Exhibit 13
                                   ----------


                              PACIFIC STATE BANCORP


                               2002 ANNUAL REPORT
<PAGE>
                                MISSION STATEMENT
                                -----------------

Our mission is to professionally meet the financial needs of individuals,
companies, and organizations within our communities.


                               CORPORATE DIRECTORY
                               -------------------

Market Makers                                           Legal Counsel
-------------------                                     -------------

Hoefer & Arnett            A.G. Edwards                 Shapiro Buchman Provine
Dave Bonacorso             Stockton, CA  95207          Patton LLP
353 Sacramento Street      Rob Thompson                 John Carr
San Francisco, CA  94111   209-957-8109                 1333 N. California Blvd.
                                                        Suite 350
                                                        Walnut Creek, CA 94596

Wedbush Morgan Securities           Monroe Securities
Joey Warmenhoven                    800/766-5560
1300 S.W. Fifth Avenue
Suite 2000
Portland, OR  972001
503/471-1898
www.wedbush.com
---------------
<TABLE>
<CAPTION>

<S>                        <C>                            <C>
First Security Van Kasper  Shareholder Relations           Certified Public Accountants
San Francisco, CA          ---------------------           ----------------------------
Stephen L. Eddy
800/652-1747 Ext. 727      Requests for a copy of Pacific  Perry-Smith LLP
                           State Bancorp's Form 10-K       400 Capitol Mall, Suite 1200
                           filed with the Securities and   Sacramento, CA  95814
                           Exchange Commission or
                           other shareholder information
                           should be directed to:
                                    Steven A. Rosso
Transfer Agent                      President/CEO                      Corporate Offices
--------------                      Pacific State Bank                 -----------------
Mellon Investor Services LLC        P.O. Box 1649                      1889 West March Lane
P.O. Box 3315                       Stockton, CA  95201-1649           Stockton, CA 95207
South Hackensack, NJ 07606


Customer Service           Web Address                                 Trading Symbol: PSBC
877/841-0110               www.pacificstatebank.com
                           ------------------------

TeleWave Banking           Member F.D.I.C.                    Equal Housing Lender
877/487-2265
</TABLE>
<PAGE>
Dear Shareholders, Customers and Friends:

2002 was such an active and successful year for Pacific State Bank and Pacific
State Bancorp it truly is a joy to present our organization's annual report. You
may have noticed something different in our report this year, in that we are now
Pacific State Bancorp. The approval and formation of our new holding company was
just one of many special events that marked 2002 as a significant year in the
history of Pacific State Bank. Reflecting on 2002 chronologically our first
quarter began the year well with the purchase and assimilation of the California
Bank and Trust Stockton branch's assets, customers and employees. At the close
of the CB & T Stockton Branch purchase Pacific State Bank was $25,000,000
greater in total assets and several hundred customers stronger. The intra-market
acquisition proved to be a key catalyst in this year of record activity, growth,
and earnings.

The second quarter was just as busy as the first quarter with the completion of
15th Annual Meeting of Pacific State Bank on May 9th. At the annual meeting the
shareholders approved the formation of Pacific State Bancorp. Later in the
quarter the new "Holding Company" purchased $5,000,000 of Trust Preferred
Securities increasing our tier one capital to aid in further asset growth.

The third quarter was spent improving the physical plant of our organization;
with the completion of March Lane branch remodel and beginning of the Modesto
branch remodel. March Lane office looks wonderful and continues to serve the
bank's ever-growing Stockton customer base.

Much like the previous three quarters in 2002 the fourth quarter was truly wild
and woolly; with the re-occupancy of the Modesto Branch and the completion of
the construction of our branch in Groveland. In the fourth quarter the bank grew
by $21,648,000 in total assets; as well net profits for the quarter increased by
$500,000 and with holding company adjustments Pacific State Bancorp posted
earning of $327,000. As well Pacific State Bank posted historic year-end growth
in assets and earnings at $180,140,000 in total assets and recording net income
of $1,162,000. The total assets of the holding company increased over 2001 by
more than 48%, with net income for the bank increasing nearly 29% for the same
period. After adjusting for the holding company expenses and administration net
income still increased by 12% over 2001. The achievements attained in 2002 by
Pacific State Bank and Bancorp were most remarkable given the level of growth,
bank wide activity and a shrinking net interest margin.

