** **

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

**FORM 10-KSB**

** **
| **ý** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|-------------------------------------------------------------------------------------------|

 

**for the Year ended December 31, 2001**

 

**OR**

 
| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

 

**For the transition period from                  to                **

 

**Commissionfile number 333-12892**

 

**MISSION COMMUNITY BANCORP**

(Exact name of registrant as specified in its charter)

 

| **State of California**                                                     |   | **77-0559736**                                          |
|-----------------------------------------------------------------------------|--------|---------------------------------------------------------|
| (State or other jurisdiction of employee  incorporation or organization)    |   | (I.R.S. Identification No.)                             |
|                                                                        |   |                                                    |
| **581 Higuera St., San Luis Obispo,  California  93401**               |   | **(805) 782-5000**                                      |
| (Address of principal executive offices) (Zip Code)                         |   | Registrant’s telephone number, including area code |
|                                                                        |   |                                                    |
| Securities registered pursuant to Section 12(b) of  the Act: **None**       |
|                                                                        |   |                                                    |
| Securities registered pursuant to Section 12(g) of  the Act:  **None** |

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes  ýNo  o(1)

 

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-Bis not contained herein, and will not be contained, to the best of theregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-KSB or any amendment tothis Form 10-KSB ý

 

Registrant’s revenue forthis year ended December 31, 2001 was $6,873,657. The aggregate market value ofthe voting stock held by non-affiliates of the Registrant at March 1, 2002 was$4,353,797.  As of March 1, 2002, theRegistrant had 630,066 shares of Common Stock outstanding.

 

Transitional SmallBusiness Disclosure Format (check one) Yes o  No  ý

 

----

(1) Prior toDecember 18 2000, Mission Community Bancorp’s subsidiary, Mission CommunityBank, N.A. filed reports pursuant to Section 15(d) of the Securities ExchangeAct of 1934 will the Comptroller  of theCurrency.  On December 18, 2000, MissionCommunity Bancorp filed an 8-K report with the Commission reporting that it hadacquired Mission Community Bank, N.A. in a holding company formationtransaction and that it would thereafter file reports with the Commissionpursuant to Section 15(d) of the Securities Exchange Act of 1934.

 

 

**TABLE OFCONTENTS**

 
| PART I    |
|-----------|
|      |
|      | ITEM  1. | DESCRIPTION OF BUSINESS |
|      | ITEM  2. | DESCRIPTION OF PROPERTIES |
|      | ITEM  3. | LEGAL PROCEEDINGS |
|      | ITEM  4. | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS |
|      |   |   |
| PART  II  |
|      |
|      | ITEM  5. | MARKET  FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS |
|      | ITEM  6. | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
|      | ITEM 7. | FINANCIAL  STATEMENTS |
|      | ITEM  8. | CHANGES  WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
|      |   |   |
| PART  III |
|      |
|      | ITEM  9. | DIRECTORS,  EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITG SECTION  16(a) OF THE EXCHANGE ACT |
|      | ITEM 10. | EXECUTIVE COMPENSATION |
|      | ITEM  11. | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
|      | ITEM  12. | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS |
|      | ITEM 13. | EXHIBITS AND  REPORTS ON FORM 8-K |

 

1

----

 

**NOTE**

# ** **

# **Certainstatements contained in this Report, including, without limitation, statementscontaining the words “believes”, “anticipates”, “intends”, “expects”, and wordsof similar import, constitute “forward-looking statements” within the meaningof section 27a of the Securities Act of 1933 and section 21e of the SecuritiesExchange Act of 1934.  Such forwardlooking statements involve known and unknown risks, uncertainties and otherfactors that may cause the actual results, performance or achievements of theCompany to be materially different from any future results, performance orachievements expressed or implied by such forward-looking statements.  Such factors include, among others, thefollowing: general economic and business conditions in those areas in which thecompany operates, demographic changes, competition, fluctuations in interestrates, changes in business strategy or development plans, changes ingovernmental regulation, credit quality, the availability of capital to fundthe expansion of the company’s business, and other factors referenced in thisReport. The Company disclaims any obligation to update any such factors or topublicly announce the results of any revisions to any of the forward-lookingstatements contained herein to reflect future events or developments**

# ** **

# **PART I**

 

**ITEM 1****.  DESCRIPTIONOF BUSINESS**

 

**General**

 

Mission CommunityBancorp (the “Company”) is a California corporation organized in September,2000 to act as the bank holding company for Mission Community Bank (the“Bank”). In December, 2000, the Company acquired all of the outstanding commonstock of the Bank in a holding company formation transaction.  Shareholders of the Bank received one shareof the common stock of the Company for each share of Bank common stock.  The transaction was accounted for on a basissimilar to the pooling of interest method and was structured to be tax free tothe shareholders. Other than holding the shares of the Bank, the Companyconducts no significant activities, although it is authorized, with the priorapproval of the Board of Governors of the Federal Reserve System (the “FederalReserve Board”), the Company’s principal regulator, to engage in a variety ofactivities which are deemed closely related to the business of banking.

 

**The Bank**

 

TheBank, a national banking association, opened its Main Office and commencedoperations on December 18, 1997 at 581 Higuera Street, San Luis Obispo,California 93401. The Bank is authorized to engage in the general commercialbanking business and its deposits are insured by the Federal Deposit InsuranceCorporation up to the applicable limits of the law. At December 31, 2001, theCompany had approximately $79.9 million in assets, $59.8 million in net loans,$71.7 million in deposits, and $6.8 million in stockholders’ equity. The Bankdoes not offer trust services or international banking services and does notplan to do so in the near future.

 

TheBank established a wholly-owned subsidiary community development corporation,Mission Community Development Corporation (“MCDC”), and an affiliatenot-for-profit, Mission Community Services Corporation (“MCSC”).

 

MissionCommunity Development Corporation is a “for-profit” CDC, which providesfinancing for small businesses and low- and moderate-income area developmentand/or affordable housing projects. Its purpose is to benefit small businessand low- and moderate-income areas/residents. The board of directors of MCDCconsists of four members of the Board of Directors of the Bank and threeoutside members who are actively involved in supporting community affairs andactivities.

 

MissionCommunity Services Corporation is a “not-for-profit” public charitablecorporation and is in the process of filing under IRS Section Code 501(c )(3).This company’s primary focus is to provide technical support, services andaccessibility to funding sources, which require non-profit status to qualifyfor granting purposes. The Board of Directors of MCSC consists of both Bank andMission Community Development Corporation board members.

 

MissionCommunity Bank and its subsidiary Mission Community Development Corporation andits affiliate Mission Community Services Corporation, form an organizationalvehicle intended to provide economic revitalization and community developmentto the Central Coast of California.

 

TheBank’s Mission Statement commits to:

 

*“Ourmission is to be the leading financial institution in our community providingfinancial support and services by promoting community development and economicvitality*

 

2

----

 

*This willbe accomplished through the development of high quality, community directedbanking services and through the fostering and nurturing of small businessgrowth.*

 

*We willbe innovative in the development and creation of jobs and individual wealthwithin our community, and be a partner and facilitator in creatingopportunities in our marketplace.*

 

*All ofthis will be accomplished while providing strong value to our shareholders anda meaningful financial investment to our investors”.*

 

The Department ofTreasury, Community Development Institution Fund (CDFI), has certified theCompany and the Bank as “community development financial institutions.” Thisstatus also provides some Community Reinvestment Act (CRA) credit toinstitutional depositors and investors. It also opens various government sponsored programs, grants, and awardsin which the Bank and Company may participate.

 

Related to its status asa “Community Development Financial Institution,” the Company completed theprivate placement of $1,000,000 in common and preferred stock during December2000 to two institutional investors. The Company also was awarded a $500,000 grant in 2001 from the CDFI Fundwhich will be funded in 2002 in the form of preferred stock.   See “Item 5. Market for Common Equity andRelated Stockholder Matters — Issuance of Preferred Stock.”

 

**Banking Services**

 

The Bank offers a widevariety of deposit, loan and other financial services to small businesses,entrepreneurs and their employees and families.  Its key strengths are customer service, an experienced managementteam familiar with the community through the Bank’s involvement in variouscommunity lending and development projects, together with its wholly-ownedsubsidiary, Mission Community Development Corporation.

 

The Bank’s primaryservice area consists of San Luis Obispo County and Northern Santa BarbaraCounty, which lies centrally within the State of California along the PacificOcean. The Bank operates out of its Main Office in the city of San Luis Obispo,its branch in Paso Robles, and a loan production office in Arroyo Grande. TheBank offers products and services to Customers located throughout San LuisObispo County. The city of San Luis Obispo is located in the central westportion of this service area. The South County includes the cities of PismoBeach, Arroyo Grande, Grover Beach, and unincorporated areas of Oceano andNipomo and is often referred to as the “Five Cities” area. The “North County”includes the cities of Paso Robles, Atascadero, Templeton and SantaMargarita.  “The Coast” includes LosOsos, Morro Bay, Cayucos, Cambria and San Simeon. Northern Santa Barbara Countyincludes the cities of Santa Maria, Guadalupe, Lompoc. The Bank offers servicesto companies and individuals located in the southern and northern portions ofthe county through the use of ATMs and courier services.

 

The Bank offers checkingand savings accounts, money market accounts and time certificates of deposits;offers commercial, agribusiness, government guaranteed, real estate, automobileand other installment and term loans and leases; issues drafts, sellstravelers’ checks and provides other customary banking services. Although the Bankdoes not operate a trust department or provide international services, it makestrust services or international services available through correspondentinstitutions. The business plan of the Bank emphasizes providing highlyspecialized financial services in a professional and personalized manner toindividuals and businesses in its service area.

 

The Bank’s operatingpolicy since its inception has emphasized community development through smallbusiness, commercial and retail banking. Most of the Bank’s customers areretail customers, farmers and small to medium-sized businesses.  As a CDFI, the Bank also emphasizes loansand financial services to low- to moderate income communities within itsservice area. The Bank takes real estate, listed and unlisted securities,savings and time deposits, automobiles, machinery and equipment as collateralfor loans. The areas in which the Bank has directed virtually all of itslending activities are (i) commercial loans, (ii) agricultural loans (iii)construction loans, (iv) real estate loans, and (v) consumer loans. As ofDecember 31, 2001, these four categories accounted for approximately 35%, 5%,17%, 36%, and 6% respectively, of the Bank’s gross loan portfolio. As ofDecember 31, 2001, $33 million or 55% of the Bank’s $60 million in gross loansconsisted of interim construction and real estate loans, primarily for singlefamily residences or for commercial development.

 

Most of the Bank’sdeposits are attracted by local promotional activities and advertising in thelocal media. A material portion of the Bank’s deposits have not been obtainedfrom a single person or a few persons, the loss of any one or more of whichwould have a materially adverse effect on the business of the Bank. As ofDecember 31, 2001, the Bank had approximately 2,316 deposit accounts consistingof non-interest bearing (demand) of $13.0 million with 1,767 accounts or anaverage balance of $7,374; 68 interest-bearing demand and money market accountswith balances totaling $2.7 million for an average balance per account ofapproximately $39,518;  949 savingsaccounts with balances totaling $27.0 million for an average balance per

 

3

----

 

account of approximately$28,598; and 535 time certificate of deposit accounts with balances totaling$28.9 million, for an average balance per account of approximately $54,043.

 

The principal sources ofthe Bank’s revenues are (i) interest and fees on loans, (ii) intereston investments, (iii) service charges on deposit accounts and othercharges and fees, (iv) BEA award, (v) gain on sale of loans, and (vi)interest on other investments including federal funds sold.  For the year ended December 31, 2001, thesesources comprised 64.4%, 11.2%, 9.3%, 7.8%, 4.9% and 2.4%, respectively, of theBank’s total operating income.

 

The Bank has not engagedin any material research activities relating to the development of new servicesor the improvement of existing services.

 

There has been nosignificant change in the types of services offered by the Bank since itsinception, except in connection with new types of accounts allowed by statuteor regulation in recent years. The Bank has no present plans to enter any newline of business that would require the investment of a material amount oftotal assets.

 

Most of the Bank’sbusiness originates from San Luis Obispo County. The Bank’s business, basedupon performance to date, does not appear to be seasonal. A material portion ofthe Bank’s loans is not concentrated within a single industry or group ofrelated industries, nor is the Bank dependent upon a single customer or groupof related customers for a material portion of its deposits. Management of theBank is unaware of any material effect upon the Bank’s capital expenditures,earnings or competitive position as a result of federal, state or localenvironmental regulation.

 

The Bank holds nopatents, licenses (other than licenses obtained from bank regulatoryauthorities), franchises or concessions.

 

**Employees**

 

As of  March 1, 2002 the Bank had a total of 33employees, of which 32 were full-time employees. The management of the Bankbelieves that its employee relations are satisfactory. The Company has nosalaried employees; the Company’s officers all hold similar positions at the Bankand receive compensation from the Bank.

 

**Competition**

 

The banking and financialservices business in California generally, and in the Bank’s market areaspecifically, is highly competitive. The increasingly competitive environmentis a result primarily of changes in regulation, changes in technology andproduct delivery systems, and the accelerating pace of consolidation amongfinancial services providers.

 

The Bank’s business isconcentrated in San Luis Obispo County and Northern Santa Barbara County. In orderto compete with other financial institutions in its service area, the Bankrelies principally upon local advertising programs; direct personal contact byofficers, directors, employees, and shareholders; and specialized services suchas courier pick-up and delivery of non-cash banking items. The Bank emphasizesto its customers the advantages of dealing with a locally owned and communitydevelopment oriented institution. The Bank also seeks to provide specialservices and programs for individuals in its primary service area who areemployed in the agricultural, professional and business fields, such as loansfor equipment, furniture, tools of the trade or expansion of practices orbusinesses. Larger banks may have a competitive advantage because of higherlending limits and major advertising and marketing campaigns. They also performservices, such as trust services, international banking, discount brokerage andinsurance services that the Bank is not authorized or prepared to offercurrently. The Bank has made arrangements with its correspondent banks and withothers to provide such services for its customers. For borrowers requiringloans in excess of the Bank’s legal lending limits, the Bank has offered, andintends to offer in the future, such loans on a participating basis with itscorrespondent banks and with other independent banks, retaining the portion ofsuch loans which is within its legal lending limits. As of December 31, 2001,the Bank’s legal lending limits to a single borrower and such borrower’srelated parties was $1,118,500 based on regulatory capital plus reserves of$7,457,000.

 

Commercial banks competewith savings and loan associations, credit unions, other financialinstitutions, securities brokerage firms, and other entities for funds. Forinstance, yields on corporate and government debt securities and other commercialpaper affect the ability of commercial banks to attract and hold deposits.Commercial banks also compete for loans with savings and loan associations,credit unions, consumer finance companies, mortgage companies and other lendinginstitutions.

 

4

----

 

**Effectof Government Policies and Recent Legislation**

 

Banking is a businessthat depends on rate differentials. In general, the difference between theinterest rate paid by the Bank on its deposits and its other borrowings and theinterest rate received by the Bank on loans extended to its customers andsecurities held in the Bank’s portfolio comprise the major portion of the Bank’searnings. These rates are highly sensitive to many factors that are beyond thecontrol of the Bank. Accordingly, the earnings and growth of the Bank aresubject to the influence of domestic and foreign economic conditions, includinginflation, recession and unemployment.

 

The commercial bankingbusiness is not only affected by general economic conditions but is alsoinfluenced by the monetary and fiscal policies of the federal government andthe policies of regulatory agencies, particularly the Federal Reserve Board.The Federal Reserve Board implements national monetary policies (withobjectives such as curbing inflation and combating recession) by itsopen-market operations in United States Government securities, by adjusting therequired level of reserves for financial institutions subject to its reserverequirements and by varying the discount rates applicable to borrowings by depositoryinstitutions. The actions of the Federal Reserve Board in these areas influencethe growth of bank loans, investments and deposits and also affect interestrates charged on loans and paid on deposits. The nature and impact of anyfuture changes in monetary policies cannot be predicted.

 

From time to time,legislation is enacted which has the effect of increasing the cost of doingbusiness, limiting or expanding permissible activities or affecting thecompetitive balance between banks and other financial institutions. Proposalsto change the laws and regulations governing the operations and taxation ofbanks, bank holding companies and other financial institutions are frequentlymade in Congress, in the California legislature and before various bankregulatory and other professional agencies. See “Financial Services Modernization Act.”

** **

**Supervisionand Regulation**

 

**General**

 

The Company and the Bankare extensively regulated under both federal and state law. Set forth below isa summary description of certain laws that relate to the regulation of theCompany and the Bank. The description does not purport to be complete and isqualified in its entirety by reference to the applicable laws and regulations.

 

**TheCompany**

 

The Company is a bankholding company within the meaning of the Bank Holding Company Act of 1956, asamended (the “BHCA”), and is registered as such with, and subject to the supervisionof, the Federal Reserve Board. The Company is required to file with the FederalReserve Board quarterly and annual reports and such additional information asthe Federal Reserve Board may require pursuant to the BHCA. The Federal ReserveBoard may conduct examinations of bank holding companies and theirsubsidiaries.

 

The Company is requiredto obtain the approval of the Federal Reserve Board before it may acquire allor substantially all of the assets of any bank, or ownership or control of thevoting shares of any bank if, after giving effect to such acquisition ofshares, the Company would own or control more than 5% of the voting shares ofsuch bank. Prior approval of the Federal Reserve Board is also required for themerger or consolidation of the Company and another bank holding company.

 

The Company is prohibitedby the BHCA, except in certain statutorily prescribed instances, from acquiringdirect or indirect ownership or control of more than 5% of the outstandingvoting shares of any company that is not a bank or bank holding company andfrom engaging, directly or indirectly, in activities other than those ofbanking, managing or controlling banks or furnishing services to itssubsidiaries. However, the Company may, subject to the prior approval of theFederal Reserve Board, engage in any, or acquire shares of companies engagedin, activities that are deemed by the Federal Reserve Board to be so closelyrelated to banking or managing or controlling banks as to be a proper incidentthereto. See discussion under “Financial Modernization Act” below for additionalinformation.

 

The Federal Reserve Boardmay require that the Company terminate an activity or terminate control of orliquidate or divest subsidiaries or affiliates when the Federal Reserve Boarddetermines that the activity or the control or the subsidiary or affiliatesconstitutes a significant risk to the financial safety, soundness or stabilityof any of its banking subsidiaries. The Federal Reserve Board also has theauthority to regulate provisions of certain bank holding company debt,including authority to impose interest ceilings and reserve requirements onsuch debt. Under certain circumstances, the Company must file written noticeand obtain approval from the Federal Reserve Board prior to purchasing orredeeming its equity securities.

 

Under the Federal ReserveBoard’s regulations, a bank holding company is required to serve as a source offinancial and managerial strength to its subsidiary banks and may not conductits operations in an unsafe and unsound manner. In addition, it is the FederalReserve Board’s policy that in serving as a source of strength to itssubsidiary banks, a bank holding company should stand ready to use availableresources to provide adequate capital funds to its subsidiary banks duringperiods of 

 

5

----

 

financial stress or adversityand should maintain the financial flexibility and capital-raising capacity toobtain additional resources for assisting its subsidiary banks. A bank holdingcompany’s failure to meet its obligations to serve as a source of strength toits subsidiary banks will generally be considered by the Federal Reserve Boardto be an unsafe and unsound banking practice or a violation of the FederalReserve Board’s regulations or both.

 

The Company is subject tothe periodic reporting requirements of Section 15(d) of the Securities ExchangeAct of 1934, as amended, and files reports pursuant to such Act with theSecurities and Exchange Commission.

 

**TheBank**

 

The Bank is charteredunder the laws of the United States and its deposits are insured by the FDIC tothe extent provided by law. The Bank is subject to the supervision of, and isregularly examined by, the Office of the Comptroller of Currency (“OCC”). Suchsupervision and regulation include comprehensive reviews of all major aspectsof the Bank’s business and condition.

 

Various requirements andrestrictions under the laws of the United States and of California affect the operationsof the Bank. Federal statutes relate to many aspects of  the Bank’s operations, including reservesagainst deposits, interest rates payable on deposits, loans, investments,mergers and acquisitions, borrowings, dividends and locations of branch offices.  Further, the Bank is required to maintaincertain levels of capital.

 

If, as a result of anexamination of a bank, the OCC should determine that the financial condition,capital resources, asset quality, earnings prospects, management, liquidity, orother aspects of the Bank’s operations are unsatisfactory or that the Bank orits management is violating or has violated any law or regulation, variousremedies are available to such regulatory agency. Such remedies include thepower to enjoin “unsafe or unsound” practices, to require affirmative action tocorrect any conditions resulting from any violation or practice, to issue anadministrative order that can be judicially enforced, to direct an increase incapital, to restrict the growth of the Bank, to assess civil monetarypenalties, to remove officers and directors, and ultimately to terminate theBank’s deposit insurance, which would result in a revocation of the Bank’scharter.

 

**CapitalStandards**

 

The Federal Reserve Boardand the OCC have adopted risk-based minimum capital guidelines intended toprovide a measure of capital that reflects the degree of risk associated with abanking organization’s operations for both transactions reported on the balancesheet as assets and transactions, such as letters of credit and recoursearrangements, which are recorded as off balance sheet items. Under theseguidelines, nominal dollar amounts of assets and credit equivalent amounts ofoff balance sheet items are multiplied by one of several risk adjustment percentages,which range from 0% for assets with low credit risk, such as certain U.S.Treasury securities, to 100% for assets with relatively high credit risk, suchas business loans.

