                (1,237,589)   (1,279,964)    (162,505)
      Decrease  in
        interest receivable                   -             -          306
      Other assets                       37,182        31,140     (109,182)
                                    -----------   -----------    ---------
          Net cash used in
            operating activities         (3,861)      (10,290)    (113,441)


Financing activities:

  Fractional shares                      (2,184)            -       (1,321)   
                                    -----------   -----------    ---------
        Net cash used in
          financing activities           (2,184)            -       (1,321)

Decrease in cash                         (6,045)     ( 10,290)    (114,762)

Cash at beginning of year                20,437        30,727      145,489  
                                    -----------   -----------    ---------

Cash at end of year                 $    14,392   $    20,437    $  30,727
                                    ===========   ===========    =========
</TABLE>





                                     - 78 -
<PAGE>   80
                        HARBOR BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1996


11. Condensed Financial Statements (Cont'd.) 


Dividend Restriction

The Company is dependent to a significant degree on dividends from its
subsidiaries.  There are statutory and regulatory limitations on the amount of
dividends which may be paid to the Company by the Bank.  Retained earnings of
subsidiaries available for dividends to the Company approximated $2,720,057 at
December 31, 1996.


12.  Fair Value of Financial Instruments

Fair value information about financial instruments, whether or not recognized
in the balance sheet, for which it is practicable to estimate that value, are
reported using quoted market prices.  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 instrument.  Fair values for certain
financial instruments and all non-financial instruments are not required to be
disclosed.  Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.

The following is a comparison of the carrying amounts and fair values of
financial instruments as of December 31, 1996:


<TABLE>
<CAPTION>
                                         CARRYING        FAIR
                                          AMOUNT         VALUE    
                                       ------------   ------------
<S>                                    <C>            <C>
Financial assets:

  Cash and cash equivalents            $ 20,142,839   $ 20,142,839
  Federal funds sold and securities
    purchased under resale agreements     8,400,000      8,400,000
  Time certificates of deposit              495,000        495,000
  Investment securities                  24,852,369     24,882,627
  Loans, net                            141,250,271    141,198,267

Financial liabilities:
  Noninterest bearing deposits         $ 92,988,957   $ 92,988,957
  Interest bearing deposits              90,442,543     90,449,761
</TABLE>





                                     - 79 -
<PAGE>   81

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
         ACCOUNTING AND FINANCIAL DISCLOSURE

     NONE





                                     - 80 -
<PAGE>   82
                                    PART III

ITEM 10.  DIRECTORS & EXECUTIVE OFFICERS OF THE REGISTRANT


                                   Directors

     The following table provides certain information as of December 31, 1996,
concerning the directors of the Company:

<TABLE>
<CAPTION>
                                
                                  PRESENT PRINCIPAL 
SERVED AS                         OCCUPATION DURING                  DIRECTOR
NAME(1)                  AGE    THE PAST FIVE YEARS                   SINCE
-----------------------------------------------------------------------------
<S>                      <C>                                          <C>
James H. Gray            59 Chairman of the Board and                 1982
                              Chief Executive Officer of
                              Harbor Bank, President and
                              Director of Harbor Bancorp

John W. Hancock          59 President, Bancap Investment Group        1992

Dallas E. Haun           43 President and Chief Operating             1993
                              Officer of Harbor Bank and
                              Director of Harbor Bancorp

Kermit Q. Jones          77 Owner, Treasure Valley Land &             1982
                              Cattle/Dairy Farmer

Robert E. Leslie         71 Retired Fire Chief                        1988

Dorothy K. Matteson      70 Uniform Sales, Retired                    1982

H. E. Nance              64 Retired President Nance                   1988
                              Travel Services

Malcolm C. Todd, M.D.    83 Physician/Surgeon, Retired                1982

James Willingham         68 President, Boulevard Buick and            1982
                              Chairman of the Board of
                              Harbor Bancorp

Margaret E. Wilson       68 Co-Trustee, Wilson Family Trust           1993
</TABLE>

(1)  All the current directors were appointed to the Board of Directors by the
Company's incorporator on June 24, 1982, with the exception of Robert E. Leslie
and H. E. Nance who were appointed March 22, 1988, John W. Hancock who was
appointed on June 23, 1992, Margaret E. Wilson who was appointed on March 23,
1993, and Dallas E. Haun who was appointed on December 21, 1993.