The management of Pacific State Bank and Pacific State Bancorp are looking for
more of the same type of strong financial performance in 2003. We are also
continuing the remodeling program for several of the offices and the new
construction of the Angels Camp branch; we are planning to open sometime in the
third quarter of this year. We encourage you to visit our web site at
pacificstatebank.com and review the new exciting developments in both technology
and finance that are occurring with your bank.


Sincerely



Steven A. Rosso                                      Harold Hand, M.D.
President and Chief Executive Officer                Chairman of the Board
<PAGE>

                      SELECTED CONSOLIDATED FINANCIAL DATA

         The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's audited financial statements and notes thereto,
included elsewhere in this report.


<TABLE>
<CAPTION>
(dollars in thousands, except share data)                      Year Ended December 31,
                                                               -----------------------

                                               2002         2001         2000         1999         1998
                                            ---------    ---------    ---------    ---------    ---------

<S>                                         <C>          <C>          <C>          <C>          <C>
Statements of Income:
  Total Interest Income                     $   9,232    $   9,195    $   9,720    $   7,586    $   6,428
  Net Interest Income                           6,289        5,614        5,735        4,693        4,127
  Provision for Loan Losses                       286          383          300          330          228
  Total Other Income                            1,635        1,259          748        1,180          762
  Net Income                                    1,163        1,036        1,009          743          476

Balance Sheets:
  Total Assets                                180,140      121,295      113,809      104,264       81,557
  Total Loans                                 135,272       98,280       83,644       71,853       50,915
  Allowance for Loan Losses (ALLL)              1,306        1,172        1,001          796          568
  Total Deposits                              158,140      111,104      104,747       96,586       75,184
  Shareholders' Equity                      $  11,320    $   9,378    $   8,047    $   6,165    $   5,783

Performance Ratios:
  Return on Average Assets                        .77%         .87%         .92%         .80%         .64%
  Return on Average Equity                      11.27%       12.04%       13.93%       12.02%        8.88%
  Average Equity to Average Assets               6.80%        7.24%        6.57%        6.64%        7.16%
  Tier 1 Risk-Based Capital                      9.40%        9.15%        9.06%        8.40%        9.10%
  Total Risk-Based Capital                      11.40%       10.29%       10.20%        9.40%       10.00%
  Net Interest Margin                            4.63%        5.15%        5.66%        5.57%        6.23%
  Earning Assets to Total Assets                89.48%       90.98%       90.80%       90.70%       86.10%
  Nonperforming Assets to Total Assets            .48%         .63%         .79%         .34%        1.25%
  ALLL to Total Loans                             .97%        1.19%        1.20%        1.10%        1.10%
  Nonperforming Loans to ALLL                   15.54%       65.41%       74.33%        7.91%       15.85%

Share Data (Common Shares Outstanding)        825,687      759,694      731,299      656,523      643,242
  Book Value Per Share                      $   13.71    $   12.34    $   11.00    $    9.39    $    8.99
  Basic Earnings Per Share                  $    1.44    $    1.40    $    1.41    $    1.14    $    0.76
  Diluted Earnings Per Share                $    1.37    $    1.32    $    1.35    $    1.08    $    0.69
</TABLE>

                                        1
<PAGE>

                          INDEPENDENT AUDITOR'S REPORT
                          ----------------------------



The Shareholders and
  Board of Directors
Pacific State Bancorp
  and Subsidiaries

         We have audited the accompanying consolidated balance sheet of Pacific
State Bancorp and subsidiaries as of December 31, 2002 and 2001 and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 2002.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Pacific State Bancorp and subsidiaries as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.