 

A banking organization’srisk-based capital ratios are obtained by dividing its qualifying capital byits total risk adjusted assets. The regulators measure risk-adjusted assets,which includes off balance sheet items, against both total qualifying capital(the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1capital. Tier 1 capital consists primarily of common stock, retained earnings,non-cumulative perpetual preferred stock (cumulative perpetual preferred stockfor bank holding companies) and minority interests in certain subsidiaries,less most intangible assets. Tier 2 capital may consist of a limited amount ofthe allowance for possible loan and lease losses, cumulative preferred stock,long term preferred stock, eligible term subordinated debt and certain otherinstruments with some characteristics of equity. The inclusion of elements ofTier 2 capital is subject to certain other requirements and limitations of thefederal banking agencies. The federal banking agencies require a minimum ratioof qualifying total capital to risk-adjusted assets of 8% and a minimum ratioof Tier 1 capital to risk-adjusted assets of 4%.

 

In addition to therisked-based guidelines, federal banking regulators require bankingorganizations to maintain a minimum amount of Tier 1 capital to total assets,referred to as the leverage ratio. For a banking organization rated in the highestof the five categories used by regulators to rate banking organizations, theminimum leverage ratio of Tier 1 capital to total assets is 3%. For all bankingorganizations not rated in the highest category, the minimum leverage ratiomust be at least 4%. In addition to these uniform risk-based capital guidelinesand leverage ratios that apply across the industry, the regulators have thediscretion to set individual minimum capital requirements for specific institutionsat rates significantly above the minimum guidelines and ratios. Future changesin regulations or practices could further reduce the amount of capitalrecognized for purposes of capital adequacy. Such a change could affect theability of the Bank to grow and could restrict the amount of profits, if any.

 

6

----

 

The following tablepresents the amounts of regulatory capital and the capital ratios for the Bankand the Company, compared to its minimum regulatory capital requirements as ofDecember 31, 2001:

 

|                     |   | **December 31, 2001** |   |
|--------------------------|--------|-----------------------|--------|
|                     |   | **Company  Actual**   |   | **Bank  Actual** |   | **Minimum Capital Requirements** |   |
| LEVERAGE RATIO           |   | 8.5                   | %      | 8.5 | % | 4 | % |
| TIER 1  RISK-BASED RATIO |   | 11.1                  | %      | 11.1 | % | 4 | % |
| TOTAL RISK-BASED  RATIO  |   | 12.1                  | %      | 12.1 | % | 8 | % |

 

Under applicableregulatory guidelines, the Bank was considered “Well Capitalized” at December31, 2001. Under existing regulations of the Federal Reserve Board, the capitalratios of the bank holding company with total assets of less than $150 million,such as the Company, are deemed to be the same as those of the Bank.

 

**PromptCorrective Action and Other Enforcement Mechanisms**

 

Federal banking agenciespossess broad powers to take corrective and other supervisory action to resolvethe problems of insured depository institutions, including but not limited tothose institutions that fall below one or more prescribed minimum capitalratios described above. An institution that, based upon its capital levels, isclassified as well capitalized, adequately capitalized, or undercapitalized maybe treated as though it were in the next lower capital category if theappropriate federal banking agency, after notice and opportunity for hearing,determines that an unsafe or unsound condition or an unsafe or unsound practicewarrants such treatment. At each successive lower capital category, an insureddepository institution is subject to more restrictions. The federal bankingagencies, however, may not treat a significantly undercapitalized institutionas critically undercapitalized unless its capital ratio actually warrants suchtreatment.

 

In addition to measurestaken under the prompt corrective action provisions, commercial bankingorganizations may be subject to potential enforcement actions by the federalregulators for unsafe or unsound practices in conducting their businesses orfor violations of any law, rule, regulation, or any condition imposed inwriting by the agency or any written agreement with the agency.

** **

**Safetyand Soundness Standards**

 

The federalbanking agencies have adopted guidelines designed to assist the federal bankingagencies in identifying and addressing potential safety and soundness concernsbefore capital becomes impaired. The guidelines set forth operational andmanagerial standards relating to internal controls, information systems andinternal audit systems; loan documentation; credit underwriting; asset growth;earnings; and compensation, fees and benefits.

 

Inaddition, the federal banking agencies have also adopted safety and soundnessguidelines with respect to asset quality and earnings standards. These guidelinesprovide six standards for establishing and maintaining a system to identify problemassets and prevent those assets from deteriorating. Under these standards, an insureddepository institution should:

 

•                  conduct periodic asset-qualityreviews to identify problem assets;

•                  estimate the inherent losses inproblem assets and establish reserves that are sufficient to absorb estimatedlosses;

•                  compare problem asset totals tocapital;

•                  take appropriate corrective action toresolve problem assets;

•                  consider the size and potential risksof material asset concentrations; and

•                  provide periodic asset qualityreports with adequate information for management and the board of directors toassess the level of asset risk.

 

Theseguidelines also set forth standards for evaluating and monitoring earnings andfor ensuring that earnings are sufficient for the maintenance of adequate capitaland reserves.

** **

**Premiumsfor Deposit Insurance**

 

Throughthe Bank Insurance Fund (“BIF”), the FDIC insures the deposits of the Bank upto prescribed limits for each depositor. The amount of FDIC assessments paid byeach BIF member institution is based on its relative risk of default as 

 

7

----

 

measured by regulatorycapital ratios and other factors. Specifically, the assessment rate is based onthe institution’s capitalization risk category and supervisory subgroupcategory. An institution’s capitalization risk category is based on the FDIC’sdetermination of whether the institution is well capitalized, adequatelycapitalized or less than adequately capitalized. An institution’s supervisorysubgroup category is based on the FDIC’s assessment of the financial conditionof the institution and the probability that FDIC intervention or othercorrective action will be required.

 

The assessment ratecurrently ranges from zero to 27 cents per $100 of domestic deposits. The FDICmay increase or decrease the assessment rate schedule on a semi-annual basis.An increase in the assessment rate could have a material adverse effect on theCompany’s earnings, depending on the amount of the increase. The FDIC isauthorized to terminate a depository institution’s deposit insurance upon afinding by the FDIC that the institution’s financial condition is unsafe orunsound or that the institution has engaged in unsafe or unsound practices orhas violated any applicable rule, regulation, order or condition enacted orimposed by the institution’s regulatory agency.

 

All FDIC-insureddepository institutions must pay an annual assessment to provide funds for thepayment of interest on bonds issued by the Financing Corporation, a federalcorporation chartered under the authority of the Federal Housing Finance Board.The bonds, commonly referred to as FICO bonds, were issued to capitalize theFederal Savings and Loan Insurance Corporation. The FDIC established the FICOassessment rates effective for the fourth quarter of 2001 at approximately$.0184 per $100 annually for assessable deposits. The FICO assessments areadjusted quarterly to reflect changes in the assessment bases of the FDIC’s insurancefunds and do not vary depending on a depository institution’s capitalization orsupervisory evaluations.

 

**FinancialServices Modernization Legislation**

 

***General.***  On November 12, 1999, President Clinton signed into law theGramm- Leach-Bliley Act of 1999 (the “Financial Services Modernization Act”).The Financial Services Modernization Act repeals the two affiliation provisionsof the Glass-Steagall Act: Section 20, which restricted the affiliation ofFederal Reserve Member Banks with firms “engaged principally” in specifiedsecurities activities; and Section 32, which restricts officer, director, oremployee interlocks between a member bank and any company or person “primarilyengaged” in specified securities activities. In addition, the FinancialServices Modernization Act also contains provisions that expressly preempt anystate law restricting the establishment of financial affiliations, primarilyrelated to insurance. The general effect of the law is to establish acomprehensive framework to permit affiliations among commercial banks,insurance companies, securities firms, and other financial service providers byrevising and expanding the BHCA framework to permit a holding company system toengage in a full range of financial activities through a new entity known as aFinancial Holding Company.

 

Thelaw also:

 
| • |   | broadens the activities  that may be conducted by national banks, banking subsidiaries of bank holding  companies, and their financial subsidiaries;                         |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                         |
| • |   | provides an enhanced  framework for protecting the privacy of consumer information;                                                                                          |
|   |   |                                                                                                                                                                         |
| • |   | adopts a number of  provisions related to the capitalization, membership, corporate governance,  and other measures designed to modernize the Federal Home Loan Bank system; |
|   |   |                                                                                                                                                                         |
| • |   | modifies the laws  governing the implementation of the Community Reinvestment Act; and                                                                                       |
|   |   |                                                                                                                                                                         |
| • |   | addresses a variety of  other legal and regulatory issues affecting both day-to-day operations and  long-term activities of financial institutions.                          |

 

The Company and the Bankdo not believe that the Financial Services Modernization Act will have amaterial adverse effect on their operations in the near-term. However, to theextent that it permits banks, securities firms, and insurance companies toaffiliate, the financial services industry may experience further consolidation.The Financial Services Modernization Act is intended to grant to communitybanks certain powers as a matter of right that larger institutions have accumulatedon an ad hoc basis. Nevertheless, this act may have the result of increasingthe amount of competition that the Company and the Bank face from larger institutionsand other types of companies offering financial products, many of which mayhave substantially more financial resources than the Company and the Bank.

*** ***

***Financial Holding Companies.*** Bankholding companies that elect to become a financial holding company mayaffiliate with securities firms and insurance companies and engage in otheractivities that are financial in nature or are incidental or complementary toactivities that are financial in nature. The Company has not yet elected tobecome a financial holding company.

 

8

----

 

“Financial in nature”activities include: securities underwriting; securities dealing and marketmaking; sponsoring mutual funds and investment companies; insuranceunderwriting and agency; merchant banking; and activities that the Federal ReserveBoard, in consultation with the Secretary of the Treasury, determines from timeto time to be so closely related to banking or managing or controlling banks asto be a proper incident thereto.

 

A bank holding companymust meet three requirements before becoming a financial holding company: allof the bank holding company’s depository institution subsidiaries must be (1)well capitalized, (2) well managed, and (3) in compliance with the CommunityReinvestment Act (except in limited circumstances). In addition, the bankholding company must file with the Federal Reserve Board a declaration of itselection to become a financial holding company, including a certification thatits depository institution subsidiaries meet the foregoing criteria.

 

Failure to comply withthe financial holding company requirements could lead to divestiture ofsubsidiary banks or require all activities of the company to conform to thosepermissible for a bank holding company. No Federal Reserve Board approval isrequired for a financial holding company to acquire a company (other than abank holding company, bank or savings association) engaged in activities thatare financial in nature or incidental to activities that are financial innature, as determined by the Federal Reserve Board. In January, 2001 theFederal Reserve Board approved a final rule defining the three categories ofactivities financial in nature or incidental to a financial activity:

 
| • |   | lending, exchanging,  transferring, investing for others, or safeguarding financial assets other  than money or securities; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                        |
| • |   | providing any device or  other instrumentality for transferring money or other financial assets; or                         |
|   |   |                                                                                                                        |
| • |   | arranging, effecting or  facilitating financial transactions for the account of third parties.                              |

 

Thefinal rule also establishes a mechanism through which financial holdingcompanies or other interested parties may request that the Federal ReserveBoard find that a particular activity falls within one of these threecategories. For example, the Federal Reserve Board has recently issued a finalrule that grants financial holding companies the right to act as a finder inbringing together one or more buyers and sellers of any product or service fortransactions that the parties themselves negotiate and consummate..

 

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

*** ***

***Privacy.*** Under theFinancial Services Modernization Act, federal banking regulators are requiredto adopt rules that will limit the ability of banks and other financialinstitutions to disclose non-public information about consumers to nonaffiliatedthird parties. These limitations will require disclosure of privacy policies toconsumers and, in some circumstances, will allow consumers to prevent disclosureof certain personal information to a nonaffiliated third party. Federal bankingregulators issued final rules on May 10, 2000. Pursuant to the rules, financialinstitutions must provide:

 
| • |   | initial notices to  customers about their privacy policies, describing the conditions under which  they may disclose nonpublic personal information to nonaffiliated third  parties and affiliates; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                |
| • |   | annual notices of their  privacy policies to current customers; and                                                                                                                                 |
|   |   |                                                                                                                                                                                                |
| • |   | a reasonable method for  customers to “opt out” of disclosures to nonaffiliated third parties.                                                                                            |

 

Therules were effective November 13, 2000 with compliance optional until July 1,2001. These privacy provisions affect how consumer information is transmittedthrough diversified financial companies and conveyed to outside vendors. It isnot possible at this time to assess the impact of the privacy provisions on theCompany’s financial condition or results of operations.

*** ***

***Consumer Protection Rules — Sale ofInsurance.*** In December 2000, pursuant to the requirementsof the Financial Services Modernization Act, the federal bank and thriftregulatory agencies adopted consumer protection rules for the sale of insuranceproducts by depository institutions. The rule became effective on October 1,2001 and applies to any depository institution or any person selling,soliciting, advertising, or offering insurance products or annuities to aconsumer at an office of the institution or on behalf of the institution. Theregulation requires oral and written disclosure, before the completion of thesale of an insurance product or annuity, that such product:

 
| • |   | is not a deposit or  other obligation of, or guaranteed by, the depository institution or its  affiliate;                |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                     |
| • |   | is not insured by the  FDIC or any other agency of the United States, the depository institution or  its affiliates; and |

 

9

----

 
| • |   | has certain risks of  investment, including the possible loss of value. |
|--------|--------|-------------------------------------------------------------------------|

 

The depositoryinstitution may not condition an extension of credit on the consumer’s purchaseof an insurance product or annuity from the depository institution or from anyof its affiliates, or on the consumer’s agreement not to obtain, or aprohibition on the consumer from obtaining, an insurance product or annuity froman unaffiliated entity. Furthermore, to the extent practicable, a depositoryinstitution must keep insurance and annuity sales activities physicallysegregated from the areas where retail deposits are routinely accepted from thegeneral public. Finally, the rule addresses cross marketing and referral fees.

*** ***

***Safeguarding Confidential Customer Information.***In January 2000, the banking agencies adopted guidelines requiring financialinstitutions to establish an information security program to:

 
| • |   | identify and assess the  risks that may threaten customer information;                                                                                                          |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                            |
| • |   | develop a written plan  containing policies and procedures to manage and control these risks;                                                                                   |
|   |   |                                                                                                                                                                            |
| • |   | implement and test the  plan; and                                                                                                                                               |
|   |   |                                                                                                                                                                            |
| • |   | adjust the plan on a  continuing basis to account for changes in technology, the sensitivity of  customer information and internal or external threats to information security. |

 

Eachinstitution may implement a security program appropriate to its size andcomplexity and the nature and scope of its operations. The guidelines becameeffective July 1, 2001.

** **

**CommunityReinvestment Act**

 

The Bank is subject tocertain fair lending requirements and reporting obligations involving homemortgage lending operations and Community Reinvestment Act (“CRA”) activities.The CRA generally requires the federal banking agencies to evaluate the recordof a financial institution in meeting the credit needs of their localcommunities, including low and moderate income neighborhoods. In addition to substantialpenalties and corrective measures that may be required for a violation ofcertain fair lending laws, the federal banking agencies may take compliancewith such laws and CRA into account when regulating and supervising otheractivities. In connection with its assessment of CRA performance, the appropriatebank regulatory agency assigns a rating of “outstanding.” “satisfactory,”“needs to improve” or “substantial noncompliance.” At its last examination bythe OCC, the Bank received a CRA rating of “Satisfactory.”

** **

**Factors That May Affect Future Results of Operations**

 

In addition to the otherinformation contained in this Report, the following risks may affect theCompany.  If any of these risks occur,the Company’s business, financial condition or operating results could beadversely affected.

*** ***

***Dependence on Real Estate.*** Asignificant portion of the loan portfolio of the Bank is dependent on realestate. At December 31, 2001, real estate served as the principal source ofcollateral with respect to approximately 55 percent of the Bank’s loanportfolio. A decline in current economic conditions or rising interest ratescould have an adverse effect on the demand for new loans, the ability ofborrowers to repay outstanding loans, the value of real estate and other collateralsecuring loans and the value of real estate owned by the Bank, as well as theCompany’s financial condition and results of operations in general and themarket value of the Company’s common stock. Acts of nature, including earthquakesand floods, which may cause uninsured damage and other loss of value to realestate that secures these loans, may also negatively impact the Company’sfinancial condition.

*** ***

***Interest Rate Changes.*** The earnings ofthe Company and the Bank are substantially affected by changes in prevailinginterest rates. Changes in interest rates affect the demand for new loans, thecredit profile of existing loans, the rates received on loans and securitiesand the rates the Bank must pay on deposits and borrowings. The differencebetween the rates the Bank receives on loans and securities and the rates itmust pay on deposits and borrowings is known as the interest rate spread. Giventhe Bank’s current volume and mix of interest-bearing liabilities andinterest-earning assets, the Bank’s interest rate spread can be expected to increasewhen market interest rates are rising, and to decline when market interestrates are declining. Although the Bank believes its current level of interestrate sensitivity is reasonable, significant fluctuations in interest rates mayhave an adverse impact on the Company’s and the Bank’s business, financialcondition and results of operations.

*** ***

***Competition.*** Competition may adverselyaffect the Bank’s performance. The financial services business in the Bank’smarket area is highly competitive and becoming more so due to changes inregulation, technological advances and the accelerating pace of consolidationamong financial service providers. The Bank faces competition both in attractingdeposits and in making loans. It competes for loans principally through theinterest rates and loan fees it charges and the efficiency and quality of theservices it provides. Increasing levels of competition in the banking andfinancial services businesses may reduce the Bank’s

 

10

----

 

marketshare or cause the prices it charges for its services to fall. The Company’sresults may differ in future periods depending on the nature or level ofcompetition.

 

***Regulation.*** The Company and the Bankare subject to government regulation that could limit or restrict theiractivities, adversely affecting operations. The financial services industry isheavily regulated. Federal and state regulation is designed to protect thedeposits of consumers, not to benefit shareholders. The regulations imposesignificant limitations on operations, and may be changed at any time to imposesignificant new limitations, possibly causing the Company’s results to varysignificantly from past results. Government policy and regulation, particularlyas implemented through the Federal Reserve Board, significantly affects creditconditions for the Bank.

*** ***

***Borrowers’ Failure to Perform.*** Asignificant number of the Bank’s borrowers and guarantors may fail to performtheir obligations as required by the terms of their loans, resulting in lossesfor the Company. The Bank has adopted underwriting and credit policies, andloan monitoring procedures, including the establishment and monitoring of allowancesfor credit losses. Management believes these provisions are reasonable andadequate, and should keep credit losses within expected limits by assessing thelikelihood of nonperformance, tracking loan performance and diversifying thecredit portfolio. However, these policies and procedures may not be adequate toprevent unexpected losses that could materially and adversely affect theCompany’s results of operations.

## ** **

**ITEM 2****.  DESCRIPTIONOF PROPERTIES**

 

The Bank and the Companyoccupy a property owned by the Bank at 581 Higuera Street, San Luis Obispo,California  93401, where the Bank’s mainoffice is located. The property, consisting of approximately 21,850 sq. ft.,was purchased from an unaffiliated third party for $976,449. The Bank purchasedand installed the modular facility being utilized as the banking facility for atotal of $250,846, plus improvements of $466,209. On August 8, 1998, the Bankopened a loan production office at 1226 Park Street, Paso Robles, California93446. This office became a full service branch in April, 1999. The Bank leasesapproximately 3,000 sq. ft. at $1,925 per month. The term of the lease is fiveyears, and the Bank has an option to renew the lease for two additionalfive-year periods.  On April 16, 2000the Bank opened an administrative office at 560 Higuera Street, San LuisObispo, California 93401 by leasing approximately 1,125 sq. ft. at a cost of$1,406 per month.  This two-year leasewas terminated in June 2001 without additional costs, and the Bank moved itsadministrative office to 569 Higuera Street (immediately next to the mainoffice). The new lease is for five years at a cost of $3,315 per month withapproximately 1,950 square feet of space. On December 15, 2000, the Bank opened a loan production office at 154West Branch Street, Arroyo Grande, California 93420.  The Bank leases approximately 2,000 sq. ft. at $2,392 per month,plus common area operating expenses. The term of the lease is five years, andthe Bank has an option to renew the lease for two additional sixty-monthperiods.  The Bank expects to completethe conversion of this LPO to a full branch status by June 2002.

 

For the years endedDecember 31, 2000 and 2001, the total occupancy cost was $132,880 and $140,180,respectively. In the opinion of management, the premises are adequate for theCompany’s purposes and the Company has sufficient insurance to cover itsinterest in the premises.

## ** **

**ITEM 3****.  LEGAL PROCEEDINGS**

 

The Company and the Bankare, from time to time, subject to various pending and threatened legal actionswhich arise out of the normal course of its business. Neither the Company northe Bank is a party to any pending legal or administrative proceedings (otherthan ordinary routine litigation incidental to the Company’s or the Bank’sbusiness) and no such proceedings are known to be contemplated.

 

There are no materialproceedings adverse to the Company or the Bank to which any director, officer,affiliate of the Company or 5 % shareholder of the Company or the Bank, or anyassociate of any such director, officer, affiliate or 5% shareholder of theCompany or Bank is a party, and none of the above persons has a materialinterest adverse to the Company or the Bank.

 

**ITEM 4****.  SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

Nomatters were submitted to a vote of security holders during the fourth quarterof 2001.

 

11

----

 

# **PART II**

 

**ITEM 5****.  MARKETFOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

** **

**Market Information**

 

TheCompany’s common stock has traded infrequently in the over-the-counter marketunder the symbol “MISS.” The Company’s Common Stock is not listed on anyexchange or market. However, Hoefer & Arnett, Brookstreet Securities, Sutro& Co. and Wedbush Morgan Securities make a market in the Company’s CommonStock. Certain information concerning the Common Stock is reported on theNASDAQ electronic bulletin board.

 

Theinformation in the following table indicates the high and low bid prices of theCompany’s Common Stock for each quarterly period during the last two yearsbased upon information provided by OTC Bulletin Board. These prices do notinclude retail mark-ups, mark-downs or commission. 