                                     - 81 -
<PAGE>   83
                               Executive Officers

     As of December 31, 1996, the principal Executive Officers of the Company
were:


<TABLE>
<CAPTION>
   NAME AND OFFICE                        AGE      DATE ELECTED  
------------------------------------------------------------------
<S>                                       <C>     <C>
James H. Gray
President & Chief Executive Officer       59      March 22, 1983

Dallas E. Haun
President &
  Chief Operating Officer                 43      October 24, 1995

H. Melissa Lanfre'
Vice President &
  Chief Financial Officer                 45      June 23, 1987
</TABLE>


     All executive officers of the Company are elected by, and serve at the
pleasure of, the Board of Directors.  Set forth above are the names and offices
held by the executive officers of the Company, their respective ages, and the
date when each was elected to his/her present position with the Company.  A
brief account of the business experience of each is set forth below:

     Mr. Gray has been President of Harbor Bank, the major subsidiary of the
Company, from July of 1976 to January 1983 and Chairman of Harbor Bank from
July of 1976 to present.  He currently holds the position of Chairman of the
Board and Chief Executive Officer of Harbor Bank and President of Harbor
Bancorp.

     Mr. Haun has been with the Company since June 1, 1977 where he served in a
variety of capacities with his most recent assignment being Executive Vice
President/Branch Administrator.  He currently holds the position of President
and Chief Operating Officer of Harbor Bank and continues to serve as a voting
member of Harbor Bank's Board of Directors.

     Ms. Lanfre' joined the Company on July 13, 1987 and currently holds the
position of Vice President and Chief Financial Officer.  Prior to joining the
Company, she served as Controller and Chief Financial Officer of Sterling Bank
from January 1984 until July 1987.  Prior to January 1984, Ms. Lanfre' served
as Accounting Manager for Foothill Capital Corporation, a commercial finance
company.





                                     - 82 -
<PAGE>   84


ITEM 11.  EXECUTIVE COMPENSATION

     The following table sets forth certain summary information concerning
compensation paid or accrued by the Company to or on behalf of the Company's
Chief Executive Officer and other officer of the Company (determined as of the
end of the last fiscal year) whose annual salary and bonus exceeded $100,000 in
1996 (the "Named Executives") for each of the fiscal years ended December 31,
1995, 1994, and 1993.


SUMMARY OF CASH AND CERTAIN COMPENSATION

                           Summary Compensation Table


<TABLE>
<CAPTION>
                                                                LONG TERM COMPENSATION
    PAYOUTS                   ANNUAL COMPENSATION                                     AWARDS      
-----------------------------------------------------------------------------------------------------------
  (A)                    (B)      (C)      (D)      (E)         (F)         (G)      (H)       (I)         
-----------------------------------------------------------------------------------------------------------
                                                   OTHER
                                                   ANNUAL   RESTRICTED                       ALL OTHER
NAME AND                                           COMPEN-    STOCK                  LTIP     COMPEN-
PRINCIPAL                       SALARY    BONUS    SATION    AWARD(S)    OPTIONS/   PAYOUTS   SATION
POSITION                YEAR    ($)(1)    ($)(2)    ($)        ($)       SARS(#)      ($)     ($)(3)      
-----------------------------------------------------------------------------------------------------------
<S>                     <C>    <C>        <C>        <C>       <C>         <C>        <C>      <C>
James H. Gray           1996   $150,900   $60,000    -0-       -0-         -0-        -0-      $8,688
 Chairman of the Board  1995    148,258    60,000    -0-       -0-         -0-        -0-
 and Chief Executive    1994    125,400    45,000    -0-       -0-         -0-        -0-
 Officer of Harbor Bank

Dallas E. Haun          1996   $123,442   $60,000    -0-       -0-         -0-        -0-      $8,880
 President and Chief    1995    106,250    50,000    -0-       -0-         -0-        -0-
 Operating Officer      1994     97,850    40,000    -0-       -0-         -0-        -0-
 of Harbor Bank(4)

Phillip J. Bond(5)      1996   $ 89,667   $25,000    -0-       -0-         -0-        -0-      $  619
</TABLE>

(1)  Included in this column are salaries paid for services rendered to the
Company's subsidiary, Harbor Bank, during 1995 before any salary reduction for
contributions to the Company's plan under section 401(k) of the Internal
Revenue Code of 1986, as amended (the "Code"), and salary reductions for
contributions for welfare plan coverages under section 125 of the Code.

(2)  The bonus amounts are payable pursuant to the Company's senior management
compensation plan as approved annually by the Board of Directors.  This column
includes bonuses accrued in the current year to be paid in subsequent year.