                                     /s/ Perry-Smith LLP


Sacramento, California
February 20, 2003

                                        2
<PAGE>

                        PACIFIC STATE BANCORP AND SUBSIDIARIES

                              CONSOLIDATED BALANCE SHEET

                              December 31, 2002 and 2001


<TABLE>
<CAPTION>
                                                               2002            2001
                                                          -------------   -------------

                        ASSETS

<S>                                                       <C>             <C>
Cash and due from banks                                   $  18,465,668   $   5,439,720
Federal funds sold                                            5,000,000       1,386,000
Investment securities (market value of $12,764,300 in
  2002 and $10,789,400 in 2001) (Notes 3 and 7)              12,767,400      10,788,600
Loans, less allowance for loan losses of $1,306,309
  in 2002 and $1,171,608 in 2001 (Notes 4, 7, 9 and 13)     133,965,914      97,108,704
Other real estate                                                48,704         181,648
Bank premises and equipment, net (Note 5)                     6,429,899       4,620,147
Accrued interest receivable and other assets (Note 12)        3,462,899       1,770,231
                                                          -------------   -------------

                                                          $ 180,140,484   $ 121,295,050
                                                          =============   =============

                   LIABILITIES AND
                SHAREHOLDERS' EQUITY

Deposits:
  Non-interest bearing                                    $  30,697,547   $  21,205,315
  Interest bearing (Note 6)                                 127,442,460      89,898,323
                                                          -------------   -------------

         Total deposits                                     158,140,007     111,103,638

Short-term borrowings (Note 7)                                1,000,000
Long-term debt (Note 7)                                       4,000,000
Mandatorily redeemable cumulative trust preferred
  securities of subsidiary grantor trust (Note 8)             5,000,000
Accrued interest payable and other liabilities                  680,615         813,473
                                                          -------------   -------------

         Total liabilities                                  168,820,622     111,917,111
                                                          -------------   -------------

Commitments and contingencies (Note 9)

Shareholders' equity (Note 10):
  Preferred stock - no par value; 2,000,000 shares
    authorized; none issued and outstanding                          --              --
  Common stock - no par value; 12,000,000 shares
    authorized; issued and outstanding - 825,687
    shares in 2002 and 759,694 shares in 2001                 6,915,534       6,192,188
  Retained earnings                                           4,404,078       3,241,458
  Accumulated other comprehensive income (loss)
    (Notes 3 and 15)                                                250         (55,707)
                                                          -------------   -------------

         Total shareholders' equity                          11,319,862       9,377,939
                                                          -------------   -------------

                                                          $ 180,140,484   $ 121,295,050
                                                          =============   =============
</TABLE>


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

                                        3
<PAGE>

                      PACIFIC STATE BANCORP AND SUBSIDIARIES

                         CONSOLIDATED STATEMENT OF INCOME

               For the Years Ended December 31, 2002, 2001 and 2000


<TABLE>
<CAPTION>
                                                  2002         2001         2000
                                               ----------   ----------   ----------
<S>                                            <C>          <C>          <C>
Interest income:
  Interest and fees on loans                   $8,508,163   $8,167,597   $8,244,959
  Interest on Federal funds sold                   64,423      219,034      605,026
  Interest on investment securities:
    Taxable                                       237,707      555,042      656,156
    Exempt from Federal income taxes              421,565      253,067      213,866
                                               ----------   ----------   ----------

         Total interest income                  9,231,858    9,194,740    9,720,007
                                               ----------   ----------   ----------

Interest expense:
  Interest on deposits (Note 6)                 2,795,719    3,580,965    3,977,550
  Interest on borrowings (Note 7)                  10,357          182        7,290
  Interest on mandatorily redeemable trust
    preferred securities (Note 8)                 137,129
                                               ----------   ----------   ----------

         Total interest expense                 2,943,205    3,581,147    3,984,840
                                               ----------   ----------   ----------

         Net interest income                    6,288,653    5,613,593    5,735,167

Provision for loan losses (Note 4)                285,500      382,500      300,000
                                               ----------   ----------   ----------

         Net interest income after provision
           for loan losses                      6,003,153    5,231,093    5,435,167
                                               ----------   ----------   ----------