 

| **Quarter Ended** |   | **Bid Prices** |   |
|-------------------|--------|----------------|--------|
| **2000**          |   | **Low**        |   | **High** |   |
| March 31          |   | $              | 8.25   |   | $ | 8.50 |   |
| June 30           |   | 7.75           |   | 8.50 |   |
| September 30      |   | 7.00           |   | 8.25 |   |
| December 31       |   | 7.50           |   | 8.00 |   |
|              |   |           |   |   |   |
| **2001**          |   |           |   |   |   |
| March 31          |   | 7.89           |   | 9.25 |   |
| June 30           |   | 7.50           |   | 9.25 |   |
| September 30      |   | 8.10           |   | 12.00 |   |
| December 31       |   | 8.55           |   | 12.00 |   |
|                   |        |                |        |  |  |  |  |

 

**Holders**

 

As of March 1, 2002, there were approximately 385holders of the Company’s Common Stock.

 

**Dividends**

 

The Company, and the Bankbefore the establishment of the Company, have followed a policy of retainingearnings to support asset growth. No cash dividends have been paid. Whether ornot stock or cash dividends will be paid in the future by the Company will bedetermined by the Board of Directors after consideration of various factors.The Company’s profitability and regulatory capital ratios in addition to otherfinancial conditions will be key factors considered by the Board of Directorsin making such determinations regarding the payment of dividends by theCompany. Additionally, certain provisions of the preferred stock restrict theability of the Company to pay cash dividends unless the required dividends onthe preferred stock are also paid.

 

The Company is a legalentity separate and distinct from the Bank. The Company’s shareholders are entitled to receive dividends when and asdeclared by its Board of Directors, out of funds legally available therefore,subject to the restrictions set forth in the in the California GeneralCorporation Law (the “Corporation Law”). The Corporation Law provides that a corporation may make a distributionto its shareholders if the corporation’s retained earnings equal at least theamount of the proposed distribution.  TheCorporation Law also provides that, in the event that sufficient retainedearnings are not available for the proposed distribution, a corporation maynevertheless make a distribution to its shareholders if it meets twoconditions, which generally stated are as follows: (i) the corporation’s assetsequal at least 1-1/4 times its liabilities, and (ii) the corporation’s currentassets equal at least its current liabilities or, if the average of thecorporation’s earnings before taxes on income and before interest expenses forthe two preceding fiscal years was less than the average of the corporation’sinterest expenses for such fiscal years, then the corporation’s currentassets  must equal at least 1-1/4 timesits current liabilities.

 

The availability of operating funds for the Company and the ability ofthe Company to pay a cash dividend depends largely on the Bank’s ability to paya cash dividend to the Company.  Thepayment of cash dividends by the Bank is subject to restrictions set forth inthe National Bank Act.  In general,dividends may not be paid from any of the Bank’s capital.  Dividends must be paid out of available netprofits, after deduction of all current operating expenses, actual losses,accrued dividends on preferred stock, if any, and all federal and statetaxes.  Additionally, a national bank isprohibited from declaring a dividend on its shares of common stock until itssurplus fund equals its common capital, or, if its surplus fund

 

12

----

 

does not equal its common capital, until at least one-tenth of suchbank’s net profits, for the preceding half year in the case of quarterly orsemi-annual dividends, or the preceding two half-years in the case of an annualdividend, are transferred to its surplus fund each time dividends aredeclared.  The approval of the OCC isrequired if the total of all dividends declared by a national bank in anycalendar year exceeds the total of its net profits for that year combined withits retained net profits of the two preceding years, less any requiredtransfers to surplus or a fund for the retirement of any preferred stock.  Under these provisions and consideringminimum regulatory capital requirements, the bank was not eligible to paydividends at December 31, 2001. Furthermore, the OCC also has authority to prohibit the payment ofdividends by a national bank when it determines such payment to be an unsafeand unsound banking practice.

 

Additionally, bank regulatory agencies have authorityto prohibit banks from engaging in activities that, in their respectiveopinions, constitute unsafe and unsound practices in conducting itsbusiness.  It is possible, dependingupon the financial condition of the bank in question and other factors, thatthe bank regulatory agencies could assert that the payment of dividends orother payments might, under some circumstances, be an unsafe or unsoundpractice.  Further, the bank regulatoryagencies have established guidelines with respect to the maintenance ofappropriate levels of capital by banks or bank holding companies under theirjurisdiction.  Compliance with thestandards set forth in such guidelines and the restrictions that are or may beimposed under the prompt corrective action provisions of federal law couldlimit the amount of dividends which the Bank may pay.

 

**Issuanceof Preferred Stock**

 

On December 29, 2000, the Company issued 100,000 shares of preferredstock to the Community Development Financial Institutions Fund, a division ofthe U.S. Treasury Department (“CDFI”), for $500,000.  Such shares of preferred stock were designated as “Series ANon-Voting Convertible Redeemable Preferred Stock” and have identical rightsand privileges in every respect to Common Stock except that they arenon-voting.  The dividend rightsattributable to the holders of “Non-Voting Convertible Redeemable PreferredStock” are proportioned to those of the holders of the Common Stock based upontwo for one conversion ratio set forth below; that is, the Non-VotingConvertible Redeemable Preferred Stock participates on a per share basis in anydividend declared on Common Stock at the rate of one-half of the per sharecommon dividend, but are not entitled to any fixed rate of return (zero percentcumulative).  This Non-VotingConvertible Redeemable Preferred Stock may be converted into Common Stock ofthe Company on a two-for-one exchange (and 50,000 shares if Common Stock shallbe set aside and reserved by the Company for such purpose) at any time upon therequest of a holder of such Non-Voting Convertible Redeemable Preferred Stockupon or after the transfer of Non-Voting Convertible Redeemable Preferred Stockby the initial holder thereof.  In theevent the Company is liquidated, for any reason, the holders of Non-VotingConvertible Redeemable Preferred Stock shall be entitled to a liquidationpreference of Five Dollars ($5.00) per share before holders of Common Stockreceive any distribution and after the holders of Common Stock receive TenDollars ($10.00) per share, any further distributions on Non-Voting ConvertibleRedeemable Preferred Stock and Common Stock shall be at the ratio of One Dollar($1.00) per share on the Non-Voting Convertible Redeemable Preferred Stock toTwo Dollars ($2.00) per share for Common Stock.  If the Common Stock is subdivided, combined or reclassified, theNon-Voting Convertible Redeemable Preferred Stock****shall be subdivided,combined or reclassified on the same basis. The holders of the Non-Voting Convertible Redeemable Preferred Stockshall have no right to vote any such shares except as may be required byapplicable law.

 

The Non-Voting Convertible Redeemable Preferred Stock shall beautomatically redeemable, in whole or in part, at any time upon the request ofthe holder of such Non-Voting Convertible Redeemable Preferred Stock, in cashat the price of Five Dollars ($5.00) per share, without further action on thepart of the Company, upon and after a finding by the CDFI or its successor thatthe Company is in default under any Community Development Financial InstitutionsProgram Assistance Agreement****for Technical Assistance Grants to andEquity Investments in Regulated Institutions, or any successor agreement, towhich the Company is a party or by which it is bound.

 

The $500,000 in proceeds from the CDFI investments was included in theaudited financial statement of the Bank for the year-ended December 31, 1999because the CDFI grant approval had occurred during such year.  When the proceeds from the sale of  Non-Voting Convertible Redeemable PreferredStock were received, $401,675 was invested as a capital contribution to theBank with the remaining $98,325 used for expenses related to the transaction.

 

On December 29 2000, the Company issued 29,500 shares of Common Stockand 20,500 shares of preferred stock to National Community Investment Fund(NCIF), a private sector community development investment trust for thedistribution of community development funds at $10.00 per share for anaggregate of $500,000.  Such shares ofpreferred stock were designated as “Series B Non-Voting Preferred Stock” andhave rights and privileges similar to Common Stock except that they arenon-voting.  The dividend rightsattributable to the holders of the Series B Non-Voting Preferred Stock areproportioned to those of the holders of the Common Stock; that is, the Series BStock participates on a per share basis in any dividend declared on CommonStock, but such Stock is not entitled to any fixed rate of return (zero percentcumulative).  The Series B Non-VotingPreferred Stock is not convertible or redeemable.  ** **If the Common Stock is

 

13

----

 

subdivided, combined or reclassified, the Series B Non-Voting PreferredStock****shallbe subdivided, combined or reclassified on the same basis.

 

In the event the Company is liquidated, for any reason, the holders ofSeries B Non-Voting Preferred Stock shall be entitled to a liquidationpreference of Ten Dollars ($10.00) per share before holders of Common Stockreceive any distribution but such liquidation preference is junior in right ofpayment to the liquidation preference for the Series A Non-Voting ConvertibleRedeemable Preferred Stock discussed above. Additionally, in the event of a so-called “change in control event”(including certain mergers, sales of assets or tender offers), holders of theSeries B Non-Voting Preferred Stock shall be entitled to receive a payment inthe same form of consideration and in the same amount as the per share pricereceived, or deemed to be received, by the holders of the common stock of theCompany in or as a result of the “change in control event.”

 

When the proceeds from the sale of Series B Non-Voting Preferred Stockwere received, $475,000 was invested as a capital contribution to the Bank withthe remaining $25,000 used for expenses related to the transaction.

 

The sales of the Non-Voting Convertible Redeemable Preferred Stock andthe Series B Non-Voting Preferred Stock were made in reliance on the exemptionprovided in Section 4(2) of the Securities Act of 1933.

 

The Company andthe Bank anticipate that they will continue during 2002 and in subsequent yearsto seek investments from CDFI, NCIF and other institutions which invest incommunity development financial institutions in order to support the capitalfor community development investment purposes. Such investment may be in the form of common and/or preferredstock.  The Company is authorized toissue an additional 369,934 shares of Common Stock and up to 879,500 shares ofpreferred stock without shareholder approval.

 

14

----

 

**ITEM 6****.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATION**

 

The following is selected consolidated financial data with respect tothe Company’s statement of financial position for the year ended December 31,2001 and its statement of income for the year ended December 31, 2001.  Bank statements for the year ended December31, 1999 are included on a comparative basis.  The information presented has been derived from the audited consolidatedfinancial statements included in Item 7 of this Form 10-KSB.  This information should be read inconjunction with such consolidated financial statements and the notes thereto.  The summary consolidated financial data withrespect to the year ended December 31, 1999 for the Bank has been derived fromthe audited financial statements of the Company, which are not presentedherein.

 
|                                                |   | **At or for the year ended December 31,** |   |
|-----------------------------------------------------|--------|-------------------------------------------|--------|
|                                                |   | **2001**                                  |   | **2000** |   | **1999** |   |
|                                                |   | **(Dollars in thousands)**                |   |
| Summary of  Operations                              |   |                                      |   |   |   |   |   |
| Interest Income                                     |   | $                                         | 5,360  |   | $ | 4,433 |   | $ | 2,458 |   |
| Interest Expense                                    |   | 2,143                                     |   | 2,169 |   | 1,064 |   |
| Net Interest  Income                                |   | 3,217                                     |   | 2,264 |   | 1,394 |   |
| Provision for  Loan Losses                          |   | 280                                       |   | 393 |   | 155 |   |
| Net Interest  Income After Provision                |   | 2,937                                     |   | 1,871 |   | 1,239 |   |
| Noninterest  Income                                 |   | 1,514                                     |   | 668 |   | 537 |   |
| Noninterest  expense                                |   | 3,431                                     |   | 2,307 |   | 1,804 |   |
| Income Before  Taxes                                |   | 1,020                                     |   | 231 |   | (20 | ) |
| Income Tax                                          |   | 0                                         |   | (100 | ) | (70 | ) |
| Net Income                                          |   | $                                         | 1,020  |   | $ | 332 |   | $ | 42 |   |
| Per Share Data                                      |   |                                      |   |   |   |   |   |
| Net Income — Basic                             |   | $                                         | 1.46   |   | $ | 0.51 |   | $ | 0.07 |   |
| Net Income —  Diluted                          |   | $                                         | 1.46   |   | $ | 0.51 |   | $ | 0.07 |   |
| Actual Number of  Shares Outstanding                |   | 700,566                                   |   | 630,066 |   | 600,566 |   |
| Actual Weighted  Average Number of Shares           |   | 700,566                                   |   | 650,826 |   | 614,245 |   |
| Balance Sheet  Data — At Period End            |   |                                      |   |   |   |   |   |
| Total Assets                                        |   | 79,891                                    |   | 62,929 |   | 47,825 |   |
| Total Loans                                         |   | 60,462                                    |   | 43,128 |   | 33,431 |   |
| Allowance for  Loan Losses                          |   | 635                                       |   | 512 |   | 210 |   |
| Investment  Securities                              |   | 10,835                                    |   | 13,805 |   | 5,228 |   |
| Total Deposits                                      |   | 71,684                                    |   | 54,171 |   | 40,411 |   |
| Total  Shareholders’ Equity                    |   | 6,774                                     |   | 5,724 |   | 4,771 |   |
| Operating Ratios  and Other Selected Data           |   |                                      |   |   |   |   |   |
| Return on  Average Assets                           |   | 1.4                                       | %      | 0.6 | % | 0.1 | % |
| Return on  Average Equity                           |   | 17.4                                      | %      | 6.8 | % | 1.0 | % |
| Operating  Efficiency Ratio                         |   | 72.5                                      | %      | 78.7 | % | 93.5 | % |
| Net Interest  Margin                                |   | 4.8                                       | %      | 4.6 | % | 4.9 | % |
| Average Equity  to Average Assets                   |   | 8.1                                       | %      | 9.0 | % | 13.1 | % |
| Selected Asset  Quality Ratios — At Period End |   |                                      |   |   |   |   |   |
| Nonperforming  Loans to Total Loans                 |   | 1.5                                       | %      | 2.4 | % | 0.0 | % |
| Nonperforming  Assets to Total Assets               |   | 1.1                                       | %      | 1.6 | % | 0.0 | % |
| ALL as a  Percentage of Nonperforming Loans         |   | 70.2                                      | %      | 50.2 | % | NA |   |
| ALL as a  Percentage of Total Loans                 |   | 1.1                                       | %      | 1.2 | % | 0.6 | % |

 

**History**

 

The Bank commenced operations in December 1997 as a full servicecommunity bank. The Bank has also established a wholly-owned communitydevelopment corporation subsidiary and its affiliated not-for profitsubsidiary.  The intent of the communitydevelopment subsidiary and affiliate is to provide financing for smallbusinesses and low- to moderate-income area development.  To date, the operations of the communitydevelopment companies were not material as of December 31, 2001.

 

15

----

 

In its first four years of operations, the Bank has progressivelyincreased its business activities and expanded its operations in San LuisObispo and neighboring areas.  Amajority of the Bank’s activities are considered “community development”activities with a focus on providing a selection of financial services to smallbusinesses and business professionals. The Company and Bank anticipate continued activity in seeking bothgrants and deposits under programs authorized by the Department of Treasury’sCommunity Development Institution Fund (CDFI). The CDFI has certified the Bank and the Company as a “communitydevelopment financial institution(s)” (CDFI). The Bank and Company are currently in the process of reviewing variousoptions for both grants and deposit programs.

 

The Company was organized in December 2000 to provide a vehicle tofacilitate raising capital from various organizations wishing to benefit fromthe Bank’s community development status. Capital activities under the umbrella of the Company are expected tobecome an increasing resource for equity to provide additional capital for Bankgrowth and expansion and for deposits by organizations to get credit forcommunity development activities.

 

In 2001, the Company received a $500,000 award under the CDFI’s CoreComponent program.  This award is aportion of the $107.5 million awarded to 53 organizations by the CDFI in 2001to assist financial organizations in making loans and providing financialservices in distressed urban and rural communities. The proceeds of the awardwill be in the form of preferred stock issued by the Company and are expectedto be received by mid-2002. No specific determination has been made on the useof funds from the award.

 

In mid-2001, the Bank received a $990,000 cash award from the BankEnterprise Award (BEA) Program another program which is sponsored by theCDFI.  The Bank was awarded this cashpayment for investing $3 million in deposits in 2001 to 14 other certifiedCommunity Development Financial Institutions. The deposits were for 3 years and were made at below market rates toassist the other CDFI’s to increase their financing activities. The Bankrecognized income of $537,750 in 2001 and has deferred the remaining $452,250over the next 30 months to approximate the future earnings on the depositscompared to market rates.

 

**Basis ofPresentation**

 

The following discussion and analysis is intended to assist in anunderstanding of the significant factors that influenced our consolidatedfinancial condition at December 31, 2001 and December 31, 2000. The followingdiscussion and analysis, which refers to the company on a consolidated basis,should be read in conjunction with the Company’s financial statements andcorresponding notes.

 

**Assets**

 

During 2001, total assets increased $17.0 million from $62.9 million atDecember 31, 2000 to $79.9 million at December 31, 2001 representing asset growthof 27%. This increase in assets was consistent with budgeted plans to continueto increase the volume of business in the Bank’s market area by continuedbusiness development in existing markets, by upgrading the Loan ProductionOffice in Paso Robles to a full service branch in 1999 and by opening a LoanProduction Office in Arroyo Grande in 2000. The Bank is very active in the local communities that it serves and itsofficers and staff members participate in a wide-range of business andcommunity group activities as a means of both providing community support andto expand its business development contacts.

 

The following table presents, for the periods indicated, thedistribution of average assets, liabilities and shareholders’ equity, as wellas the total dollar amounts of interest income from average interest-earningassets and the resultant yields. Also presented are the dollar amounts ofinterest expense and average interest-bearing liabilities, expressed both indollars and in rates. Nonaccrual loans are included in the calculation of theaverage balances of loans, and interest not accrued is excluded.

 

16

----

 
|                                  |   | **For the  Year-ending December 31, 2001** |   | **For the  Year-ending December 31, 2000** |   |
|---------------------------------------|--------|--------------------------------------------|--------|--------------------------------------------|--------|
|                                  |   | **Average  Balance  (000’s)**         |   | **Income/  Expense  (000’s)**         |   | **Average  Yield or  Rate Paid** |   | **Average  Balance  (000’s)** |   | **Income/   Expense**

**(000’s)** |   | **Average  Yield or   Rate Paid** |   |
| Interest-bearing  deposits in banks   |   | $                                          | 1,706  |                                       | $      | 60 |   | 3.52 | % | $ | 324 |   | $ | 21 |   | 6.48 | % |
| Investment  securities                |   | 11,202                                     |   | 684                                        |   | 6.11 | % | 10,777 |   | 758 |   | 7.03 | % |
| Federal funds  sold                   |   | 2,543                                      |   | 96                                         |   | 3.78 | % | 1,451 |   | 90 |   | 6.20 | % |
| Loans                                 |   | 51,180                                     |   | 4,520                                      |   | 8.83 | % | 36,549 |   | 3,564 |   | 9.75 | % |
| Total  Interest-earning assets        |   | $                                          | 66,631 |                                       | 5,360  |   | 8.04 | % | $ | 49,101 |   | 4,433 |   | 9.03 | % |
|                                  |   |                                       |   |                                       |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:        |   |                                       |   |                                       |   |   |   |   |   |   |   |   |   |
| Deposits:                             |   |                                       |   |                                       |   |   |   |   |   |   |   |   |   |
| Demand,  interest-bearing             |   | 2,987                                      |   | 63                                         |   | 2.11 | % | $ | 1,937 |   | 51 |   | 2.63 | % |
| Savings                               |   | 27,965                                     |   | 943                                        |   | 3.37 | % | 26,590 |   | 1,399 |   | 5.26 | % |
| Time                                  |   | 23,333                                     |   | 1,125                                      |   | 4.82 | % | 11,915 |   | 678 |   | 5.69 | % |
| Borrowings                            |   | 157                                        |   | 11                                         |   | 7.01 | % | 623 |   | 40 |   | 6.42 | % |
| Total interest  bearing liabilities   |   | $                                          | 54,442 |                                       | 2,142  |   | 3.93 | % | $ | 41,065 |   | 2,168 |   | 5.28 | % |
|                                  |   |                                       |   |                                       |   |   |   |   |   |   |   |   |   |
| Net interest  income and yield:       |   |                                       |   |                                       |   |   |   |   |   |   |   |   |   |
| Net Interest  income                  |   |                                       |   | $                                          | 3 ,218 |   |   |   |   |   | $ | 2,265 |   |   |   |
| Net yield on  interest-earning assets |   |                                       |   |                                       |   | 4.83 | % |   |   |   |   | 4.61 | % |

 

#### **Net Interest Income**

 

The principal component of earnings is net interest income.  Net interest income is the differencebetween the interest earned on loans and investments and the interest paid ondeposits and other interest-bearing liabilities.

 

Net interest income is affected by changes in the amount and mix of ourinterest-earning assets and interest-bearing liabilities, referred to as a“volume change”.  It is also affected bychanges in the yields we earn on interest-earning assets and rates we pay oninterest-bearing deposits and other borrowed funds, referred to as a “ratechange”.

 

The following table sets forth changes in interest income and interestexpense for each major category of interest-earning assets and interest-bearingliabilities, and the amount of change attributable to volume and rate changesfor the years indicated. Changes not solely attributable to rate or volume havebeen allocated to volume and rate changes in proportion to the relationship ofthe absolute dollar amounts of the changes in each.