(3)  "All Other Compensation" is only required to be reported for 1996.  The
amount represents the Company's matching contribution for the 401(k) plan and
directors fees.

(4)  Dallas E. Haun was promoted to the position of Vice President of Harbor
Bancorp on May 23, 1995, and was elected as the President and Chief Operating
Officer of Harbor Bank on October 24, 1995.  On August 22, 1995, the Board of
Directors of Harbor Bank approved an





                                     - 83 -
<PAGE>   85
Employment Agreement effective September 1, 1995, between Harbor Bank and
Dallas Haun that would run to February 22, 1999.  The agreement calls for base
salary levels and bonus plan participation declared annually by the Board of
Directors and is extended for an additional year each succeeding February 28 by
mutual agreement.

(5)  Phillip J. Bond joined Harbor Bank on September 11, 1995 as Executive Vice
President and Chief Credit Officer and by a Letter Agreement with the Board of
Directors will be entitled to extra compensation in the amount of $50,000.00 if
there is a change in majority ownership of the Bank within 24 months of his
employment.





              AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                         AND YEAR-END OPTION/SAR VALUE

<TABLE>
<CAPTION>
    (A)                   (B)                       (C)                     (D)                       
------------------------------------------------------------------------------------------------------
                                                                                          VALUE
                                                                        NUMBER OF     UNEXERCISED IN-
                                                                       UNEXERCISED      THE-MONEY
                                                                     OPTIONS/SARS AT  OPTIONS/SARS AT
                                                                       YEAR-END (#)    YEAR-END ($)
                    SHARES ACQUIRED ON       VALUE REALIZED(1)         EXERCISABLE/    EXERCISABLE/
    NAME              EXERCISE (#)                 ($)                UNEXERCISABLE   UNEXERCISABLE    
-------------------------------------------------------------------------------------------------------
<S>                      <C>                       <C>                 <C>                 <C>
James H. Gray            -0-                       -0-                 -0-/15,788          -0-

Dallas E. Haun           -0-                       -0-                 -0-/27,365          -0-
</TABLE>

(1) There are no in-the-money options.



     Directors of the Company which are considered to be inside directors, or
employees of the Company,  receive a director's fee of $600 per meeting and all
other directors, which are considered to be outside directors, receive a
director's fee of $1,000 per meeting.  Non-officer directors serving on the
Company's weekly Loan Committee receive $150 per meeting.





                                     - 84 -
<PAGE>   86

                     Harbor Bancorp 1990 Stock Option Plan

     On 2/22/90, the Company adopted an Employee Stock Option Plan for the
purpose of providing an additional means of attracting and retaining competent
managerial personnel.  The plan provides 90,000 unissued shares of the Company,
or approximately 10% of the issued and outstanding shares of the Company to be
reserved for issuance to directors, officers and employees of the Company and
its subsidiaries.  Options granted pursuant to the plan may be non-qualified
options or incentive options within the meaning of Section 422A of the Internal
Revenue Code.

     The plan will be administered by the Board of Directors of the Company or
by a committee appointed from time to time by the Board.  The committee or the
Board of Directors will determine with respect to the persons who shall
participate in the plan and the extent of their participation.

     The purchase price of stock subject to each option shall be not less than
one hundred percent of the fair market value of such stock at the time such
option is granted.  An employee owning more than ten percent of the total
combined voting power of all classes of stock of the Bank may not be granted an
option under the plan.  The purchase price of any shares exercised shall be
paid in full in cash.  Options may be granted pursuant to the plan for a term
of up to ten years.  Each option shall be exercisable according to the
determination of the Board or committee.

     Options granted under the plan shall not be transferable by the optionee
during the optionee's lifetime.  In the event of termination of employment as a
result of the optionee's disability or in the event of an employee's death
during the exercise period, to the extent the option is exercisable on the date
employment terminates or the date the employee dies, the option shall remain
exercisable for up to one year (but not beyond the end of the original option
term) by the disabled optionee, or in the event of death of the optionee, a
non-qualified option shall be exercisable by the person or persons to whom
rights under the option shall have passed by will or the laws of descent and
distribution.

     If an optionee's employment is terminated, unless termination was by
reason of disability or death the optionee shall have the right, for a
three-month period after termination, to exercise that portion of the option
which was exercisable immediately prior to such termination.  In no event may
the option be exercised after the end of the original option term.