Non-interest income:
  Service charges                                 531,456      403,154      346,795
  Net gain on sale of investments (Note 3)         28,957       69,067
  Gain on sale of loans                           583,741      427,520      151,661
  Gain on sale of branch (Note 17)                                           20,002
  Other                                           491,314      359,713      229,460
                                               ----------   ----------   ----------

         Total non-interest income              1,635,468    1,259,454      747,918
                                               ----------   ----------   ----------

Other expenses:
  Salaries and employee benefits (Notes 4
    and 14)                                     2,600,516    2,217,034    2,255,736
  Occupancy (Notes 5 and 9)                       542,859      527,781      478,809
  Furniture and equipment (Notes 5 and 9)         567,404      578,206      463,413
  Other (Note 11)                               2,135,222    1,611,546    1,421,945
                                               ----------   ----------   ----------

         Total other expenses                   5,846,001    4,934,567    4,619,903
                                               ----------   ----------   ----------

         Income before income taxes             1,792,620    1,555,980    1,563,182

Income taxes (Note 12)                            630,000      520,000      554,500
                                               ----------   ----------   ----------

         Net income                            $1,162,620   $1,035,980   $1,008,682
                                               ==========   ==========   ==========

Basic earnings per share (Note 10)             $     1.44   $     1.40   $     1.41
                                               ==========   ==========   ==========

Diluted earnings per share (Note 10)           $     1.37   $     1.32   $     1.35
                                               ==========   ==========   ==========
</TABLE>


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

                                        4
<PAGE>
<TABLE>
<CAPTION>
                                    PACIFIC STATE BANCORP AND SUBSIDIARIES

                           CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

                             For the Years Ended December 31, 2002, 2001 and 2000


                                                                                    Accumulated
                                                Common Stock                           Other
                                          -------------------------                   Compre-
                                                                        Retained      hensive     Shareholders'
                                             Shares        Amount       Earnings   (Loss) Income     Equity
                                          -----------   -----------   -----------   -----------   -----------

<S>                                           <C>       <C>           <C>           <C>           <C>
Balance, January 1, 2000                      656,523   $ 5,400,294   $ 1,196,796   $  (432,249)  $ 6,164,841

Net income                                                              1,008,682                   1,008,682
Unrealized gains on available-for-sale
  investment securities                                                                 318,202       318,202
Stock options exercised and related tax
  benefit (Note 10)                             8,276        56,293                                    56,293
Issuance of common stock (Note 10)             66,500       498,750                                   498,750
                                          -----------   -----------   -----------   -----------   -----------

Balance, December 31, 2000                    731,299     5,955,337     2,205,478      (114,047)    8,046,768

Net income                                                              1,035,980                   1,035,980
Unrealized gains on available-for-sale
  investment securities                                                                  58,340        58,340
Stock options exercised and related tax
  benefit (Note 10)                            28,395       236,851                                   236,851
                                          -----------   -----------   -----------   -----------   -----------

Balance, December 31, 2001                    759,694     6,192,188     3,241,458       (55,707)    9,377,939

Net income                                                              1,162,620                   1,162,620
Unrealized gains on available-for-sale
  investment securities (Note 3)                                                         55,957        55,957
Stock options exercised and related tax
  benefit (Note 10)                            28,993       242,346                                   242,346
Issuance of common stock (Note 17)             37,000       481,000                                   481,000
                                          -----------   -----------   -----------   -----------   -----------

Balance, December 31, 2002                    825,687   $ 6,915,534   $ 4,404,078   $       250   $11,319,862
                                          ===========   ===========   ===========   ===========   ===========
</TABLE>


<TABLE>
<CAPTION>
                                                                          2002          2001          2000
                                                                      -----------   -----------   -----------

<S>                                                                   <C>           <C>           <C>
Comprehensive income (Note 15):
  Net income                                                          $ 1,162,620   $ 1,035,980   $ 1,008,682
                                                                      -----------   -----------   -----------
  Other comprehensive income:
    Unrealized holding gains arising during the
      year, net of tax                                                     74,634        99,780       318,202
    Less: reclassification adjustment for gains included
      in net income, net of tax                                            18,677        41,440
                                                                      -----------   -----------   -----------