 

17

----

 
|                                |   | **Year ended  December 31, 2001  over  Year ended December 31, 2000** |   |
|-------------------------------------|--------|-----------------------------------------------------------------------|--------|
|                                |   | **Increase  (decrease) due to change**                                |   |
|                                |   | **Average  Balance/  Volume**                                         |   | **Average  Rate** |   | **Total** |   |
|                                |   | **(Dollars  in thousands)**                                           |   |
| Increase  (Decrease) in:            |   |                                                                  |   |   |   |   |   |
| Interest Income:                    |   |                                                                  |   |   |   |   |   |
| Interest-bearing  deposits in banks |   | $                                                                     | 44     |   | $ | (5 | ) | $ | 39 |   |
| Investment  securities              |   | 28                                                                    |   | (102 | ) | (74 | ) |
| Federal funds sold                  |   | 12                                                                    |   | (6 | ) | 6 |   |
| Loans                               |   | 1,251                                                                 |   | (295 | ) | 956 |   |
| Total                               |   | 1,335                                                                 |   | (408 | ) | 927 |   |
|                                |   |                                                                  |   |   |   |   |   |
| Interest  Expense:                  |   |                                                                  |   |   |   |   |   |
| Demand,  interest-bearing           |   | 19                                                                    |   | (7 | ) | 12 |   |
| Savings                             |   | 163                                                                   |   | (619 | ) | (456 | ) |
| Time                                |   | 531                                                                   |   | (84 | ) | 447 |   |
| Borrowings                          |   | 3                                                                     |   | (32 | ) | (29 | ) |
| Total                               |   | 716                                                                   |   | (742 | ) | 26 |   |
|                                |   |                                                                  |   |   |   |   |   |
| Increase in                         |   |                                                                  |   |   |   |   |   |
| Net Interest  Income                |   | $                                                                     | 619    |   | $ | 334 |   | $ | 953 |   |

 

#### **Year Ended December 31,2001 Compared to December 31, 2000**

 

For the year ended 2001, interest income was $5.4 million, an increaseof $927,000 or 21% compared to $4.4 million for the year ended 2000.  This increase was universally driven byincreases in volume activity during a period when the Federal Reserve recordeda record number of rate decreases.  On arelative basis, $408,000 in rate related decreases were offset by volumeincreases of $1,335,000 with loan activity representing the largest growtharea.  The target Federal Funds Ratestood at 6.00% on January 2, 2001 but reached 1.75% as of December 11, 2001 fora total drop of 4.25%.  At the sametime, the Bank was able to manage earning yields with only a modest 1.0% dropin the average rate on earning assets due to strong loan growth, someconsistency in investment yields, and prudent loan pricing during a period ofeconomic uncertainty.

 

Even with a record drop in deposit and investment rates, interestexpense decreased by $26,000 at a time when average deposits increased $13million.  The Bank also noted severalshifts in depositor trends including a propensity to move funds to certificatesof deposits from saving accounts with annual growth of $12.9 million inCDs.  Savings and Money Market accountbalances remained relatively static with limited growth, and a generaldiscouragement with deposits rates appeared to reduce depositor motivation toseek get higher rates as reflected in the annualized growth of $4.5 million indemand deposits. The most noticeable trend was a lack of deposit growth in thelast quarter of 2001.

 

The Bank has promoted and will continue to promote a “special” savingsaccount, which pays a rate of interest between the rate paid for interestchecking and certificates of deposits. This account is similar to a money market account based on 

 

18

----

 

rates but is generally more stable since it does not provide forwithdrawal by check. While the Investor Savings Account representedapproximately 65% of total deposits in 2000 and 62% of total deposits in 1999,it dropped to 37% of total deposits as of the end of 2001.  This decrease was promulgated by shiftingrates, investment decisions by depositors to move funds to CDs, and by theBank’s use of the account to help manage the cost of funds rather than as adeposit growth tool.

 

#### **Provision for LoanLosses**

 

The Bank booked provisions for loan losses to bring the total allowancefor loan losses to a level deemed appropriate. The determination is based onsuch factors as historical experience, the volume and type of lendingconducted, the amount of nonperforming loans, regulatory policies, general economicconditions, and other factors related to the collectibility of loans in theportfolio.  The amount provided for loanlosses is charged to earnings. The provision for loan losses was $280,000 for2001 compared to $392,500 for 2000.

 

While the provision for loan losses decreased compared to 2000, theBank believes that 2000, which was its third year in operation, required anunusually high provision expense to offset rapid loan growth and a slightdecline in asset quality in 2000.  Rapidloan growth in 2001 continued, but asset quality improved and the overall levelof the Allowance for Loan Losses based on internal and external reviews appearsto be adequate.

 

#### **Noninterest Income**

 

The Bank recorded $537,750 in non-interest income for 2001 based on a$990,000 award from the Banker Enterprise Award program under the Department ofTreasury’s CDFI program.  Thisincome/award was based on the Bank meeting its investment goals by investing $3million in other CDFIs at below market rates. The balance of the award funds will be accrued to income over the next30 months which is consistent with the maturities of the underlying CDinvestments.

 

SBA lending remains the Bank’s most active lending area and sales ofSBA loans generated $338,000 in fee income in 2001 compared to $268,000 theprior year.  For the second year in arow, the Bank was the number one SBA lender in the Central Coast and ranked 6thin the Fresno District Office.

 

Fee and service charge income increased by $238,000 from $400,000 in2000 to $638,000 in 2001.  This increasewas the result of the overall growth in Bank activity and a strategy to expandrelationship banking products to small businesses.

 

#### **Noninterest Expense**

 

Noninterest expense increased in 2001 by $1.1 million compared to theprior year.  The majority of theincrease came from increases in Salary and Benefits, Data Processing, and OtherExpenses.   Salary and Benefitsincreased for the comparative periods by $546,000.  This increase included the employment in 2001 of three new seniorofficers including a Senior Credit Office, a Senior Vice President Operations,and a Senior Vice President Government Lending.  These new positions were created to strengthen the overallmanagement team and provide improved risk management given the rapid growth ofthe Bank. The Bank also accrued $24,000 for an employer 401k matchingcontribution, and the Bank had a material increase in employee insuranceexpenses. The balance of the increase represents normal pay/promotion expensesand some changes in general staff levels.

 

Data Processing expenses increased by $214,000.  The largest portion of this increase,$110,000, was from processing costs for merchant card activity which was offseton the income side by an increase in merchant card income of $140,000 (netincome increase of approximately $30,000). The Bank also had increased volume costs from Fiserv, its primary coreapplication service bureau, which includes core data processing, itemprocessing, and ATM processing.  Dataprocessing expense also increased by approximately $30,000 from costsassociated with Internet Banking. Internet Banking is still in beta testing and expected to be availableto all customers in mid-2002.

 

Other Expenses increased by $109,000 included funds spent forshareholder expenses including costs for EDGAR filings ($25,000), loancollections costs ($30,000), outside meetings $16,000, and armored car($7,000).

 

**Income Taxes**

 

The BEA $990,000 cash award was fully taxable in 2001.  Combined with normal income, the Bank andCompany have fully utilized its operating loss carry forward as of December 31,2001, and the Company will be fully taxable beginning in 2002. Also see Note Gto the consolidated financial statements for more information on income taxes.

 

19

----

 

**Liquidityand Asset/Liability Management**

 

The objective ofour asset/liability strategy is to manage liquidity and interest rate risks toensure the safety and soundness of the Bank and its capital base, whilemaintaining adequate net interest margins and spreads to provide an appropriatereturn to shareholders.

 

The Bank'sliquidity, which primarily represents the ability to meet fluctuations indeposit levels and provide for customers' credit needs, is manages throughvarious funding strategies that reflect the maturity structures of the sourcesof funds being gathered and the assets being funded.  The Bank's liquidity is further augmented by payments ofprincipal and interest on loans and increases in short-term liabilities such asdemand deposits, short-term certificates of deposit, and overnight purchases offederal funds.  Short-term investments,primarily federal funds sold and federal fund lines of credit provided by ourcorrespondents, the Bank endeavors to maintain an appropriate liquidityration.  The liquidity ratio isequivalent to the sum of cash and deposits at other banks, interest-earningdeposits at other banks, federal funds sold, and Available for Sale investmentsecurities, divided by deposits.

 

As of December 31,2001 and 2000, the Bank's liquidity ratio was 16.6% and 24.5%,respectively.  On December 31, 2001, theBank purchases $370,000 in federal funds purchased under its $2 million line ofcredit with its primary correspondent bank. Year end 2001 was abnormal (due to the September 11 terrorist attacksand the "recession") in that deposits which traditionally increase atthe end of the year experienced minor decreases while loan growthcontinued.  As part of liquiditymanagement, the Bank has available $4 million in short-term funding lines fromtwo correspondent banks.  The lines arefor short term needs and are generally not actively used.  The Bank also completed a $2 millionshort-term borrowing from the Federal Home Loan Bank of San Francisco in mid January2002 as part of liquidity strategy to fund growth at the lowest possible costof funds.  Under its arrangements withthe FHLB, the Bank has the potential on a secured basis to borrow up to 20percent of its total assets or approximately $15 million.  The Bank anticipates utilizing FHLBborrowings in 2002 as part of its normal liquidity management to costeffectively fund asset growth.

 

The Company'sliquidity is provided by a line of credits from Pacific Coast Bankers' Bank andfrom cash retained from stock offerings for expenses and working capital.  The Bank will become eligible to paydividends in 2002.  At December 31,2001, the Company had $50,000 drawn under a $200,000 line of credit fromPacific Coast Bankers' Bank.  Repaymentof outstanding debit will be accomplished as part of the uses of fundsanticipated in 2002 from a $500,000 CDFI Core Component award that haspreviously been approved pending funding in 2002.

 

The objectives ofinterest rate risk management are to control exposure of net interest income torisks associated with interest rate movements in the market, to achieveconsistent growth in net interest income and to profit from favorable marketopportunities.  Even with perfectlymatched repricing of assets and liabilities, risks remain in the form ofprepayment of assets, timing lags in adjusting certain assets and liabilitiesthat have varying sensitivities to market interest rates and basic risk.

 

The table belowsets forth the interest rate sensitivity of earning-earning assets andinterest-bearing liabilities as of December 31, 2001, using the interest ratesensitivity gap ratio.  For purposes ofthe table, an asset or liability is considered rate-sensitive within aspecified period when it can be repriced or matures within its contractualterms.

 

20

----

 

 
|                                             |   | **Up to 3  months** |   | **Over 3  months to  less than 1  Year** |   | **1 Year to  5  Years** |   | **Over 5  Years** |   | **Total** |   |
|--------------------------------------------------|--------|---------------------|--------|------------------------------------------|--------|-------------------------|--------|-------------------|--------|-----------|--------|
| Interest-Earning Assets:                         |   |                |   |                                     |   |                    |   |              |   |      |   |
| Investment Securities                            |   | $                   | 2,573  |                                     | $      | 4,412                   |   | $                 | 2,764  |      | $      | 1,086 |   | $ | 10,835 |   |
| CDs with Other Banks                             |   |                |   |                                     |   | 3,009                   |   |              |   | 3,009     |   |
| Federal Funds Sold                               |   |                |   |                                     |   |                    |   |              |   | 0         |   |
| Loans                                            |   | 36,088              |   | 15,679                                   |   | 7,284                   |   | 1,411             |   | 60,462    |   |
|                                             |   | $                   | 38,661 |                                     | $      | 20,091                  |   | $                 | 13,057 |      | $      | 2,497 |   | $ | 74,306 |   |
|                                             |   |                |   |                                     |   |                    |   |              |   |      |   |
| Interest-Bearing  Liabilities:                   |   |                |   |                                     |   |                    |   |              |   |      |   |
| Money Market and  NOW                            |   | $                   | 2,894  |                                     |   |                    |   |              |   |      | $      |  2,894 |   |
| Savings                                          |   | 26,847              |   |                                     |   |                    |   |              |   | 26,847    |   |
| Time Deposits                                    |   | 11,407              |   | 15,534                                   |   | 1,972                   |   |              |   | 28,913    |   |
| Other Borrowings                                 |   | 370                 |   | 50                                       |   |                    |   |              |   | 420       |   |
|                                             |   | $                   | 41,518 |                                     | $      | 15,584                  |   | $                 | 1,972  |      | — |   | $ | 59,074 |   |
|                                             |   |                |   |                                     |   |                    |   |              |   |      |   |   |   |   |   |
| Interest Rate  Sensitivity Gap                   |   | $                   | (2,887 | )                                        | $      | 4,507                   |   | $                 | 11,085 |      | $      | 2,497 |   | $ | 15,232 |   |
| Cumulative  Interest Rate  Sensitivity Gap       |   | $                   | (2,887 | )                                        | $      | 1,650                   |   | $                 | 15,592 |      | $      | 13,582 |   | $ | 17,029 |   |
| Cumulative  Interest Rate  Sensitivity Gap Ratio |   |                |   |                                     |   |                    |   |              |   |      |   |
| Based on Total  Assets                           |   | -3.57               | %      | 2.06                                     | %      | 19.49                   | %      | 16.98             | %      | 22.16     | %      |
|                                                  |        |                     |        |                                          |        |                         |        |                   |        |           |        |  |  |  |  |  |  |

 

Gap analysis attempts to capture interest rate risk, which isattributable to the mismatching of interest rate sensitive assets andliabilities.  The actual impact ofinterest rate movements on net interest income may differ from that implied byany gap measurement, depending on the direction and magnitude of the interestrate movements, the repricing characteristics of various on and off-balancesheet instruments, as well as competitive pressures.  These factors are not fully reflected in the foregoing gapanalysis and, as a result, the gap report may not provide a complete assessmentof our interest rate risk.

 

A generally negative cumulative gap value means that over the periodsindicated our liabilities will reprice slightly faster than our assets.  This means generally that, in a risinginterest rate environment, net interest income can be expected to decrease andthat, in a declining interest rate environment, net interest income can beexpected to increase. In actual practice, the Bank has generally delayedchanging deposit rates when the Federal Reserve changes the rates for federalfunds and/or the discount window.  Thisstrategy allows the bank to continue to attract deposits during periods of declininginterest rates but negates some of the benefits from a negative cumulative gap.

 

After a record setting series of interest rate reductions, it appearsthat the next interest rate trend will be for modest increases as the FederalReserve works to balance renewed economic growth versus future inflation.  However, the Bank expects reasonably flatinterest rates patterns for much of 2002 and expects to continue to stressfloating rate loans and short-term investments that provide a combination ofboth cash flow and yield.

 

#### **Lending Activities**

 

The Bank originates purchases, sells loans, participates in loans fromother banks and structures loans for possible sale in the secondarymarket.  Loans include home equity loansand lines, leases, commercial business, agribusiness, commercial real estateloans, Small Business Administration loans, and consumer loans.

 

21

----

 

The following table setsforth the composition of our loan portfolio by type of loan at the periodsindicated:

 
|                              |   | **December  31, 2001**      |   | **December  31, 2000** |   |
|-----------------------------------|--------|-----------------------------|--------|------------------------|--------|
| **Loan  Category**                |   | **Amount**                  |   | **Percent**            |   | **Amount** |   | **Percent** |   |
|                              |   | **(dollars  in thousands)** |
| Commercial                        |   | $                           | 19,781 |                   | 33.0   | % | $ | 13,863 |   | 32.0 | % |
| Agricultural                      |   | 2,833                       |   | 5.0                    | %      | 2,115 |   | 5.0 | % |
| Real Estate                       |   | 22,797                      |   | 17.0                   | %      | 19,655 |   | 45.0 | % |
| Construction                      |   | 10,159                      |   | 37.0                   | %      | 3,278 |   | 8.0 | % |
| Installment  Loans to Individuals |   | 3,520                       |   | 6.0                    | %      | 3,093 |   | 7.0 | % |
| Leases                            |   | 1,371                       |   | 2.0                    | %      | 1,125 |   | 3.0 | % |
| Total Loans,  gross               |   | 60,462                      |   | 100                    | %      | 43,128 |   | 100.00 | % |
| Standby Letters  of Credit        |   | 268                         |   |                   |   | 220 |   |   |   |
| Undisbursed Loan  Commitments     |   | 13,444                      |   |                   |   | 10,287 |   |   |   |
|                                   |        |                             |        |                        |        |  |  |  |  |  |  |

 

The Bank makes commercial loans to provide working capital, finance thepurchase of equipment and for other business purposes. These loans can be“short-term”, with maturities ranging from thirty days to one year, or “termloans” with maturities normally ranging from one to twenty-five years.  Short-term loans are generally intended tofinance current transactions and typically provide for periodic principal payments,with interest payable monthly.  Termloans normally provide for floating interest rates, with monthly payments ofboth principal and interest.

 

Consumer loans are used to finance automobiles, various types ofconsumer goods, and other personal purposes. Consumer loans generally provide for the monthly payment of principaland interest.  Most consumer loans aresecured by the personal property being purchased.

 

The Bank has seen a major increase in construction lending for interimloans to finance the construction of commercial and single family residentialproperty.  These loans are typicallyshort term.  As a rule, the Bank doesnot provide loans for speculative purposes except to know builders who have atrack record of successful projects and the expertise and financial strengthfor this kind of building.

 

Residential real estate loans are generally limited to home equityloans and home equity lines of credit. The Bank is not active in residential real estate lending and refersloan requests for residential mortgages to other lenders.

 

Other real estate loans consist primarily of commercial and industrialreal estate loans. These loans are made based on the income generating capacityof the property or the cash flow of the borrower.  These loans are secured by the property. The Bank offers bothfixed and variable rate loans with maturities, which generally do not exceed 15years, unless the loans are Small Business Administration (“SBA”) loans securedby real estate or other commercial real estate loans easily sold in thesecondary market.

 

The Bank makes SBA-guaranteed loans, the guaranteed portion of whichmay be resold in the secondary market. As a rule, the Bank sells the guaranteedportion of our SBA loans in the secondary market but retains the servicingrights for such SBA loans. At December 31, 2001 and 2000, the Bank servicedapproximately $12.3 million and $10.0 million, respectively, in SBA loans. SBAloans are categorized as Commercial or Real Estate depending on the underlyingcollateral.

 

A majority of the Bank’s loans have floating rates tied to a base rateor other market rate indicator, the majority of which are adjusted at leastquarterly. The following table shows the maturity distribution of the fixedrate portion of the loan portfolio and the repricing portion of the variablerate portion of the loan portfolio outstanding as of December 31, 2001:

 
| **For the  year ended December 31, 2001** |   |
|-------------------------------------------|--------|
|                                      |   | **3 months  or less** |   | **Over 3  months to 12 months** |   | **Due after  3 years   to 5 years** |   | **Due after  5 years through 15 years** |   | **Total** |   |
| **(dollars  in thousands)**               |   |
| Fixed Rate                                |   | 2,563 |   | 5,631 |   | 3,319 |   | 8,543 |   | 20,056 |   |
| Variable Rate                             |   | 24,949 |   | 8,158 |   | 3,646 |   | 2,764 |   | 39,517 |   |
|                                      |   |   |   |   |   |   |   | Nonaccrual |   | 889 |   |
|                                      |   |   |   |   |   |   |   | Total Loans |   | 60,462 |   |

 

22

----

 

#### **Asset Quality**

 

The risk of nonpayment of loans is an inherent feature of the bankingbusiness. That risk varies with the type and purpose of the loan, thecollateral which is utilized to secure payment, and ultimately, the creditworthiness of the borrower.  In order tominimize this credit risk, many loans are approved and/or reviewed by the LoanCommittee of the board of directors. The Loan Committee is comprised of directors and members of seniormanagement.

 

Loan grades are based on a risk assessment with loans with minimum riskgraded as “Pass” with other classifications of “Special Mention”,“Substandard”, “Doubtful” and “Loss”, depending on credit quality.  As these loans are identified in our reviewprocess, they are added to the internal watch list and a loss allowance is establishedfor them as follows:  Special Mention —5%, Substandard — 15%, Doubtful — 50%, and Loss — 100%.  Additionally, loans are examined regularlyby the OCC, and the Bank engages an outside firm to perform periodic reviews ofthe loan portfolio and to test the adequacy of the Allowance for Loan Losses.

 

Loans are not returned to accrual status until it is brought currentwith respect to both principal and interest payments, the loan is performing tocurrent terms and conditions, the interest rate is commensurate with marketinterest rates and future principal and interest payments are no longer indoubt at which time a further review of loans is conducted.

 

The following table provides information with respect to the componentsof our impaired or nonperforming assets at the dates indicated:

 
|                                                              |   | **For the  Year Ended December 31,** |   |
|-------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                              |   | **2001**                             |   | **2000** |   |
|                                                              |   | **(dollars  in thousands)**          |   |
| Nonperforming                                                     |   | $                                    | 889    |   | $ | 1,020 |   |
| Loans  90 Days Past Due and Still Accruing                        |   | 15                                   |   | — |   |
| Restructured  Loans                                               |   | —                               |   | — |   |
| Total Nonperforming Loans                                         |   | 904                                  |   | 1,020 |   |
| Other  Real Estate Owned                                          |   | —                               |   | — |   |
| Total Nonperforming Assets                                        |   | $                                    | 904    |   | $ | 1,020 |   |
|                                                              |   |                                 |   |   |   |
| Non-Accrual  Loans as Percentage of Total Loans                   |   | 1.47                                 | %      | 2.37 | % |
| Loans  90 Days Past Due as a Percentage of Total Loans            |   | 0.02                                 | %      | 0.00 | % |
| Restructured  Loans as a Percentage of Total Loans                |   | 0.00                                 | %      | 0.00 | % |
| Nonperforming  Loans as a Percentage of Total Loans               |   | 1.50                                 | %      | 2.37 | % |
|                                                              |   |                                 |   |   |   |
| Allowance for  Loan Losses as Percentage of Nonperforming   Loans |   | 70.24                                | %      | 50.20 | % |
| Nonperforming  Assets as Percentage of Total Assets               |   | 1.13                                 | %      | 1.19 | % |

 

Restructured loans are those loans with concessions in interest ratesor repayment terms to assist the borrower. Non-accrual loans are generallyloans which are past due 90 days or are loans that management believes theinterest upon which may not be collectible. At December 31, 2001 the Bank had $889,000 in loans on non-accrual andthe SBA guaranteed portion of these loans totaled $454,000. The unguaranteedloans are secured and are not expected to result in material loss if any.

 

Other real estate owned is acquired in satisfaction of loan receivablesthrough foreclosure or other means and is carried on an individual asset basisat the estimated fair value less selling expenses. The Bank had no other realestate owned as of December 31, 2001 and 2000.

 

The attacksof  September 11 and the relativeeconomic concerns before and after this tragic event combined to produce amaterial slowdown in the economy “recession”. The Bank has seen some of the results of the “recession” in slower, morecautious growth since September 2001, but has not seen any material drop inbusiness and has actually seen an improvement in credit quality.  Real estate values in San Luis Obispo Countyhave continued to increase and the percent of unemployed (3.1%) remains amongthe lowest in California and as of February 2002, remains unchanged fromFebruary 2001.