     In the event of certain changes in the outstanding Common Stock of the
Company without receipt of consideration by the





                                     - 85 -
<PAGE>   87
Company, such as stock dividends, stock splits, recapitalization,
reclassification, reorganization, merger, stock consolidation, or otherwise,
appropriate and proportionate adjustments shall be made in the number, kind and
exercise price of shares covered by any unexercised or partially unexercised
options which were already granted.  Optionees will receive prior notice of any
pending dissolution or liquidation of the Company, or reorganization, merger or
dissolution or liquidation of the Company where the Company is not the
surviving corporation or sale of substantially all the assets of the Company,
or other form of corporate reorganization in which the Company is not a
surviving entity, or the acquisition of stock representing more that 50% of the
voting power of the stock of the Company then outstanding ("Terminating
Event").  Optionees shall be notified of the Terminating Event, any option not
exercised shall terminate, and upon the happening of the Terminating Event, the
plan shall terminate, unless some other provision is made in connection with
the Terminating Event.

     The Board reserves the right to suspend, amend, or terminate the plan,
and, with the consent of the optionee, make such modifications, of the terms
and conditions of his or her option as it deems advisable, except that the
Board may not, without further approval of a majority of the shares, increase
the maximum number of shares covered by the plan, change the minimum option
price, increase the maximum term of options under the plan or permit options to
be granted to any one other than an officer, employee or director of the
Company or its subsidiaries.

                   Harbor Bank Employee Stock Ownership Plan

On January 1, 1980, Harbor Bancorp established the Harbor Bancorp Employee
Stock Ownership Plan for the purpose of enabling employees of Harbor Bancorp to
invest in employer stock.  The plan covers substantially all employees.

The Bank contributes amounts as determined annually by the Company's Board of
Directors, but not in excess of the amount allowable as a deduction for federal
income tax purposes.  The contribution may be in cash, common stock or other
property which is acceptable to the Trustee, and shall be invested primarily in
common stock, but may be invested in assets other than common stock.
Contributions were $90,000 in 1996, 1995 and 1994.  In absence of an active
Employee Stock Ownership Plan Committee, the trustee of the Plan has full
authority as to the investment of the Plan's assets.

Each employee of the Bank over 21 years of age becomes a participant of the
Plan when he completes one year of service.  A new vesting schedule was adopted
which was effective January 1, 1989.  Participants vest at the rate of ten
percent per year of service until the fifth year of service when vesting is at
60% in the fifth year, 80% in the sixth year and fully (100%)





                                     - 86 -
<PAGE>   88
vested after 7 years of service.  A year of service is a time period of no more
than twelve months in which an employee has a least 1,000 hours of service
commencing on the anniversary date of employment.

A separate account is maintained for each participant which is adjusted
annually for Bank contributions, income, gains and losses of the Plan and
reallocation of forfeitures.

Upon the earliest of retirement at age 65, death or disability, the balance of
the separate account is paid to the participant or his beneficiary in company
common stock or in cash or a combination of common stock and cash (by his
election).  If termination of employment occurs before retirement, death or
disability, the vested balance in the separate account is distributed to the
participant in the same manner if the vested balance exceeds $3,500.00.  If the
vested balance does not exceed $3,500.00, the participant's election as to the
form of distribution is not required.

For the purpose of allocating Bank contributions and forfeitures, each
participant is credited on a pro rata basis determined by the proportion that
each eligible participant's compensation for the year bears to the total
compensation of all participants.  Annual additions to a participant account
are limited to twenty-five percent (25%) of the participant's compensation, or
$30,000, whichever is less.  Participants are included in the allocation of
forfeitures after one year.

The annual allocation of the income, gains and losses of the Plan is on a pro
rata basis determined by the proportion that each participant's dollar value of
interest in the Plan bears to the total dollar value interest of all
participants at the beginning of the year.

While the Company has not expressed any intent to terminate the Plan, it has
the right to do so at any time.  In the event of termination, each
participant's interest automatically becomes fully vested to the extent of the
balance in his separate account.





                                     - 87 -
<PAGE>   89
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
          AND MANAGEMENT

     The following table sets forth certain information about those
stockholders who are known to the Company to be beneficial owners of more than
5% of the Common Stock as of December 31, 1996:

<TABLE>
<CAPTION>
NAME & ADDRESS OF          AMOUNT AND NATURE OF       PERCENT
BENEFICIAL OWNER           BENEFICIAL OWNERSHIP       OF CLASS     
---------------------------------------------------------------
<S>                               <C>                   <C>
James H. Gray                     120,441               8.51%
11 Golden Shore, Suite 600
Long Beach, CA  90802

Harbor Bank Employee Stock
  Ownership Plan                  120,649               8.53%
11 Golden Shore, Suite 600
Long Beach, CA  90802