                                                                           55,957        58,340       318,202
                                                                      -----------   -----------   -----------

        Total comprehensive income                                    $ 1,218,577   $ 1,094,320   $ 1,326,884
                                                                      ===========   ===========   ===========
</TABLE>



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

                                        5
<PAGE>

                            PACIFIC STATE BANCORP AND SUBSIDIARIES

                             CONSOLIDATED STATEMENT OF CASH FLOWS

                     For the Years Ended December 31, 2002, 2001 and 2000


<TABLE>
<CAPTION>
                                                      2002            2001            2000
                                                  ------------    ------------    ------------

<S>                                               <C>             <C>             <C>
Cash flows from operating activities:
  Net income                                      $  1,162,620    $  1,035,980    $  1,008,682
  Adjustments to reconcile net income to net
    cash provided by operating activities:
      Provision for loan losses                        285,500         382,500         300,000
      Deferred loan origination fees and costs,
        net                                             52,210        (108,257)       (176,426)
      Depreciation and amortization                    738,104         501,661         350,028
      Net gain on available-for-sale investment
        securities                                     (28,957)        (69,067)
      Net gain on sale of equipment                     (3,042)                         (3,116)
      Net decrease in loans held for sale                                              220,500
      Provision for losses on other real estate                          1,578          10,086
      (Increase) decrease in accrued interest
        receivable and other assets                   (325,971)        143,375        (524,801)
      (Decrease) increase in accrued interest
        payable and other liabilities                 (155,614)       (201,674)         38,730
      Deferred tax benefit                            (191,000)        (81,000)       (116,000)
                                                  ------------    ------------    ------------

          Net cash provided by operating
            activities                               1,533,850       1,605,096       1,107,683
                                                  ------------    ------------    ------------

Cash flows from investing activities:
  Proceeds from matured and called available-
    for-sale investment securities                  16,110,967       7,299,300      24,000,000
  Proceeds from sale of available-for-sale
    investment securities                            1,977,707       3,551,478
  Purchases of available-for-sale investment
    securities                                     (20,757,409)     (4,957,587)    (21,798,720)
  Proceeds from principal repayments from
    available-for-sale government-guaranteed
    mortgage-backed securities                         544,054         306,620         406,400
  Proceeds from principal repayments from
    held-to-maturity government-guaranteed
    mortgage-backed securities                          60,954          71,025         149,446
  Net increase in loans                            (29,200,549)    (14,882,274)    (11,183,301)
  Proceeds from sale of other real estate              140,867         109,255         144,938
  Capitalized other real estate costs                                                  (13,200)
  Proceeds from sale of bank premises and
    equipment                                           17,000                           9,700
  Purchases of bank premises and equipment          (2,294,647)     (1,563,537)       (484,962)
  Net cash received in branch acquisition
    (Note 17)                                       13,721,772
                                                  ------------    ------------    ------------

          Net cash used in investing activities    (19,679,284)    (10,065,720)     (8,769,699)
                                                  ------------    ------------    ------------
</TABLE>


                                   (Continued)

                                        6
<PAGE>

                           PACIFIC STATE BANCORP AND SUBSIDIARIES

                            CONSOLIDATED STATEMENT OF CASH FLOWS
                                         (Continued)
                    For the Years Ended December 31, 2002, 2001 and 2000


<TABLE>
<CAPTION>
                                                        2002          2001           2000
                                                    -----------   -----------    -----------

<S>                                                 <C>           <C>            <C>
Cash flows from financing activities:
  Net increase in demand, interest-bearing and
    savings deposits                                $13,037,246   $ 8,325,687    $ 5,337,995
  Net increase (decrease) in time deposits           11,577,826    (1,969,354)     6,930,907
  Sale of Columbia branch deposits and facility
    (Note 17)                                                                     (4,015,281)
  Proceeds from exercise of stock options               170,310       147,113         38,794
  Proceeds from the issuance of mandatorily
    redeemable trust preferred securities             5,000,000
  Proceeds from the issuance of common stock                                         498,750
  Net increase (decrease) in short-term
    borrowings                                        1,000,000                     (500,000)
  Proceeds from issuance of long-term debt            4,000,000
                                                    -----------   -----------    -----------