 

23

----

 

#### **Allowance for LoanLosses**

 

The following table summarizes, for the periods indicated, changes inthe allowance for loan losses arising from loans charged off, recoveries onloans previously charged off, additions to the allowance which have beencharged to operating expenses and certain ratios relating to the allowance forloan losses:

 
|                                      |   | **For the  Year Ended December 31,** |   |
|-------------------------------------------|--------|--------------------------------------|--------|
|                                      |   | **2001**                             |   | **2000** |   |
|                                      |   | **(dollars  in thousands)**          |   |
| **Allowance For Loan Losses:**            |   |                                 |   |   |   |
| Balance at Beginning of Period            |   | $                                    | 512    |   | $ | 210 |   |
| Actual  Charge-offs:                      |   |                                 |   |   |   |
| Commercial                                |   | 150                                  |   | 91 |   |
| Consumer                                  |   | 14                                   |   | — |   |
| Real Estate                               |   | —                               |   | — |   |
| Total  Charge-Offs                        |   | 164                                  |   | 91 |   |
| **Less Recoveries:**                      |   |                                 |   |   |   |
| Commercial                                |   | 6                                    |   | — |   |
| Consumer                                  |   | 1                                    |   | — |   |
| Real Estate                               |   | —                               |   | — |   |
| Total Recoveries                          |   | 7                                    |   | — |   |
|                                      |   |                                 |   |   |   |
| Net Loans  Charged Off                    |   | 157                                  |   | 91 |   |
| Provision for  Loan Losses                |   | 280                                  |   | 393 |   |
| Balance at End  of Period                 |   | $                                    | 635    |   | $ | 512 |   |
|                                      |   |                                 |   |   |   |
| **Ratios:**                               |   |                                 |   |   |   |
| Net Loans  Charged Off to Average Loans   |   | 0.31                                 | %      | 0.25 | % |
| Allowance for  Loan Losses to Total Loans |   | 1.05                                 | %      | 1.19 | % |

 

The Bank performs a quarterly detailed review to identify the risksinherent in the loan portfolio, to assess the overall quality of the loanportfolio and to determine the adequacy of the allowance for loan losses andthe related provision for loan losses to be charged to expense.  Systematic reviews follow the methodologyset forth by the OCC in its 1993 policy statement on the allowance for loanlosses.

 

A key element of the Bank’s methodology is the previously discussedcredit classification process.  As ofDecember 31, 2001, the Bank did not establish special reserves for individualloans based on specific anticipation of loss to the portfolio.   The inherent risk present in the“acceptable” portion of the loan portfolio is taken into consideration andadjustments made for trends, changes in economic conditions and other relevantfactors that may affect repayment of the loans.  As of December 31, 2001, the Bank allocated $25,000 as anadditional portion of the Allowance for unknown factors.   The Bank does not have adequate losshistory to include loss migration factors in its evaluation of the Allowance;however, management is finalizing migration tools/models to help estimatetrends starting in 2002.  Uponcompletion, the written analysis is presented to the board of directors fordiscussion, review and approval.

 

Management and the board consider the allowance for loan losses to beadequate to provide for losses inherent in the loan portfolio. While managementuses available information to recognize losses on loans and leases, futureadditions to the allowance may be necessary based on changes in economicconditions. In addition, federal regulators, as an integral part of theirexamination process, periodically review our allowance for loan losses and mayrecommend additions based upon their evaluation of the portfolio at the time oftheir examination.  Accordingly, therecan be no assurance that our allowance for loan losses will be adequate tocover future loan losses or that significant additions to the allowance forloan losses will not be required in the future.  Material additions to the allowance for loan losses would decreaseour earnings and capital and would thereby reduce the ability to paydistributions among other adverse consequences.

 

The ratio of allowance for loan losses to total loans as of December31, 2001 was 1.05%, and management and the board feel this is adequate based onits analysis and reviews of the portfolio. The analysis assumes that there will be no material asset qualityproblems following the “recession” and resumption of economic growth in theCentral Coast.  On a peer basis (UniformBank Performance Report), the ratio of the allowance for loan losses to totalloans was 1.26% as of December 31, 2001.

 

24

----

 

As part of the analysis of the allowance, the Bank also assigns certainrisk factors to the entire loan portfolio in addition to the specificpercentages used for classified loans. The following table summarizes theallocation of the allowance for loan losses by general loan types based oncollateral or security type as used internally by the Bank as of December 31,2001. This form of review was first implemented in 2000.

 
|                            |   | **Loans** |   | **Percent** |   | **Factor** |   | **Reserve  Amt.** |   |
|---------------------------------|--------|-----------|--------|-------------|--------|------------|--------|-------------------|--------|
| Real Estate                     |   | $         | 34,716 |        | 57     | %          | 0.35   | %                 | $      | 120 |   |
| Other Security                  |   | 22,222    |   | 37          | %      | 0.94       | %      | 210               |   |
| Unsecured                       |   | 3,333     |   | 6           | %      | 0.75       | %      | 25                |   |
| Total Loans                     |   | $         | 60,462 |        | 100    | %          | 0.59   | %                 | 355    |   |
| **Other Factors:**              |   |      |   |        |   |       |   |              |   |
| Letters of  Credit              |   | $         | 258    |        |   |       | 0.25   | %                 | 1      |   |
| Cash Secured  Letters of Credit |   | 10        |   |        |   | 0.00       | %      | —            |   |
| Undisbursed                     |   | 13,444    |   |        |   | 0.10       | %      | 2                 |   |
| Special Reserve                 |   |      |   |        |   |       |   | 25                |   |
| Total of Other Factors          |   | $         | 13,712 |        |   |       |   |              | 39     |   |
|                            |   |      |   |        |   |       |   |              |   |
| Classified Loans                |   | $         | 1,544  |        |   |       | 15.60  | %                 | 241    |   |
|                            |   |      |   |        |   |       |   |              |   |
| Total Allowance for Loan Losses |   |      |   |        |   |       |   | $                 | 635    |   |

 

**InvestmentActivity**

 

Banks are required under federal regulations to maintain a minimumamount of liquid assets and are also permitted to purchase certain otherinvestment securities.  The Bank intendsto hold securities in its investment portfolio to balance the overallinterest-rate sensitivities of its assets and liabilities. The Bank does notmaintain a trading account.

 

Investment decisions are primarily made by the Bank’s Chief FinancialOfficer within policies limits established by the board of directors. The CFOreports investment activity on a monthly basis to the Board and on a quarterlybasis to the Investment Committee. Investments can include investment grade corporate securities, AAA-ratedmortgage-backed securities, federally insured certificates of deposit, U.S.treasury obligations and U.S. Government agency-backed securities.  Investment goals are to obtain the highestyield consistent with maintaining a stable overall asset and liability positionwhile limiting economic risks. In accordance with this policy, managementactively manages its investment portfolio between available for sale and heldto maturity investments, the composition of which may shift substantially overtime. For further information concerning our investment securities portfoliosee Note B of the notes to our consolidated financial statements included inItem 7.

 

The following table summarizes the amounts and distribution ofinvestment securities held and the weighted average yield as of December 31,2001 and 2000.

 

25

----

 
|                       |   | **December  31, 2001**             |   |
|----------------------------|--------|------------------------------------|--------|
|                       |   | **Available-for-Sale  Securities** |   | **Held-to-Maturity  Securities** |   |
|                       |   | **Amortized  Cost**                |   | **Fair  Value** |   | **Weighted  Average  Yield** |   | **Amortized  Cost** |   | **Fair  Value** |   | **Weighted  Average  Yield** |   |
|                       |
|                       |
|                       |   | **(dollars  in thousands)**        |   |   |
| US Government Agencies     |   | $                                  | 3,889  |   | $ | 3,970 |   | 6.54 | % | $ | 1,916 |   | $ | 1,935 |   | 6.30 | % |
| Mortgage Backed Securities |   | 2,335                              |   | 2,361 |   | 5.91 | % | 2,544 |   | 2,573 |   | 6.60 | % |
| Other  Investments         |   | —                             |   | — |   |   |   | 44 |   | 53 |   | 6.00 | % |
| Total Investments          |   | $                                  | 6,224  |   | $ | 6,331 |   | 6.30 | % | $ | 4,504 |   | $ | 4,561 |   | 6.55 | % |

 
|                    |   | **December 31, 2000**             | ** ** |
|-------------------------|--------|-----------------------------------|------------|
|                    |   | **Available-for-Sale Securities** | ** ** | **Held-to-Maturity Securities** | ** ** |
|                    |   | **Amortized  Cost**               | ** ** | **Fair  Value** | ** ** | **Weighted  Average  Yield** | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** | **Weighted  Average  Yield** | ** ** |
| ** **              |
| ** **              |
| ** **              |
| US Government  Agencies |   | $                                 | 10,274     |   | $ | 10,344 |   | 6.89 | % | $ | 389 |   | $ | 356 |   | 7.13 | % |
| Other  Investments      |   | —                            |       | — |   |   |   | 3,072 |   | 3,051 |   | 8.13 | % |
| Total Investments       |   | $                                 | 10,274     |   | $ | 10,344 |   | 6.89 | % | $ | 3,461 |   | $ | 3,407 |   | 6.97 | % |

 

#### **Deposits**

 

Deposits are the primary source of funding for lending and investingneeds. Total deposits were $71.7 million at December 31, 2001 representing a32% or $17.5 million increase in 2001.

 

The scheduled maturity distribution of time deposits as of December 31,2001, were as follows:

 
|                                   | **(dollars  in thousands)** |    |
|----------------------------------------|-----------------------------|---------|
| Less than 3 months                     |                        | $11,227 |   |
| 3 months to 12  months                 |                        | 15,630  |   |
| 1 year to 3  years months to 12 months |                        | 2042    |   |
| Beyond 3 years                         |                        | 14      |   |
| Total                                  |                        | $28,913 |   |
|                                        |                             |         |  |  |

 

The following schedule reflects the material drop in deposits rate from2000 to 2001 as a result of rate decreases by the Federal Reserve.

 
|                                |   | **December  31, 2001** |   | **December 31,  2000** |   |
|-------------------------------------|--------|------------------------|--------|------------------------|--------|
|                                |   | **Average  Balance**   |   | **Average  Rate Paid** |   | **Average  Balance** |   | **Average  Rate Paid** |   |
|                                |
| Demand, interest-bearing            |   | $                      | 2,987  |                   | 2.11   | % | $ | 1,937 |   | 2.60 | % |
| Savings                             |   | 27,965                 |   | 3.37                   | %      | 26,590 |   | 5.30 | % |
| Time                                |   | 23,333                 |   | 4.82                   | %      | 11,915 |   | 5.70 | % |
| Borrowings                          |   | 157                    |   | 7.01                   | %      | 623 |   | 6.40 | % |
| Total  interest-bearing liabilities |   | $                      | 54,442 |                   | 3.93   | % | $ | 41,065 |   | 5.30 | % |

 

26

----

 

#### **Short Term and OtherBorrowings**

 

As of December 31, 2001, the Bank had $370,000 drawn under a federalfunds purchased line of credit with its primary correspondent bank.  This borrowing was repaid on January 10,2001.

 

As of December 31, 2001, the Company also had a $50,000 outstandingunder a $200,000 line of credit with Pacific Coast Bankers’ Bank.

 

For further information concerning our borrowings, see Note F of thenotes to consolidated financial statements included in Item 8.

 

#### **Effects of Inflation andEconomic Issues**

 

The impact of inflation on a financial institution can differsignificantly from that exerted on other companies.  Banks, as financial intermediaries, have many assets andliabilities, which may move in concert with inflation both as to interest ratesand value.  This is especially true forbanks with a high percentage of interest rate-sensitive assets andliabilities.  A bank can reduce theimpact of inflation if it can manage its interest rate sensitivity gap.Management has attempted to structure the mix of financial instruments andmanage interest rate sensitivity gap in order to minimize the potential adverseeffects of inflation or other market forces on net interest income and,therefore, earnings and capital.

 

The Bank expects to see static interest rates for most of 2002 as theeconomy begins the transition from a modest recession to some level ofsustainable growth.  The Central Coastand greater San Luis Obispo area have not felt the brunt of the recession andthe area has continued to maintain low unemployment and actually seen realestate values continue to increase through the first months of 2002.

 

27

----

 

**MISSIONCOMMUNITY BANCORP AND SUBSIDIARY**

** **

**CONSOLIDATEDFINANCIAL STATEMENTS**

**WITH**

**INDEPENDENT AUDITORS` REPORT**

** **

**DECEMBER31, 2001 AND 2000**

 

 

----

 

**ITEM 7.  FINANCIAL STATEMENTS**

** **

**CONTENTS**

 
| **INDEPENDENT  AUDITORS’ REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS** |
|---------------------------------------------------------------------------------|
|                                                                            |
| **CONSOLIDATED  FINANCIAL STATEMENTS**                                          |
|                                                                            |
| **Consolidated Balance Sheets**                                                 |
| **Consolidated  Statements of Income**                                          |
| **Consolidated  Statement of Changes in Shareholders’ Equity**             |
| **Consolidated  Statements of Cash Flows**                                      |
| **Notes to  Consolidated Financial Statements**                                 |

 

 

----

 

#### **INDEPENDENTAUDITORS’ REPORT**

 

Board of Directors and Shareholders of

Mission Community Bancorp and Subsidiary

 

We have audited the accompanying consolidated balance sheets of MissionCommunity Bancorp and Subsidiary as of December 31, 2001 and 2000 and therelated consolidated statements of income, changes in shareholders’ equity, andcash flows of the years then ended. These consolidated financial statements are the responsibility of theCompany’s management.  Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the consolidated financial statements arefree of material misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the consolidated financial statements.  An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of MissionCommunity Bancorp and Subsidiary as of December 31, 2001 and December 31, 2000,and the results of its operations and its cash flows for the years then ended,in conformity with accounting principles generally accepted in the UnitedStates of America.

 

**Vavrinek, Trine, Day & Co., LLP**

 

Laguna Hills, California

February 26, 2002

#### ** **

F-1

----

 

#### **MISSION COMMUNITY BANCORP AND SUBSIDIARY**

 

**CONSOLIDATED BALANCE SHEETS**

**December 31, 2001 and 2000**

 
|                                                |   | **2001**   |       | **2000**   |   |
|-----------------------------------------------------|--------|------------|------------|------------|--------|
| **ASSET**S                                          |   |       |       |       |   |
|                                                |   |       |       |       |   |
| Cash and Due from Banks                             |   | $          | 2,526,189  |       | $      | 2,326,294 |   |
| Federal Funds Sold                                  |   | —     |       | 295,000    |   |
| **TOTAL  CASH AND CASH EQUIVALENTS**                |   | 2,526,189  |       | 2,621,294  |   |
|                                                |   |       |       |       |   |
| Interest-Bearing Deposits in Other Banks            |   | 3,009,345  |       | 298,000    |   |
|                                                |   |       |       |       |   |
| Investment Securities:                              |   |       |       |       |   |
| Investment Securities, Available for Sale           |   | 6,331,381  |       | 10,343,818 |   |
| Investment Securities, Held to Maturity             |   | 4,503,944  |       | 3,461,313  |   |
| **TOTAL  INVESTMENT SECURITIES**                    |   | 10,835,325 |       | 13,805,131 |   |
|                                                |   |       |       |       |   |
| Loans:                                              |   |       |       |       |   |
| Commercial                                          |   | 21,152,236 |       | 14,987,191 |   |
| Agricultural                                        |   | 2,833,275  |       | 2,114,932  |   |
| Construction                                        |   | 10,159,461 |       | 3,278,013  |   |
| Real Estate                                         |   | 22,796,843 |       | 19,655,465 |   |
| Consumer                                            |   | 3,520,079  |       | 3,092,718  |   |
| **TOTAL  LOANS**                                    |   | 60,461,894 |       | 43,128,319 |   |
|                                                |   |       |       |       |   |
| Allowance for Loan Losses                           |   | (635,468   | )          | (511,607   | )      |
| **NET LOANS**                                       |   | 59,826,426 |       | 42,616,712 |   |
|                                                |   |       |       |       |   |
| Federal Reserve Bank Stock and Other Stock, at Cost |   | 222,475    |       | 143,575    |   |
| Premises and Equipment                              |   | 2,389,031  |       | 2,374,049  |   |
| Accrued Interest and Other Assets                   |   | 1,082,139  |       | 1,070,282  |   |
|                                                |   | $          | 79,890,930 |       | $      | 62,929,043 |   |

 

 

F-2

----

 
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**               |   | **2001**   |       | **2000**   |   |
|-------------------------------------------------------------|--------|------------|------------|------------|--------|
| Deposits:                                                   |   |       |       |       |   |
| Noninterest-Bearing Demand                                  |   | $          | 13,030,253 |       | $      | 8,459,467 |   |
| Money Market, NOW and Savings                               |   | 29,740,916 |       | 29,647,078 |   |
| Time Deposits Under $100,000                                |   | 11,038,762 |       | 6,129,829  |   |
| Time Deposits $100,000 and Over                             |   | 17,874,419 |       | 9,934,207  |   |
| **TOTAL  DEPOSITS**                                         |   | 71,684,350 |       | 54,170,581 |   |
|                                                        |   |       |       |       |   |
| Short-Term Borrowings                                       |   | 420,000    |       | 2,648,000  |   |
| Accrued Interest and Other Liabilities                      |   | 1,012,687  |       | 386,287    |   |
| **TOTAL  LIABILITIES**                                      |   | 73,117,037 |       | 57,204,868 |   |
|                                                        |   |       |       |       |   |
| Commitments and Contingencies - Notes D and  L         |   | —     |       | —     |   |
|                                                        |   |       |       |       |   |
| Shareholders’ Equity:                                  |   |       |       |       |   |
| Preferred Stock Authorized 1,000,000 Shares:                |   |       |       |       |   |
| Series A - $5 Stated Value; Issued and Outstanding, 100,000 |   |       |       |       |   |
| Liquidation Value of $500,000                               |   | 392,194    |       | 392,194    |   |
| Series B - $10 Stated Value; Issued and Outstanding, 20,500 |   |       |       |       |   |
| Liquidation Value of $205,000                               |   | 191,606    |       | 191,606    |   |
| Common Stock - Authorized 1,000,000 Shares;                 |   |       |       |       |   |
| Issued and Outstanding, 630,066                             |   | 6,272,276  |       | 6,272,276  |   |
| Accumulated Deficit                                         |   | (153,185   | )          | (1,172,779 | )      |
| Accumulated Other Comprehensive Income -                    |   |       |       |       |   |
| Unrealized Appreciation on Available-for-Sale Securities    |   | 71,002     |       | 40,878     |   |
| **TOTAL  SHAREHOLDERS’ EQUITY**                        |   | 6,773,893  |       | 5,724,175  |   |
|                                                        |   | $          | 79,890,930 |       | $      | 62,929,043 |   |

 

F-3

----

 

**MISSION COMMUNITY BANCORP AND SUBSIDIARY**

 

**CONSOLIDATEDSTATEMENTS OF INCOME**

**Years Ended December 31, 2001 and2000**

 
|                                      |   | **2001**  |      | **2000**  |   |
|-------------------------------------------|--------|-----------|-----------|-----------|--------|
| **INTEREST INCOME**                       |   |      |      |      |   |
| Interest and Fees on Loans                |   | $         | 4,424,831 |      | $      | 3,563,592 |   |
| Interest on Investment Securities         |   | 769,476   |      | 749,719   |   |
| Other Interest Income                     |   | 165,725   |      | 119,813   |   |
| **TOTAL  INTEREST INCOME**                |   | 5,360,032 |      | 4,433,124 |   |
|                                      |   |      |      |      |   |
| **INTEREST EXPENSE**                      |   |      |      |      |   |
| Interest on Money Market, NOW and Savings |   | 1,007,363 |      | 1,449,383 |   |
| Interest on Time Deposits                 |   | 1,124,849 |      | 678,187   |   |
| Other Interest Expense                    |   | 10,557    |      | 41,124    |   |
| **TOTAL  INTEREST EXPENSE**               |   | 2,142,769 |      | 2,168,694 |   |
|                                      |   |      |      |      |   |
| **NET  INTEREST INCOME**                  |   | 3,217,263 |      | 2,264,430 |   |
|                                      |   |      |      |      |   |
| Provision for Loan Losses                 |   | 280,000   |      | 392,500   |   |
| **NET  INTEREST INCOME AFTER**            |   |      |      |      |   |
| **PROVISION  FOR LOAN LOSSES**            |   | 2,937,263 |      | 1,871,930 |   |
|                                      |   |      |      |      |   |
| **NONINTEREST INCOME**                    |   |      |      |      |   |
| Gain on Sale of Loans                     |   | 337,547   |      | 267,503   |   |
| Bank Enterprise Award                     |   | 537,750   |      | —    |   |
| Service Charges, Fees and Other Income    |   | 638,328   |      | 400,368   |   |
|                                      |   | 1,513,625 |      | 667,871   |   |
| **NONINTEREST EXPENSE**                   |   |      |      |      |   |
| Salaries and Employee Benefits            |   | 1,599,643 |      | 1,053,177 |   |
| Occupancy Expenses                        |   | 244,163   |      | 132,880   |   |
| Furniture and Equipment                   |   | 198,773   |      | 187,112   |   |
| Other Expenses                            |   | 1,388,715 |      | 934,934   |   |
|                                      |   | 3,431,294 |      | 2,308,103 |   |
| **INCOME  BEFORE INCOME TAXES**      |   | 1,019,594 |      | 231,698   |   |
| Income Tax Benefit                        |   | —    |      | (100,000  | )      |
| **NET  INCOME**                           |   | $         | 1,019,594 |      | $      | 331,698 |   |
| Per Share Data:                           |   |      |      |      |   |
| Net Income  - Basic                  |   | $         | 1.46      |      | $      | 0.51 |   |
| Net Income  - Diluted                |   | $         | 1.46      |      | $      | 0.51 |   |