James A. Willingham                81,524               5.76%
1881 Long Beach Boulevard
Long Beach, CA  90806
</TABLE>



     The following table sets forth, as of December 31, 1996, the number and
percentage of shares of the Company's Common Stock, the only class outstanding
equity securities of the Company, beneficially owned by each of the Company's
directors, and the directors and current executive officers of the Company, as
a group:


<TABLE>
<CAPTION>
                           AMOUNT AND NATURE OF       PERCENT
NAME                       BENEFICIAL OWNERSHIP       OF CLASS     
---------------------------------------------------------------
<S>                               <C>                   <C>
James H. Gray                     120,441               8.51%

John W. Hancock                     4,377                .31%

Dallas E. Haun                     44,626               3.15%

Kermit Q. Jones                    55,590               3.93%

Robert E. Leslie                      837                .06%
</TABLE>





                                     - 88 -
<PAGE>   90
<TABLE>
<S>                               <C>                  <C>
Dorothy K. Matteson                38,741               2.74%

H. E. Nance                        10,828                .77%

Malcolm C. Todd                    48,145               3.40%

James A. Willingham                81,524               5.76%

Margaret E. Wilson                 51,804               3.66%

All executive officers as
  a group                         456,913              32.29%
</TABLE>





                                     - 89 -
<PAGE>   91
ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


     Some of the directors, officers and principal shareholders of the Company
and their associates were customers of, and had banking transactions with, the
Company's subsidiary, Harbor Bank, in the ordinary course of the Bank's
business during 1993 and the Bank expects to have such transactions in the
future.  All loans and commitments to loan included in such transactions were
made in compliance with the applicable laws on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons of similar creditworthiness, and in
the opinion of the Bank, did not involve more than a normal risk of
collectibility or present other unfavorable features.





                                     - 90 -
<PAGE>   92

                                    PART IV




ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
          REPORTS ON FORM 8-K


(a)  Financial statements and financial statement schedules and exhibits:

      (1) and (2) Financial statements and financial statement schedules:  See
          "Item 8.  Financial Statements and Supplementary Data."

      (3)   Exhibits:

           27   - FINANCIAL DATA SCHEDULE

(b)  Reports on Form 8-k:

           None





                                     - 91 -
<PAGE>   93



                                   SIGNATURES


     Pursuant to the requirements of Sections 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.


                                          HARBOR BANCORP


DATED:  March 26, 1997               By:/s/ James H. Gray
                                        -------------------------
                                        James H. Gray, President


     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 and on the dates indicated.

                                        PRINCIPAL EXECUTIVE OFFICER
                                        AND DIRECTOR

DATED:  March 26, 1997               By:/s/ James H. Gray
                                        -------------------------
                                        James H. Gray, President and
                                        Chief Executive Officer

                                        PRINCIPAL FINANCIAL AND
                                        ACCOUNTING OFFICER

DATED:  March 26, 1997               By:/s/H. Melissa Lanfre'
                                        -------------------------
                                        H. Melissa Lanfre'
                                        Vice President and Chief
                                        Financial Officer




                                        DIRECTORS:


DATED:  March 26, 1997               By:/s/ James H. Gray
                                        -------------------------
                                        James H. Gray, Director





                                     - 92 -
<PAGE>   94

DATED:  March 26, 1997               By:/s/ John W. Hancock
                                        -------------------------
                                        John W. Hancock, Director


DATED:  March 26, 1997               By:/s/ Dallas E. Haun
                                        -------------------------
                                        Dallas E. Haun, Director


DATED:  March 26, 1997               By:/s/ Kermit Q. Jones
                                        -------------------------
                                        Kermit Q. Jones, Director


DATED:  March 26, 1997               By:/s/ Robert E. Leslie
                                        -------------------------
                                        Robert E. Leslie, Director


DATED:  March 26, 1997               By:/s/ Dorothy K. Matteson
                                        -------------------------
                                        Dorothy K. Matteson, Director


DATED:  March 26, 1997               By:/s/ H. E. Nance
                                        -------------------------
                                        H. E. Nance, Director


DATED:  March 26, 1997               By:/s/ Malcolm C. Todd
                                        -------------------------
                                        Malcolm C. Todd, Director


DATED:  March 26, 1997               By:/s/ James A. Willingham
                                        -------------------------
                                        James A. Willingham, Director


DATED:  March 26, 1997               By:/s/ Margaret E. Wilson
                                        -------------------------
                                        Margaret E. Wilson, Director





                                     - 93 -