 

F-4

----

 

**MISSION COMMUNITY BANCORP ANDSUBSIDIARY**

 

**CONSOLIDATEDSTATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY**

 

#### **Years Ended December 31,2001 and 2000**

 
|                                                                                    |   |                 |    |    |    |      |   |                      |      |                     |      |
|-----------------------------------------------------------------------------------------|--------|----------------------|---------|---------|---------|-----------|--------|---------------------------|-----------|--------------------------|-----------|
|                                                                                    |   | **Preferred  Stock** |    |    |    |      |   | **Comprehensive  Income** |      | **Accumulated  Deficit** |      | **Accumulated  Comprehensive**

**Income** |   |
| **Common  Stock**                                                                       |   |
| **Shares**                                                                              |   | **Amount**           |
| **Balance  at**                                                                         |   |                 |    |    |    |      |   |                      |      |                     |      |   |   |
| **January  1, 2000**                                                                    |   | $                    | 438,379 |    | 600,566 |      | $      | 5,977,276                 |      |                     |      | $ | (1,504,477 | ) | $ | (140,039 | ) |
|                                                                                    |   |                 |    |    |    |      |   |                      |      |                     |      |   |   |
| Issuance of  Preferred Stock                                                            |   | 145,421              |    |    |    |      |   |                      |      |                     |      |   |   |
|                                                                                    |   |                 |    |    |    |      |   |                      |      |                     |      |   |   |
| Issuance of  Common Stock                                                               |   |                 |    | 29,500  |    | 295,000   |   |                      |      |                     |      |   |   |
|                                                                                    |   |                 |    |    |    |      |   |                      |      |                     |      |   |   |
| **Comprehensive  Income:**                                                              |   |                 |    |    |    |      |   |                      |      |                     |      |   |   |
| Net Income                                                                              |   |                 |    |    |    |      |   | $                         | 331,698   |                     | 331,698   |   |   |   |
|                                                                                    |   |                 |    |    |    |      |   |                      |      |                     |      |   |   |
| Net Unrealized  Appreciation on Available-for-Sale Securities, Net of Taxes  of $28,407 |   |                 |    |    |    |      |   | 180,917                   |      |                     |      | 180,917 |   |
|                                                                                    |   |                 |    |    |    |      |   |                      |      |                     |      |   |   |
| **Total  Comprehensive Income**                                                         |   |                 |    |    |    |      |   | $                         | 512,615   |                     |      |   |   |   |
|                                                                                    |   |                 |    |    |    |      |   |                      |      |                     |      |   |   |
|                                                                                    |   |                 |    |    |    |      |   |                      |      |                     |      |   |   |
| **Balance  at  December 31, 2000**                                                      |   | 583,800              |    | 630,066 |    | 6,272,276 |   |                      |      | (1,172,779               | )    | 40,878 |   |
|                                                                                    |   |                 |    |    |    |      |   |                      |      |                     |      |   |   |
| **Comprehensive  Income:**                                                              |   |                 |    |    |    |      |   |                      |      |                     |      |   |   |
| Net Income                                                                              |   |                 |    |    |    |      |   | $                         | 1,019,594 |                     | 1,019,594 |   |   |   |
|                                                                                    |   |                 |    |    |    |      |   |                      |      |                     |      |   |   |
| Net Unrealized  Appreciation on Available-for-Sale Securities, Net of Taxes of $8,039   |   |                 |    |    |    |      |   | 30,124                    |      |                     |      | 30,124 |   |
|                                                                                    |   |                 |    |    |    |      |   |                      |      |                     |      |   |   |
| **Total  Comprehensive Income**                                                         |   |                 |    |    |    |      |   | $                         | 1,049,718 |                     |      |   |   |   |
|                                                                                    |   |                 |    |    |    |      |   |                      |      |                     |      |   |   |
| **Balance  at December 31, 2001**                                                       |   | $                    | 583,800 |    | 630,066 |      | $      | 6,272,276                 |      |                     |      | $ | (153,185 | )  | $ | 71,002 |   |

 

F-5

----

 

**MISSION COMMUNITY BANCORP AND SUBSIDIARY**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**Years Ended December 31, 2001 and2000**

 
|                                                                 |   | **2001**    |      | **2000**    |   |
|----------------------------------------------------------------------|--------|-------------|-----------|-------------|--------|
| **OPERATING  ACTIVITIES**                                            |   |        |      |        |   |
| Net Income                                                           |   | $           | 1,019,594 |        | $      | 331,698 |   |
| Adjustments to  Reconcile Net Income to Net                          |   |        |      |        |   |
| Cash Provided by  Operating Activities:                              |   |        |      |        |   |
| Depreciation and  Amortization                                       |   | 198,773     |      | 145,058     |   |
| Provision for  Credit Losses                                         |   | 280,000     |      | 392,500     |   |
| Deferred Taxes                                                       |   | (140,000    | )         | (108,000    | )      |
| Net Change in  Other Assets and Liabilities                          |   | 662,478     |      | 147,886     |   |
| **NET CASH PROVIDED BY**                                             |   |        |      |        |   |
| **OPERATING ACTIVITIES**                                             |   | 2,020,845   |      | 909,142     |   |
|                                                                 |   |        |      |        |   |
| **INVESTING  ACTIVITIES**                                            |   |        |      |        |   |
| Net Change in  Federal Reserve Bank and Other Stock                  |   | (78,900     | )         | (11,450     | )      |
| Net Increase in  Deposits in Other Banks                             |   | (2,711,345  | )         | (198,000    | )      |
| Purchase of  Available-for-Sale Securities                           |   | (7,469,861  | )         | (41,031,849 | )      |
| Purchase of  Held-to-Maturity Securities                             |   | (5,567,309  | )         | (267,740    | )      |
| Proceeds from  Maturities and Sales of Available-for-Sale Securities |   | 11,626,075  |      | 33,047,339  |   |
| Proceeds from  Maturities of Held-to-Maturity Securities             |   | 4,503,090   |      | 9,742       |   |
| Net Increase in  Loans                                               |   | (17,489,714 | )         | (9,788,328  | )      |
| Purchases of  Premises and Equipment                                 |   | (213,755    | )         | (240,360    | )      |
| **NET CASH USED BY**                                                 |   |        |      |        |   |
| **INVESTING ACTIVITIES**                                             |   | (17,401,719 | )         | (18,480,646 | )      |
|                                                                 |   |        |      |        |   |
| **FINANCING  ACTIVITIES**                                            |   |        |      |        |   |
| Net Increase in  Demand Deposits and Savings Accounts                |   | 4,664,624   |      | 10,653,241  |   |
| Net Increase in  Time Deposits                                       |   | 12,849,145  |      | 3,106,374   |   |
| Net (Increase)  Decrease in Other Borrowings                         |   | (2,228,000  | )         | 176,000     |   |
| Proceeds from  Issuance of Common Stock                              |   | —      |      | 295,000     |   |
| Proceeds from  Issuance of Preferred Stock - Net of Costs            |   | —      |      | 145,421     |   |
| **NET CASH PROVIDED BY**                                             |   |        |      |        |   |
| **FINANCING ACTIVITIES**                                             |   | 15,285,769  |      | 14,376,036  |   |
|                                                                 |   |        |      |        |   |
| **NET DECREASE IN**                                                  |   |        |      |        |   |
| **CASH AND CASH EQUIVALENTS**                                        |   | (95,105     | )         | (3,195,468  | )      |
| Cash and Cash  Equivalents at Beginning of Period                    |   | 2,621,294   |      | 5,816,762   |   |
| **CASH AND CASH EQUIVALENTS**                                        |   |        |      |        |   |
| **AT END OF YEAR**                                                   |   | $           | 2,526,189 |        | $      | 2,621,294 |   |
|                                                                 |   |        |      |        |   |
| **Supplemental  Disclosures of Cash Flow Information:**              |   |        |      |        |   |
| Interest Paid                                                        |   | $           | 2,151,445 |        | $      | 2,147,949 |   |
| Taxes Paid                                                           |   | $           | 3,200     |        | $      | 800 |   |

 

F-6

----

 

**MISSION COMMUNITY BANCORP ANDSUBSIDIARY**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2001 and 2000**

 

**NOTE A - SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

Principles ofConsolidation

 

The financialstatements include the accounts of Mission Community Bancorp and itssubsidiary, Mission Community Bank (“the Bank”), and the Bank’s subsidiary,Mission Community Development Corporation collectively referred to herein asthe “Company”.

 

Nature ofOperations

 

The Bank has beenorganized as a single reporting segment and operates two branches and a LoanProduction Office in the Central Coast area of California.  The Bank’s primary source of revenue isproviding Small Business Administration (“SBA”) guaranteed loans, real estate,commercial and consumer loans to customers, who are predominately small- andmiddle-market businesses and individuals. The Company and Bank are certified bythe Department of Treasury as Certified Development Financial Institution(s)(CDFI) with a commitment to focus on providing financial services to low andmoderate income communities.

 

Mission CommunityDevelopment Corporation

 

Mission CommunityDevelopment Corporation is a community development corporation, which providesfinancing for small businesses and low- and moderate-income areas andprojects.  The Board of Directors ofMission Community Development Corporation consists of four members of the Boardof Directors of the Company and three outside members who are actively involvedin supporting community affairs and activities. Community developmentinvestment is limited to 5% of the Company’s capital and up to 10% with priorapproval by the Comptroller of the Currency.

 

Mission CommunityServices Corporation

 

The Company, Bankand Mission Community Development Corporation are closely affiliated with,Mission Community Services Corporation. Mission Community Services Corporation is intended to operate as a“not-for-profit” corporation.  Thiscompany’s primary focus will be to provide technical support, services, andaccessibility to funding sources, which require not-for-profit status toqualify for granting purposes.  TheBoard of Directors of Mission Community Services Corporation will consist ofboth Company and Mission Community Development Corporation board members.

 

Operations ofMission Community Development Corporation and Mission Community ServicesCorporation were not material as of December 31, 2001.

 

Use of Estimatesin the Preparation of Financial Statements

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.

 

F-7

----

 

Cash and CashEquivalents

 

For purposes ofreporting cash flows, cash and cash equivalents include cash, due from banksand federal funds sold.  Generally,federal funds are sold for one-day periods.

 

Cash and Due FromBanks

 

Bankingregulations require that all banks maintain a percentage of their deposits asreserves in cash or on deposit with the Federal Reserve Bank.  The Bank complied with the reserverequirements as of December 31, 2001.

 

The Companymaintains amounts due from banks, which exceed federally insured limits.  The Company has not experienced any lossesin such accounts.

 

InvestmentSecurities

 

Bonds, notes, anddebentures for which the Company has the positive intent and ability to hold tomaturity are reported at cost, adjusted for premiums and discounts that arerecognized in interest income using the interest method over the period tomaturity.

 

Investments notclassified as trading securities nor as held to maturity securities are classifiedas available-for-sale securities and recorded at fair value.  Unrealized gains or losses onavailable-for-sale securities are excluded from net income and reported as anamount net of taxes as a separate component of other comprehensive income includedin shareholders’ equity.  Premiums ordiscounts are amortized or accreted into income using the interest method.  Realized gains or losses on sales ofheld-to-maturity or available-for-sale securities are recorded using thespecific identification method.

 

Loans

 

Loans receivablethat management has the intent and ability to hold for the foreseeable futureor until maturity or payoff are reported at their outstanding unpaid principalbalances reduced by any charge-offs or specific valuation accounts and net ofany deferred fees or costs on originated loans, or unamortized premiums ordiscounts on purchased loans.

 

Loan originationfees and certain direct origination costs are capitalized and recognized as anadjustment of the yield of the related loan.

 

The accrual ofinterest on impaired loans is discontinued when, in management’s opinion, theborrower may be unable to meet payments as they become due.  When interest accrual is discontinued, allunpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cashpayments are received.

 

F-8

----

 

For impairmentrecognized in accordance with Financial Accounting Standards Board (“FASB”)Statement of Financial Accounting Standards (“SFAS”) No. 114, *“Accountingby Creditors for Impairment of a Loan”*, as amended by SFAS No. 118,the entire change in the present value of expected cash flows is reported aseither provision for credit losses in the same manner in which impairment initiallywas recognized, or as a reduction in the amount of provision for credit lossesthat otherwise would be reported.

 

Allowance for LoanLosses

 

The allowance forloan losses is adjusted by charges to income and decreased by charge-offs (netof recoveries).  Management’s periodicevaluation of the adequacy of the allowance is based on the Company’s past loanloss experience, known and inherent risks in the portfolio, adverse situationsthat may affect the borrower’s ability to repay, the estimated value of anyunderlying collateral, and current economic conditions.

 

###### *Loans Held for Sale*

 

SBA loansoriginated and intended for sale in the secondary market are carried at thelower of cost or estimated market value in the aggregate.  Net unrealized losses are recognized througha valuation allowance by charges to income.

 

Premises andEquipment

 

Land is carried atcost.  Premises and equipment arecarried at cost less accumulated depreciation and amortization.  Depreciation is computed using thestraight-line method over the estimated useful lives, which ranges from threeto ten years for furniture and fixtures and forty years for buildings.  Leasehold improvements are amortized usingthe straight-line method over the estimated useful lives of the improvements orthe remaining lease term, whichever is shorter.  Expenditures for betterments or major repairs are capitalized andthose for ordinary repairs and maintenance are charged to operations asincurred.

 

Income Taxes

 

Deferred taxassets and liabilities are reflected at currently enacted income tax ratesapplicable to the period in which the deferred tax assets or liabilities areexpected to be realized or settled.  Aschanges in tax laws or rates are enacted, deferred tax assets and liabilitiesare adjusted through the provision for income taxes.

 

ComprehensiveIncome

 

Beginning in 1998,the Company adopted SFAS No. 130, *“Reporting Comprehensive Income”*, whichrequires the disclosure of comprehensive income and its components.  Changes in unrealized gain (loss) onavailable-for-sale securities net of income taxes is the only component ofaccumulated other comprehensive income for the Company.

 

F-9

----

 

FinancialInstruments

 

In the ordinarycourse of business, the Company has entered into off-balance sheet financialinstruments consisting of commitments to extend credit, commercial letters ofcredit, and standby letters of credit. Such financial instruments are recorded in the financial statements whenthey are funded or related fees are incurred or received.

 

Earnings Per Shares (EPS)

 

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

 

Stock-Based Compensation

 

SFAS No. 123*, “Accounting for Stock-Based Compensation”,*encourages, but does not require, companies to record compensation cost forstock-based employee compensation plans at fair value.  The Company has chosen to account forstock-based compensation using the intrinsic value method prescribed inAccounting Principles Board (“APB”) Opinion No. 25, *“Accounting for Stock Issued toEmployees”,* and related Interpretations.  Accordingly, compensation cost for stock options is measured asthe excess, if any, of the quoted market price of the Bank’s stock at the dateof the grant over the amount an employee must pay to acquire the stock.  The pro forma effects of adoption aredisclosed in Note H.

 

###### *DisclosureAbout Fair Value of Financial Instruments*

 

In December 1996,the FASB issued SFAS No. 126, *“Exemption from Certain Required Disclosures aboutFinancial Instruments for Certain Nonpublic Entities,”* an amendmentof FASB Statement No. 107.  Inaccordance with SFAS No. 126, the Company is exempt from the disclosurerequirements of SFAS No. 107 and has therefore elected not to disclose fairvalue information for financial instruments.

 

Current AccountingPronouncements

 

In June 2001, the FASB issued SFAS No. 142, *“Accounting for Goodwill and OtherIntangible Assets”*effectivestarting with fiscal years beginning after December 15, 2001.  This Statement establishes new accountingstandards for goodwill and continues to require the recognition of goodwill asan asset but does not permit amortization of goodwill as previously required bythe APB Opinion No. 17.  The Statementalso establishes a new method of testing goodwill for impairment.  It requires goodwill to be separately testedfor impairment at a reporting unit level. The amount of goodwill determined to be impaired would be expensed tocurrent operations.  Management believesthat the adoption of the statement will not have a material effect on theBank’s financial statements.

 

F-10

----

 

Reclassifications

 

Certainreclassifications were made to prior years’ presentations to conform to thecurrent year.  These reclassificationsare of a normal recurring nature.

 

**NOTE B - INVESTMENT SECURITIES**

 

Debt and equitysecurities have been classified in the statements of condition according tomanagement’s intent.  The carryingamount of securities and their approximate fair values at December 31 were asfollows:

 
|                               |   | **Amortized  Cost** |       | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Estimated  Market  Value** |    |
|------------------------------------|--------|---------------------|------------|------------------------------|--------|-------------------------------|--------|------------------------------|---------|
| **Available-for-Sale Securities:** |   |                |       |                         |   |                          |   |                         |    |
| **December 31, 2001**              |   |                |       |                         |   |                          |   |                         |    |
| U.S. Government Agencies           |   | $                   | 3,888,797  |                         | $      | 81,372                        |   | $                            | —  |   | $ | 3,970,169 |   |
| Mortgage-Backed Securities         |   | 2,335,136           |       | 26,206                       |   | (130                          | )      | 2,361,212                    |    |
|                               |   | $                   | 6,223,933  |                         | $      | 107,578                       |   | $                            | (130    | ) | $ | 6,331,381 |   |
|                               |   |                |       |                         |   |                          |   |                         |    |
| **December 31, 2000**              |   |                |       |                         |   |                          |   |                         |    |
| U.S. Government Agencies           |   | $                   | 10,274,533 |                         | $      | 79,429                        |   | $                            | (10,144 | ) | $ | 10,343,818 |   |
|                               |   |                |       |                         |   |                          |   |                         |    |
| **Held-to-Maturity Securities:**   |   |                |       |                         |   |                          |   |                         |    |
| **December 31, 2001**              |   |                |       |                         |   |                          |   |                         |    |
| U.S. Government Agencies           |   | $                   | 1,915,960  |                         | $      | 22,813                        |   | $                            | (3,583  | ) | $ | 1,935,190 |   |
| Mortgage-Backed Securities         |   | 2,543,555           |       | 45,874                       |   | (16,316                       | )      | 2,573,113                    |    |
| Other                              |   | 44,429              |       | 8,194                        |   | —                        |   | 52,623                       |    |
|                               |   | $                   | 4,503,944  |                         | $      | 76,881                        |   | $                            | (19,899 | ) | $ | 4,560,926 |   |
|                               |   |                |       |                         |   |                          |   |                         |    |
| **December 31, 2000**              |   |                |       |                         |   |                          |   |                         |    |
| U.S. Government Agencies           |   | $                   | 388,830    |                         | $      | —                        |   | $                            | (33,100 | ) | $ | 355,730 |   |
| Other                              |   | 3,072,483           |       | 2,101                        |   | (23,327                       | )      | 3,051,257                    |    |
|                               |   | $                   | 3,461,313  |                         | $      | 2,101                         |   | $                            | (56,427 | ) | $ | 3,406,987 |   |

 

F-11

----

 

Investmentssecurities carried at $5**,**648,000as of December 31, 2001 were pledged to secure short-term borrowings and otherdeposits as required by law.

 

Proceeds fromsales of securities available-for-sale during 2000 were $3,204,339.  Gross realized gains of $4,339 are includedin other income.

 

The scheduledmaturities of securities available for sale at December 31, 2001, were asfollows:

 
|                           |   | **Available-for-Sale  Securities** |      | **Held-to-Maturity  Securities** |   |
|--------------------------------|--------|------------------------------------|-----------|----------------------------------|--------|
|                           |   | **Amortized  Cost**                |      | **Fair  Value**                  |   | **Amortized  Cost** |   | **Fair  Value** |   |
| Due in One Year to Five Years  |   | $                                  | 1,500,000 |                             | $      | 1,532,500 |   | $ | 1,500,000 |   | $ | 1,522,815 |   |
| Due in Five Years to Ten Years |   | 1,888,797                          |      | 1,935,814                        |   | — |   | — |   |
| Due in Greater Then Ten Years  |   | 500,000                            |      | 501,855                          |   | 415,960 |   | 412,375 |   |
| Mortgage-Backed Securities     |   | 2,335,136                          |      | 2,361,212                        |   | 2,543,555 |   | 2,573,113 |   |
| Other                          |   | —                             |      | —                           |   | 44,429 |   | 52,623 |   |
|                           |   | $                                  | 6,223,933 |                             | $      | 6,331,381 |   | $ | 4,503,944 |   | $ | 4,560,926 |   |

 

### **NOTE C - LOANS**

 

The Bank’s loanportfolio consists primarily of loans to borrowers within the Central CoastArea of California.  Although the Bank seeksto avoid concentrations of loans to a single industry or based upon a singleclass of collateral, real estate and real estate associated businesses areamong the principal industries in the Bank’s market area and, as a result, theBank’s loan and collateral portfolios are, to some degree, concentrated inthose industries.

 

The Bank alsooriginates SBA loans for sale to institutional investors.  At December 31, 2001 and 2000 the Bank wasservicing approximately $12,347,000 and $10,015,000, respectively in loanspreviously sold or participated.

 

F-12

----

 

A summary of thechanges in the allowance for possible loan losses as of December 31 follows:

 
|                                          |   | **2001** |    | **2000** |   |
|-----------------------------------------------|--------|----------|---------|----------|--------|
| Balance at Beginning of Year                  |   | $        | 511,607 |     | $      | 210,219 |   |
| Additions to the Allowance Charged to Expense |   | 280,000  |    | 392,500  |   |
| Recoveries on Loans Charged Off               |   | 7,483    |    | 258      |   |
|                                          |   | 799,090  |    | 602,977  |   |
| Less Loans Charged Off                        |   | (163,622 | )       | (91,370  | )      |
| Balance at End of Year                        |   | $        | 635,468 |     | $      | 511,607 |   |

 

The following is asummary of the investment in impaired loans, the related allowance for loanlosses, and income recognized thereon as of December 31:

 
|                                          |   | **2001** |      | **2000** |   |
|-----------------------------------------------|--------|----------|-----------|----------|--------|
| Recorded Investment in Impaired Loans         |   | $        | 889,000   |     | $      | 1,020,000 |   |
| Related Allowance for Loan Losses             |   | $        | 133,000   |     | $      | 153,000 |   |
| Average Recorded Investment in Impaired Loans |   | $        | 1,480,000 |     | $      | 468,000 |   |
| Interest Income Recognized for Cash Payments  |   | None     |      | None     |   |

 

F-13

----

 

### **NOTE D - PREMISES ANDEQUIPMENT**

 

A summary ofpremises and equipment as of December 31 follows:

 
|                                      |   | **2001**  |      | **2000**  |   |
|-------------------------------------------|--------|-----------|-----------|-----------|--------|
| Land                                      |   | $         | 976,498   |      | $      | 976,498 |   |
| Buildings                                 |   | 722,333   |      | 722,333   |   |
| Leasehold Improvements                    |   | 272,414   |      | 227,490   |   |
| Furniture, Fixtures, and Equipment        |   | 990,694   |      | 823,354   |   |
|                                      |   | 2,961,939 |      | 2,749,675 |   |
| Accumulated Depreciation and Amortization |   | (572,908  | )         | (375,626  | )      |
|                                      |   | $         | 2,389,031 |      | $      | 2,374,049 |   |

 

The Bank hasentered into operating leases for its branches and operating facilities, whichexpire at various dates through 2005. These leases include provisions for periodic rent increases as well aspayment by the lessee of certain operating expenses.

 

Rental expenserelating to these leases was approximately $88,000 in 2001 and $35,000 in 2000which included rental expense related to the lease of premises owned by apartnership of one of the Company’s directors of approximately $9,000 for 2001and $7,000 for 2000.

 

AtDecember 31, 2001, the approximate future minimum annual payments under theseleases are as follows:

 

| 2002   |   | $      | 91,000  |   |
|--------|--------|--------|---------|--------|
| 2003   |   | 83,000 |    |
| 2004   |   | 72,000 |    |
| 2005   |   | 49,000 |    |
|   |   | $      | 295,000 |   |

 

The minimum rentalpayments shown above are given for the existing lease obligations and do notreflect any increases in rent.  It isnot a forecast of rental expenses.

 

F-14

----

 

**NOTE E - DEPOSITS**

 

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

 

| Due in One Year          |   | $         | 26,858,550 |   |
|--------------------------|--------|-----------|------------|--------|
| Due in One to Five Years |   | 2,054,631 |       |
|                     |   | $         | 28,913,181 |   |

 

**NOTE F - SHORT-TERM BORROWINGS**

 

Short-term borrowings atDecember 31, 2001 are comprised of the following advances:

 

| **Maturity Date** |   | **Interest  Rate** |   | **Amount** |    |
|-------------------|--------|--------------------|--------|------------|---------|
| 1/2/2002          |   | 2.70               | %      | $          | 370,000 |   |
| 7/5/2002          |   | 7.75               | %      | 50,000     |    |
|              |   |               |   | $          | 420,000 |   |

 

These advances aresecured by investment securities as discussed in Note B.

 

**NOTE G - INCOME TAXES**

 

The income tax provision (benefit) for the years ended December 31,2001 and 2000 is comprised of the following:

 
|           |   | **2001** |    | **2000** |   |
|----------------|--------|----------|---------|----------|--------|
| Current Taxes: |   |     |    |     |   |
| Federal        |   | $        | 107,000 |     | $      | — |   |
| State          |   | 33,000   |    | 8,000    |   |
|           |   | 140,000  |    | 8,000    |   |
| Deferred       |   | (140,000 | )       | (108,000 | )      |
|           |   | $        | —  |     | $      | (100,000 | ) |

 

F-15

----

 

A comparison ofthe federal statutory income tax rates to the Company’s effective income tax 

 
|                                                   |   | **2001**   |    | **2000** |   |
|--------------------------------------------------------|--------|------------|---------|----------|--------|
|                                                   |   | **Amount** |    | **Rate** |   | **Amount** |   | **Rate** |   |
| Federal tax rate                                       |   | $          | 347,000 |     | 34.0   | % | $ | 79,000 |   | 34.0 | % |
| California franchise taxes, net of federal tax benefit |   | 73,000     |    | 7.2      | %      | 17,000 |   | 7.3 | % |
| Reduction in valuation allowance                       |   | (376,000   | )       | (36.9    | )%     | (200,000 | ) | (86.3 | )% |
| Other items - net                                      |   | (44,000    | )       | (4.3     | )%     | 4,000 |   | 1.8 | % |
|                                                   |   | $          | —  |     | — |   | $ | (100,000 | ) | (43.2 | )% |

 

follows:

Deferred taxes area result of differences between income tax accounting and generally acceptedaccounting principles with respect to income and expense recognition.  The Company’s principal timing differencesare from organizational and start-up costs and the allowance for loan and leaselosses.

 

The following is asummary of the components of the net deferred tax asset accounts recognized inthe accompanying statements of financial condition:

 
|                                             |   | **2001** |    | **2000** |   |
|--------------------------------------------------|--------|----------|---------|----------|--------|
| Deferred Tax Assets:                             |   |     |    |     |   |
| Organizational and Start-up Costs                |   | $        | 52,000  |     | $      | 110,000 |   |
| Operating Loss Carryforwards                     |   | —   |    | 488,000  |   |
| Allowance for Loan Losses Due to Tax Limitations |   | 219,000  |    | 188,000  |   |
| Other                                            |   | 70,000   |    | 10,000   |   |
|                                             |   | 341,000  |    | 796,000  |   |
|                                             |   |     |    |     |   |
| Valuation Allowance                              |   | —   |    | (376,000 | )      |
|                                             |   |     |    |     |   |
| Deferred Tax Liabilities:                        |   |     |    |     |   |
| Cash Basis of Tax Reporting                      |   | (3,000   | )       | (222,000 | )      |
| Depreciation Differences                         |   | (9,000   | )       | (20,000  | )      |
| Unrealized Gain on Investment Securities         |   | (36,000  | )       | (28,000  | )      |
| Other                                            |   | (11,000  | )       | —   |   |
| Net Deferred Tax Assets                          |   | $        | 282,000 |     | $      | 150,000 |   |

 

F-16

----

 

**NOTE H - STOCK OPTION PLAN**

 

During 1998, the Board of Directors adopted a stock option plan, whichwas approved by the shareholders, under which 180,000 shares of the Company’scommon stock may be issued.  The Companyapplies APB Opinion No. 25 and related interpretations in accounting for itsplan.  Accordingly, no compensation costhas been recognized for its fixed stock option plan.

 

Thefair value of each option grant was estimated on the date of grant using theBlack-Scholes option pricing model with the following assumptions:  risk-free rate of 4.00% and 6.00% for 2001and 2000 respectively, expected lives of five years, no dividend payments anddisregarding any stock price volatility.

 

A summary of the status of the Company’s fixed stock option plan as ofDecember 31, 2001 and 2000 and changes during the years is presented below:

 
|                                                           |   | **2001**   |   | **2000**                               |       |
|----------------------------------------------------------------|--------|------------|--------|----------------------------------------|------------|
|                                                           |   | **Shares** |   | **Weighted  Average  Exercise  Price** |       | **Shares** |   | **Weighted  Average  Exercise  Price** |   |
| Outstanding at Beginning of Year                               |   | 117,666    |   | $                                      | 9.83       |   | 115,652 |   | $ | 9.89 |   |
| Granted                                                        |   | 36,500     |   | $                                      | 7.89       |   | 7,500 |   | $ | 8.06 |   |
| Forfeited                                                      |   | (10,000    | )      | $                                      | 8.78       |   | (5,486 | ) | $ | 8.81 |   |
| Outstanding at End of Year                                     |   | 144,166    |   | $                                      | 9.41       |   | 117,666 |   | $ | 9.83 |   |
|                                                           |   |       |   |                                   |       |   |   |   |   |
| Options Exercisable at Year-End                                |   | 62,600     |   | $                                      | 9.98       |   | 42,566 |   | $ | 10.00 |   |
|                                                           |   |       |   |                                   |       |   |   |   |   |
| Weighted-Average Fair Value of Options Granted During the Year |   |       |   | $                                      |  1.51 |   |   |   | $ |  1.58 |   |

 

The followingtable summarizes information about fixed options outstanding at December 31,2001:

 
|                |   | **Options  Outstanding** |   | **Options  Exercisable**                             |   |
|---------------------|--------|--------------------------|--------|------------------------------------------------------|--------|
| **Exercise  Price** |   | **Number  Outstanding**  |   | **Weighted-  Average  Remaining  Contractual  Life** |   | **Weighted  Average  Exercise  Price** |   | **Number  Exercisable** |   | **Weighted  Average  Exercise  Price** |   |
| $ 7.00 to $10.00    |   | 144,166                  |   | 7.02                                                 |   | $ | 9.41 |   | 62,600 |   | $ | 9.98 |   |
|                     |        |                          |        |                                                      |        |  |  |  |  |  |  |  |  |

 

F-17

----

 

Had compensationcosts for the Company’s stock option plan been determined based on the fairvalue at the grant dates for awards under this plan consistent with the methodof SFAS No. 123, the Bank’s consolidated results of operations and per shareamounts would have been adjusted to the pro forma amounts indicated the tablebelow:

 
|                      |   | **2001** |      | **2000** |   |
|---------------------------|--------|----------|-----------|----------|--------|
| Net Income:               |   |     |      |     |   |
| As Reported               |   | $        | 1,019,594 |     | $      | 331,698 |   |
| Pro Forma                 |   | 968,522  |      | 305,050  |   |
|                      |   |     |      |     |   |
| Basic Income Per Share:   |   |     |      |     |   |
| As Reported               |   | 1.46     |      | 0.51     |   |
| Pro Forma                 |   | 1.38     |      | 0.47     |   |
|                      |   |     |      |     |   |
| Diluted Income Per Share: |   |     |      |     |   |
| As Reported               |   | 1.46     |      | 0.51     |   |
| Pro Forma                 |   | 1.38     |      | 0.47     |   |
|                           |        |          |           |          |        |  |  |

 

**NOTE I - OTHER EXPENSES**

 

Other expenses asof December 31 are comprised of the following:

 
|                                 |   | **2001** |      | **2000** |   |
|--------------------------------------|--------|----------|-----------|----------|--------|
| Data Processing                      |   | $        | 505,931   |     | $      | 291,881 |   |
| Professional Expenses                |   | 162,267  |      | 123,965  |   |
| Marketing and Business Promotion     |   | 112,737  |      | 91,080   |   |
| Insurance and Regulatory Assessments |   | 80,829   |      | 27,484   |   |
| Office Supplies and Expenses         |   | 117,304  |      | 108,622  |   |
| Other Expenses                       |   | 401,461  |      | 291,902  |   |
|                                 |   | $        | 1,380,529 |     | $      | 934,934 |   |

 

F-18

----

 

**NOTE J - PREFERRED STOCK**

 

Series A — the Series A Preferred Stock has$5.00 par value and is non-voting, convertible and redeemable.  Each share is convertible into voting commonstock of the Company on a two-for-one exchange.  Series A shares are not entitled to any fixed rate of return butdo participate on the same basis (as if converted on a two-for-one exchange) inany dividends declared on the Company’s common stock. In the event ofliquidation, the holders of Series A shares will be entitled to a liquidationpreference of $5.00 per share before the holders of common stock receive anydistributions and after the holders of common stock receive distributions of$10.00 per share, all distributions will be on the same basis (as if convertedon a two-for-one exchange).  Theseshares were issued for $392,194 (net of issuance costs of $107,806) pursuant toan award from the Community Development Institutions Fund of the Department ofthe Treasury.

 

Series B — the Series B Preferred Stock has nopar value and is non-voting, non-convertible and non-redeemable.  Series B shares are not entitled to anyfixed rate of return but do participate on the same basis in any dividendsdeclared on the Company’s common stock. In the event of liquidation, theholders of Series B shares will be entitled to a liquidation preference of$10.00 per share before the holders of common stock receive anydistributions.  Additionally, in theevent of a so-called “change in control event” (including certain mergers orsales of assets) holders of the Series B Preferred Stock shall be entitled toreceive payment on the same basis as the holders of the common stock of theCompany.  These shares were issued for$191,606 (net of issuance costs of $13,394) pursuant to an investment from theNational Community Investment Fund (“NCIF”). In connection with this investment, NCIF also purchased 29,500 shares ofthe Company’s common stock for $10.00 per share. As part of the investmentagreement, the Company by covenant agreed that so long as NCIF or any successorto NCIF owns and holds any of the Shares to remain a CDFI and to meet certainreporting requirements.

 

### **NOTE K - RELATED PARTY TRANSACTIONS**

 

Inthe ordinary course of business, the Bank has granted loans to certaindirectors and the companies with which they are associated.  In the Bank’s opinion, all loans and loancommitments to such parties are made on substantially the same terms, includinginterest rate and collateral, as those prevailing at the time for comparabletransactions with other persons.  Thebalance of these loans outstanding at December 31, 2001 and 2000 wasapproximately $1,608,000 and $1,945,000, respectively.

 

**NOTE L - COMMITMENTS ANDCONTINGENCIES**

 

In the normalcourse of business, the Bank enters into financial commitments to meet thefinancing needs of its customers.  Thesefinancial commitments include commitments to extend credit and standby lettersof credit.  Those instruments involve tovarying degrees, elements of credit and interest rate risk not recognized inthe statement of financial position.

 

The Bank’sexposure to credit loss in the event of nonperformance on commitments to extendcredit and standby letters of credit is represented by the contractual amountof those instruments.  The Bank uses thesame credit policies in making commitments as it does for loans reflected inthe financial statements.

 

F-19

----

 

As of December 31,2001, the Bank had the following outstanding financial commitments whosecontractual amount represents credit risk:

 
| Commitments to Extend Credit |   | $       | 13,444,000 |   |
|------------------------------|--------|---------|------------|--------|
| Standby Letters of Credit    |   | 268,000 |       |
|                         |   | $       | 13,712,000 |   |

 

Commitments toextend credit are agreements to lend to a customer as long as there is noviolation of any condition established in the contract.  Standby letters of credit are conditionalcommitments to guarantee the performance of a Bank customer to a thirdparty.  Since many of the commitmentsand standby letters of credit are expected to expire without being drawn upon,the total amounts do not necessarily represent future cash requirements.  The Bank evaluates each customer’s creditworthiness on a case-by-case basis.  Theamount of collateral obtained if deemed necessary by the Bank is based onmanagement’s credit evaluation of the customer.

 

The Company isinvolved in various litigation, which has arisen in the ordinary course ofbusiness.  In the opinion of management,the disposition of such pending litigation will not have a material effect onthe Bank’s financial statements.

 

**NOTE M - EARNINGS PER SHARE**

 

Thefollowing is a reconciliation on net income and shares outstanding to theincome and number of shares used in the computation of earnings per share:

 
|                                                                            |   | **2001**   |      | **2000**   |    |
|---------------------------------------------------------------------------------|--------|------------|-----------|------------|---------|
|                                                                            |   | **Income** |      | **Shares** |    | **Income** |   | **Shares** |   |
| Net Income                                                                      |   | $          | 1,019,594 |       |    |   | $ | 331,698 |   |   |   |
| Average Common  Shares Outstanding During the Year                              |   |       |      | 630,066    |    |   |   | 600,714 |   |
| Preferred Shares  Participating in Net Income With Common Shareholders -Average |   |       |      | 70,500     |    |   |   | 50,112 |   |
| Used in Basic  EPS                                                              |   | 1,019,594  |      | 700,566    |    | 331,698 |   | 650,826 |   |
|                                                                            |   |       |      |       |    |   |   |   |   |
| Dilutive Effect  of Outstanding Stock Options                                   |   |       |      | —     |    |   |   | — |   |
| Used in Dilutive  EPS                                                           |   | $          | 1,019,594 |       | 700,566 |   | $ | 331,698 |   | 650,826 |   |

 

F-20

----

 

Preferredshares are included in the computation of basic earnings per share because theyshare equally with common shares in the distribution of net income and they donot have a stated dividend rate.

 

Theimpact of stock options has been excluded from the computation of diluted EPSin 2001 and 2000 because they are anti-dilutive.

 

**NOTE N - REGULATORY MATTERS**

 

The Bank is subject tovarious regulatory capital requirements administered by the federal bankingagencies.  Failure to meet minimumcapital requirements can initiate certain mandatory - and possibly additionaldiscretionary - actions by regulators that, if undertaken, could have a directmaterial effect on the Bank’s financial statements.  Under capital adequacy guidelines and the regulatory frameworkfor prompt corrective action, the Bank must meet specific capital guidelinesthat involve quantitative measures of the Bank’s assets, liabilities, andcertain off-balance-sheet items as calculated under regulatory accountingpractices.  The Bank’s capital amountsand classification are also subject to qualitative judgments by the regulatorsabout components, risk weightings, and other factors.

 

Quantitative measuresestablished by regulation to ensure capital adequacy require the Bank tomaintain minimum amounts and ratios (set forth in the table below) of total andTier 1 capital (as defined in the regulations) to risk-weighted assets (asdefined), and of Tier 1 capital (as defined) to average assets (asdefined).  Management believes, as ofDecember 31, 2001, that the Bank meets all capital adequacy requirements towhich it is subject.

 

As of December 31, 2001,the most recent notification from the Comptroller of the Currency categorizedthe Bank as well-capitalized under the regulatory framework for promptcorrective action (there are no conditions or events since that notification thatmanagement believes have changed the Bank’s category).  To be categorized as well-capitalized, theBank must maintain minimum ratios as set forth in the table below.  The following table also sets forth theBank’s actual capital amounts and ratios (dollar amounts in thousands):

 
|                                      |   |       |   |                               |   | **Amount of  Capital Required** |   |
|-------------------------------------------|--------|------------|--------|------------------------------------|--------|---------------------------------|--------|
|                                      |   | **Actual** |   | **To Be  Adequately  Capitalized** |   | **To Be  Well-  Capitalized**   |   |
|                                      |   | **Amount** |   | **Ratio**                          |   | **Amount**                      |   | **Ratio** |   | **Amount** |   | **Ratio** |   |
| **As  of December 31, 2001:**             |   |       |   |                               |   |                            |   |   |   |   |   |   |   |
| Total Capital  (to Risk-Weighted Assets)  |   | $          | 7,385  |                               | 12.1   | %                               | $      | 4,919 |   | 8.0 | % | $ | 6,149 |   | 10.0 | % |
| Tier 1 Capital  (to Risk-Weighted Assets) |   | $          | 6,750  |                               | 11.1   | %                               | $      | 2,459 |   | 4.0 | % | $ | 3,689 |   | 6.0 | % |
| Tier 1 Capital  (to Average Assets)       |   | $          | 6,750  |                               | 8.5    | %                               | $      | 3,173 |   | 4.0 | % | $ | 3,967 |   | 5.0 | % |
|                                      |   |       |   |                               |   |                            |   |   |   |   |   |   |   |
| **As  of December 31, 2000:**             |   |       |   |                               |   |                            |   |   |   |   |   |   |   |
| Total Capital  (to Risk-Weighted Assets)  |   | $          | 5,803  |                               | 11.1   | %                               | $      | 4,194 |   | 8.0 | % | $ | 5,242 |   | 10.0 | % |
| Tier 1 Capital  (to Risk-Weighted Assets) |   | $          | 5,291  |                               | 10.1   | %                               | $      | 2,097 |   | 4.0 | % | $ | 3,145 |   | 6.0 | % |
| Tier 1 Capital  (to Average Assets)       |   | $          | 5,291  |                               | 8.9    | %                               | $      | 2,390 |   | 4.0 | % | $ | 2,987 |   | 5.0 | % |

 

F-21

----

 

The Bank isrestricted as to the amount of dividends that can be paid.  Dividends declared by national banks thatexceed the net income (as defined) for the current year plus retained netincome for the preceding two years must be approved by the OCC.  The Bank may not pay dividends that wouldresult in its capital levels being reduced below the minimum requirements shownabove.

 

The Company is subject tosimilar requirements administered by its primary regulator, the Federal ReserveBoard. For capital adequacy purposes, the Company must maintain total capitalto risk-weighted assets, Tier 1 capital to risk-weighted assets and Tier 1capital to average assets of 8.0%, 4% and 4.0%, respectively.  It’s total capital to risk-weighted assets,Tier 1 capital to risk-weighted assets and Tier 1 capital to average assets was12.1%, 11.1% and 8.5%, respectively, at December 31, 2001 and 11.1%, 10.1% and8.9%, respectively, at December 31, 2000.

###  

### **NOTE O - FORMATION OFMISSION COMMUNITY BANCORP**

 

On December 15,2000, Mission Community Bancorp acquired Mission Community Bank by issuing600,566 shares of common stock in exchange for the surrender of all outstandingshares of the Bank’s common stock. There was no cash involved in this transaction.  The acquisition was accounted for like apooling of interest and the consolidated financial statements contained hereinhave been restated to give full effect to this transaction.

 

Mission CommunityBancorp has no significant business activity other than its investment inMission Community Bank.  Accordingly, noseparate financial information on the Company is provided.

 

### **NOTE P – BANK ENTERPRISE AWARD**

 

During2001, the Bank received a $990,000 award under the Fiscal Year 2001 BankEnterprise Award Program.  The programis sponsored by the Department of Treasury, Community Development FinancialInstitutions Fund.  The Bank receivedthe award for making a total of $3,000,000 in deposits with certified CommunityDevelopment Financial Institutions.

 

TheBank deferred $452,250 of the award to increase the future earnings on thedeposits to market rates.  The Bank willrecognize $180,900 of this deferred amount in 2002 and 2003 and the balance of$90,450 in 2004.

 

F-22

----

 

## **ITEM 8.  CHANGES WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL**

 

DISCLOSURE

None.

 

----

 

**PART III**

 

**ITEM9. ****DIRECTORS,EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;  COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.**

 

The following table lists the names and certaininformation as of December 31, 2001, concerning all directors and executiveofficers of the Company and the Bank. The Company and the Bank have no “significant employees” except itsexecutive officers.

 
| **Name and Title**                                                     |   | **Age** |   | **Business Experience for Past Five Years**                                                                                                                                                                                                                  |   | **Year First Elected or Appointed Director*** |
|------------------------------------------------------------------------|--------|---------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|
| Bruce M. Breault  Founding Chairman of the Board (Emeritus)            |   | 59      |   | Partner and Owner, F. McLintocks, Inc. (restaurants)  (1973-)                                                                                                                                                                                                |   | 1996                                          |
|                                                                   |   |    |   |                                                                                                                                                                                                                                                         |   |                                          |
| Roxanne M. Carr  Secretary                                             |   | 64      |   | Division President and Corporate Senior Vice  President, The Mortgage House, Inc. (1995-); Regional Vice President, ARCS  Mortgage, Inc. (1973-1995)                                                                                                         |   | 1997                                          |
|                                                                   |   |    |   |                                                                                                                                                                                                                                                         |   |                                          |
| Karla S. Cool  Director                                                |   | 59      |   | President and Owner, Central California Investments  (1998-); Broker and Owner, Karla Cool Realty (1987-1998)                                                                                                                                                |   | 1998                                          |
|                                                                   |   |    |   |                                                                                                                                                                                                                                                         |   |                                          |
| William B. Coy  Vice Chairman of the Board                             |   | 64      |   | Managing Partner, Rancho Rio Conejo (citrus and  avocados) (1979-); Corporate Marketing Manager, San Luis Obispo County Farm  Supply Company (1991-2001)                                                                                                     |   | 1996                                          |
|                                                                   |   |    |   |                                                                                                                                                                                                                                                         |   |                                          |
| William C.  Demmin  Executive Vice President/  Chief Financial Officer |   | 56      |   | Banker (1)                                                                                                                                                                                                                                                   |   | N/A                                           |
|                                                                   |   |    |   |                                                                                                                                                                                                                                                         |   |                                          |
| David A. Duarte  Executive Vice President/  Chief Credit Officer       |   | 52      |   | Banker (2)                                                                                                                                                                                                                                                   |   | N/A                                           |
|                                                                   |   |    |   |                                                                                                                                                                                                                                                         |   |                                          |
| Erol F. Giray,  M.D.  Director                                         |   | 45      |   | Psychiatrist                                                                                                                                                                                                                                                 |   | 1997                                          |
|                                                                   |   |    |   |                                                                                                                                                                                                                                                         |   |                                          |
| Anita M.  Robinson  Director, President and  Chief Executive Officer   |   | 49      |   | Banker (3)                                                                                                                                                                                                                                                   |   | 1996                                          |
|                                                                   |   |    |   |                                                                                                                                                                                                                                                         |   |                                          |
| Robin L. Rossi  Director                                               |   | 54      |   | President, Rossi Enterprises (property management)  (1991-); President, Infinite Horizons, Inc. (Manager of Avila Beach Resort)  (1979-)                                                                                                                     |   | 1996                                          |
|                                                                   |   |    |   |                                                                                                                                                                                                                                                         |   |                                          |
| Gary E. Stemper  Chairman of the Board                                 |   | 59      |   | Eagles Crest Winery, LLC, Manager (2000-); Sales  Consultant and Technical Analyst, Artesia Ready Mix, Inc. (1996-2000);  Partner, Eberle Winery of Paso Robles (1982-); Owner, Gary Stemper  Construction Co. (1967-); Partner, Mill Road Vineyard (1994-); |   | 1996                                          |
|                                                                   |   |    |   |                                                                                                                                                                                                                                                         |   |                                          |
| Karl F.  Wittstrom  Director                                           |   | 48      |   | Self-Employed-real estate development, ranching,  vineyards, investments, (1996-); President and CEO, Allwaste Transportation  and Remediation, Inc. (1992-1996)                                                                                             |   | 1997                                          |

 

----

* Refers to year first elected or appointed to Boardof the Bank.

 

(1)                                Mr. William C. Demmin joined the Bank on March12, 2001.  Mr. Demmin has over 31 yearsof banking experience.  For the period1999 to 2001 he served as Interim President/CEO, and Executive VicePresident/Chief Financial Officer, for Network Bank USA, Ontario, California.  From 1997 to 1999 he held the position ofExecutive Vice President/Chief Financial Officer with Cuyamaca Bank, N.A., inSantee, California.  From 1996 to 1997he served as President/Chief Executive Officer for Merchants Bank ofCalifornia, Carson, California.  For theperiod 1987 to 1996, he served as Executive Vice President/Chief FinancialOfficer for Monarch Bancorp and Monarch Bank, Laguna Niguel, California.  Prior to 1987, he held various managementpositions with Commercial Center Bank, Southern California Bancorp and 

 

----

Bank of America.

(2)                                  Mr. David A. Duarte joined the Bank onFebruary 26, 2001 as the Executive Vice President and Chief CreditOfficer.   Mr. Duarte has 29 years ofbanking experience.  For the period 1999to 2001 he served as an Executive Vice President/Chief Credit Officer forCerritos Valley Bank, Norwalk, California. From 1997 to 1999 he held the position of Executive Vice President/ChiefCredit Officer with Security First Bank, Fullerton, California.  From 1992 to 1996, he held executivemanagement positions, including Senior Vice President/Chief Credit Officer,(and from 1973 to 1986 held various management positions), with Home Bank,Signal Hill, California.

 

(3)                                  Ms.Robinson has over 29 years of banking experience.  From 1982 to 1989 she was a Vice President, Branch Manager andCommercial Loan Officer for National Bank of Southern California in Santa Ana,California.  From 1989 to 1993 Ms.Robinson served as Executive Vice President/Senior Loan Administrator ofCommerce Bank of San Luis Obispo.  In1994 she became the President and Chief Executive Officer of Commerce Bank ofSan Luis Obispo and served in that capacity until the bank was acquired byValliWide Bank in 1996.  Ms. Robinsonleft ValliWide Bank and joined the organizing effort of the Bank in 1996.

 

None of the Bank’sdirectors or executive officers were selected pursuant to any arrangement orunderstanding, other than with the directors and executive officers of theBank, acting within their capacities as such. There are no family relationships between the directors or executive officersof the Bank and none serve as directors of any other company which has a classof securities registered under, or which is subject to the periodic reportingrequirements of, the Securities Exchange Act of 1934 or any investment companyregistered under the Investment Company Act of 1940.

 

**Section16(a) Beneficial Ownership Reporting Compliance**

 

The Company does not have a class of equity securities registeredpursuant to Section 12 of the Securities Exchange Act of 1934 (the “ExchangeAct”).  Therefore, the Company’sofficers and directors, and persons who own more than 10% of the Company’sCommon Stock, are not subject to the reporting requirements under Section 16(a)of the Exchange Act.

 

**ITEM10.  EXECUTIVE COMPENSATION**

 

**SummaryCompensation**

 

The following table setsforth a summary of annual and long-term compensation for services in allcapacities to the Bank for the Bank’s President and Chief Executive Officer. 

 
|                   |   | **Annual Compensation** |   | **Long-Term  Compensation  Awards** |    |
|------------------------|--------|-------------------------|--------|-------------------------------------|---------|
| **Name  and Position** |   | **Year**                |   | **Salary/  Benefits**               |    | **Bonus** |   | **Other Annual  Compensation (1)** |   | **Securities  Underlying Options** |   | **All Other Compensation** |   |
| **Anita  M. Robinson** |   |                    |   |                                |    |   |   |   |   |   |   |   |   |
| President and Chief    |   | 2001                    |   | $                                   | 115,000 |   | — |   | $ | 7,800 |   | 5,000 |   | — |   |
| Executive Officer      |   | 2000                    |   | $                                   | 90,000  |   | — |   | $ | 6,000 |   | — |   | — |   |
|                   |   | 1999                    |   | $                                   | 90,000  |   | — |   | $ | 5,000 |   | — |   | — |   |

 

----

(1) This figurerepresents automobile allowance paid during the year.

 

No other officer received annual compensation of$100,000 or more in 2001.  The Companycurrently pays no salaries to its officers.

 

**Option/SARGrants**

 

On January 20, 1998 the Bank’s Board of Directors adopted the 1998Stock Option Plan, pursuant to approval by the Bank’s shareholders prior toJanuary 20, 1999.  The Bank’sshareholders approved the

 

----

 

1998 Stock Option Plan at the Annual Meeting of Shareholders held onJune 16, 1998.   In 1998, a total of125,099 incentive and non-qualified stock option shares were granted at a pricerange of $10.00 to $11.00 per share; 5,000 stock option shares were retired;and no stock options were exercised.  In1999, a total of 11,000 incentive option shares were granted at a price rangeof $8.125 to $9.00 per share; 17,433 incentive and non-qualified stock optionswere retired; and no options were exercised. In 2000, a total of 7,500 incentive and non-qualified stock optionshares were granted at a price range of $7.875 to $8.188 per share; 5,486 stockoption shares were retired; and no options were exercised.   In 2001, a total of 36,500 incentive andnon-qualified stock options were granted at a price range of $7.50 to $8.25 pershare; 10,000 stock options were retired; and no stock options wereexercised.  The 1998 Stock Option Planand the options granted pursuant thereto were assumed by the Company inconnection with the holding company formation transaction in which the Bankbecame a wholly-owned subsidiary of the Company.

 

**LongTerm Incentive Plan Awards**

 

There were no long-term incentive plan awards in 1999, 2000 or 2001.

 

**EmploymentContracts**

 

In 1997 the Bankand Ms. Robinson entered into an employment contract, for a period of threeyears, which provides for a base salary of $7,500 per month, discretionarybonuses, an automobile allowance of $500 per month, expense reimbursement,$250,000 of life insurance and standard and customary medical and dentalinsurance benefits.  The contractprovides for severance benefits of six months’ compensation for terminationwithout cause and severance benefits equal to the greater of $100,000 or thebase salary for the balance of the contract term for termination after amerger, change in control, or other defined corporate reorganizations.  On February 27, 2001, the Board of Directorsapproved a new employment contract for Ms. Robinson, effective for a one yearterm beginning on January 1, 2001, which provides for a base salary of $9,583per month, discretionary bonuses, an automobile allowance of $650 per month,expense reimbursement, $250,000 of life insurance, standard and customarymedical and dental insurance benefits, and a stock option grant of 5,000 shares.  The contract provides for severance benefitsof six months’ base salary for termination without cause, and severancebenefits of twelve months’ base salary for termination after a merger, changein control, or other defined corporate reorganizations.   OnFebruary 25, 2002, the Board of Directors approved a new employment contractfor Ms. Robinson, effective for a five year term beginning on January 1, 2002,which provides for a base salary of $10,833 per month, an automobile allowanceof $650 per month, expense reimbursement, $250,000 of life insurance, standardand customary medical and dental insurance benefits, and a non-recurring bonusof $10,000 payable by December 31, 2002. The five year agreement provides for an annual review by the Board ofDirectors of the base salary provided to Ms. Robinson, which shall not be lessthan $10,833 per month during the life of the agreement. The contract providesfor severance benefits of six months base salary for termination without cause,and severance benefits of sixty months base salary, from the date of event, fortermination after a merger, change in control, or other defined corporationreorganizations.

 

In 2001, the Bankentered into Change in Control Employment agreements with Executive OfficersDemmin and Duarte, and also with four of the Bank’s Senior Vice Presidents,that will provide for severance benefits for termination after a merger, changein control, or other defined corporate reorganizations equal to a lump sumamount equal to six months salary.

 

**Directors’Compensation**

 

During 1999, 2000 and 2001 the Bank’s directors were not paid forattending meetings of the Board or the committees on which they served.  Directors of the Company receive nocompensation for attending meetings.

 

Eight non-employee directors received a Stock Option grant during theyear-ending December 31, 2001, which was for 2,000 non-qualified stock optionshares at a price of $7.50 per share.

 

----

 

**ITEM 11  SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND****MANAGEMENT**

 

The following table setsforth certain information as of December 31, 2001, concerning the beneficialownership of the Company’s outstanding Common Stock: (i) by each of thedirectors and executive officers; and (ii) by all directors and executiveofficers of the Company as a group. Management is not aware of any change in control of the Company whichhas occurred since January 1, 2002 or of any arrangement which may, at asubsequent date, result in such a change in control.  Management of the Company is aware of one person who owns,beneficially or of record, more than 5% of the Company’s outstanding CommonStock: The Patrick W. Hopper Trust beneficially owns 41,834 shares of commonstock, or 6.6% of total shares outstanding.

 
| **Name and  Position Held**                                               |   | **Common  Stock  Beneficially  Owned (1)** |   | **Shares  Subject to  Exercise(2)** |   | **Total Shares  Beneficially  Owned** |   | **Percent  of Class** |   |
|---------------------------------------------------------------------------|--------|--------------------------------------------|--------|-------------------------------------|--------|---------------------------------------|--------|-----------------------|--------|
| Bruce M. Breault  Founding Chairman of the Board (Emeritus)               |   | 21,250                                     |   | 11,146                              |   | 32,396                                |   | 4.9                   | %      |
|                                                                      |   |                                       |   |                                |   |                                  |   |                  |   |
| Roxanne M. Carr  Secretary                                                |   | 10,000                                     |   | 6,240                               |   | 16,240                                |   | 2.5                   | %      |
|                                                                      |   |                                       |   |                                |   |                                  |   |                  |   |
| Karla S. Cool  Director                                                   |   | 2,837                                      |   | 500                                 |   | 3,337                                 |   | 0.5                   | %      |
|                                                                      |   |                                       |   |                                |   |                                  |   |                  |   |
| William B. Coy  Director, Vice Chairman of the Board                      |   | 7,750                                      | (3)    | 6,240                               |   | 13,990                                |   | 2.2                   | %      |
|                                                                      |   |                                       |   |                                |   |                                  |   |                  |   |
| Erol F. Giray, M.D  Director                                              |   | 6,530                                      |   | 5,386                               |   | 11,916                                |   | 1.9                   | %      |
|                                                                      |   |                                       |   |                                |   |                                  |   |                  |   |
| Anita M. Robinson  Director, President and  Chief  Executive Officer |   | 17,659                                     |   | 17,000                              |   | 34,659                                |   | 5.4                   | %      |
|                                                                      |   |                                       |   |                                |   |                                  |   |                  |   |
| Robin L. Rossi  Director                                                  |   | 13,707                                     | (4)    | 9,440                               |   | 23,147                                |   | 3.6                   | %      |
|                                                                      |   |                                       |   |                                |   |                                  |   |                  |   |
| Gary E. Stemper  Chairman of the Board                                    |   | 7,500                                      |   | 8,160                               |   | 15,660                                |   | 2.5                   | %      |
|                                                                      |   |                                       |   |                                |   |                                  |   |                  |   |
| Karl F. Wittstrom  Director                                               |   | 15,100                                     |   | 7,520                               |   | 22,620                                |   | 3.5                   | %      |
|                                                                      |   |                                       |   |                                |   |                                  |   |                  |   |
| All Directors and Executive Officers  as a Group (11)                |   | 102,333                                    |   | 72,632                              |   | 174,965                               |   | 24.9                  | %      |

 

----

(1)          Includes sharesbeneficially owned, directly or indirectly, together with associates. Alsoincludes shares held as trustee and held by or as custodian for minor children,by a closely held business or other associate. Unless otherwise indicated, allshares are held as community property under California law or with sole vetoingand investment power.

 

(2)          Shares subject tooptions that were exercisable within 60 days of 12/31/01 are treated as issuedand outstanding for the purpose of computing the percent of class owned by suchperson but not for the purpose of computing the percent of class owned by anyother person.  Includes 1,000 sharessubject to option held by David A. Duarte exercisable within 60 days.

 

(3)          Includes 2,500 sharesheld by the Blanchard Family Trust of which Mr. Coy serves as a co-trustee.

 

(4)          Includes 474 shares heldin the name of The Rossi Foundation.

 

----

 

# **ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

**CertainTransactions**

 

There are no existing or proposed material transactions between theCompany or the Bank and any of its executive officers, directors, or beneficialowners of 5% or more of the Common Stock, or the immediate family or associatesof any of the foregoing persons, except as indicated below.

 

Some of the Bank’s directors and executive officers and their immediatefamilies, as well as the companies with which such directors and executiveofficers are associated, are customers of, and have had banking transactionswith the Bank in the ordinary course of business and anticipate having suchbanking transactions with such persons in the future.  In the opinion of Management, all loans and commitments to lendincluded in such transactions were made in compliance with applicable laws onsubstantially the same terms, including interest rates and collateral, as thoseprevailing at the time for comparable transactions with other persons ofsimilar creditworthiness and did not involve more than a normal risk ofcollectibility or present other unfavorable features.  As of December 31, 2001, loans outstanding to the Bank’s directorsand executive officers (including associated companies) totaled approximately$2.7 million.

 

----

 

## **ITEM 13.**          EXHIBITS AND REPORTS ON FORM 8-K

** **

**Exhibits**

** **
| **Exhibit #** |   |                                                                                            |
|---------------|--------|-------------------------------------------------------------------------------------------------|
| 2.1           |   | Plan of Reorganization  and Agreement of Merger dated as of October 4, 2000*                    |
|          |   |                                                                                            |
| 3.1           |   | Articles of  Incorporation**                                                                    |
|          |   |                                                                                            |
| 3.2           |   | Bylaws**                                                                                        |
|          |   |                                                                                            |
| 4.1           |   | Certificate of  Determination for Series A Non-Voting Convertible Redeemable Preferred  Stock** |
|          |   |                                                                                            |
| 4.2           |   | Certificate of  Determination for Series B Non-Voting Preferred Stock**                         |
|          |   |                                                                                            |
| 10.1          |   | Purchase and Sale  Agreement and Lease dated January, 1997, as amended**                        |
|          |   |                                                                                            |
| 10.2          |   | Financial Facilities  Purchase Agreement**                                                      |
|          |   |                                                                                            |
| 10.3          |   | Employment Contract — Ms. Robinson**                                                       |
|          |   |                                                                                            |
| 10.4          |   | Lease Agreement — Paso Robles**                                                            |
|          |   |                                                                                            |
| 10.5          |   | Lease Agreement — San Luis Obispo**                                                        |
|          |   |                                                                                            |
| 10.6          |   | Lease Agreement — Arroyo Grande**                                                          |
|          |   |                                                                                            |
| 10.7          |   | 1998 Stock Option Plan                                                                          |
|          |   |                                                                                            |
| 10.8          |   | Lease Agreement — 569 Higuera, San Luis Obispo                                             |
|          |   |                                                                                            |
| 21            |   | Subsidiaries of the  registrant                                                                 |
|          |   |                                                                                            |
| 23            |   | Consent of accountants                                                                          |

 

----

*Filed as an exhibit to the Company 8-K Report ofDecember 18, 2001.

** Filed as an exhibit to the Company’s annual reporton Form 10-KSB as of December 31, 2001

 

**Reportson Form 8-K:**

#### ** **

#### **None.**

#### ** **

----

 

**Signatures**

 

Pursuant to therequirements of Section 13 of the Securities Exchange Act of 1934, the Companyhas duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.

 

**MISSIONCOMMUNITY BANCORP**

 
| By:                                    | /s/ Anita M.  Robinson |   |
|----------------------------------------|------------------------|--------|
| ANITA M.  ROBINSON                     |
| President and  Chief Executive officer |
| Dated:  March 27, 2002            |

 

 
| By:                                                   | /s/ William C. Demmin |   |
|-------------------------------------------------------|-----------------------|--------|
| **WILLIAM  C. DEMMIN**                                |
| Executive Vice  President and Chief Financial officer |
| Dated:  March 27, 2002                           |

 

[Signatures continue on next page]

 

----

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated.

** **
| **/s/  Bruce M. Breault** | **Founding  Chairman of the Board (Emeritus)**                                       | **March  27, 2002** |
|---------------------------|--------------------------------------------------------------------------------------|---------------------|
| BRUCE M. BREAULT          |                                                                                 |                |
|                      |                                                                                 |                |
| /s/ Roxanne M. Carr       | Secretary                                                                            | March 27, 2002      |
| ROXANNE M. CARR           |                                                                                 |                |
|                      |                                                                                 |                |
| /s/ Karla S. Cool         | Director                                                                             | March 27, 2002      |
| KARLA S. COOL             |                                                                                 |                |
|                      |                                                                                 |                |
| /s/ William B. Coy        | Vice Chairman of  the Board                                                          | March 27, 2002      |
| WILLIAM B. COY            |                                                                                 |                |
|                      |                                                                                 |                |
| /s/ Erol F. Giray, M.D.   | Director                                                                             | March 27, 2002      |
| EROL F. GIRAY, M.D.       |                                                                                 |                |
|                      |                                                                                 |                |
| /s/ William C. Demmin     | Executive Vice President and Chief Financial Officer  (Principal Accounting Officer) | March 27, 2002      |
| WILLIAM C. DEMMIN         |                                                                                 |                |
|                      |                                                                                 |                |
| /s/ Anita M. Robinson     | Director, President and Chief Executive Officer                                      | March 27, 2002      |
| ANITA M. ROBINSON         |                                                                                 |                |
|                      |                                                                                 |                |
| /s/ Robin L. Rossi        | Director                                                                             | March 27, 2002      |
| ROBIN L. ROSSI            |                                                                                 |                |
|                      |                                                                                 |                |
| /s/ Gary E. Stemper       | Chairman of the  Board                                                               | March 27, 2002      |
| GARY E. STEMPER           |                                                                                 |                |
|                      |                                                                                 |                |
| /s/ Karl F. Wittstrom     | Director                                                                             | March 27, 2002      |
| KARL F. WITTSTROM         |                                                                                 |                |

 

----