          Net cash provided by financing
            activities                               34,785,382     6,503,446      8,291,165
                                                    -----------   -----------    -----------

          Increase (decrease) in cash and cash
            equivalents                              16,639,948    (1,957,178)       629,149

Cash and cash equivalents at beginning of year        6,825,720     8,782,898      8,153,749
                                                    -----------   -----------    -----------

Cash and cash equivalents at end of year            $23,465,668   $ 6,825,720    $ 8,782,898
                                                    ===========   ===========    ===========

Supplemental disclosure of cash flow information:

  Cash paid during the year for:
    Interest expense                                $ 3,278,121   $ 3,652,210    $ 3,595,256
    Income taxes                                    $   512,000   $   570,109    $   983,000

Non-cash investing activities:
  Real estate acquired through foreclosure          $    29,934   $   141,950
  Net change in unrealized gain on available-
    for-sale investment securities                  $    86,807   $    90,431    $   555,856
  Common stock issued in connection with
    branch acquisition                              $   481,000
</TABLE>


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

                                        7
<PAGE>

                     PACIFIC STATE BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.       NATURE OF OPERATIONS

         On June 24, 2002, Pacific State Bancorp ("Bancorp") commenced
         operations as a bank holding company by acquiring all of the
         outstanding shares of Pacific State Bank (the "Bank") in a one bank
         holding company reorganization. The new corporate structure gives
         Bancorp and the Bank greater flexibility in terms of operation,
         expansion, and diversification. The reorganization was approved by the
         Bank's shareholders on May 9, 2002, and all required regulatory
         approvals or non-disapprovals with respect to the reorganization were
         obtained.

         Pacific State Bancorp's subsidiaries include the Bank and Pacific State
         Statutory Trust I, a Delaware statutory business trust which was formed
         in June 2002 for the exclusive purpose of issuing and selling trust
         preferred securities.

         The Bank commenced operations in 1987 and is a California
         state-chartered member bank of the Federal Reserve System. The Bank
         operates seven branches in California, including two branches in
         Stockton and branches in Modesto, Groveland, Arnold, Angels Camp and
         Tracy. The Bank's primary source of revenue is providing loans to
         customers who are predominately small and middle-market businesses and
         individuals.


2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         The accounting and reporting policies of the Pacific State Bancorp and
         its subsidiaries (collectively, the "Company") conform with accounting
         principles generally accepted in the United States and prevailing
         practice within the banking industry. The more significant of these
         policies applied in the preparation of the accompanying consolidated
         financial statements are discussed below.

         Principles of Consolidation
         ---------------------------

         The accompanying consolidated financial statements include the accounts
         of Bancorp and its wholly-owned subsidiaries, Pacific State Bank and
         Pacific State Statutory Trust I. Significant intercompany transactions
         and balances have been eliminated in consolidation.

         Use of Estimates
         ----------------

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

         Reclassifications
         -----------------

         Certain reclassifications have been made to prior years' balances to
         conform to classifications used in 2002.

                                        8
<PAGE>

                     PACIFIC STATE BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         Cash and Cash Equivalents
         -------------------------

         For purposes of the statement of cash flows, cash and cash equivalents
         include cash and due from banks and Federal funds sold. Generally,
         Federal funds are sold for one-day periods.

         Investment Securities
         ---------------------

         Investments are classified into the following categories:

                  o        Available-for-sale securities, reported at fair
                           value, with unrealized gains and losses excluded from
                           earnings and reported, net of taxes, as accumulated
                           other comprehensive income or loss within
                           shareholders' equity.

                  o        Held-to-maturity securities, which management has the
                           positive intent and ability to hold to maturity,
                           reported at amortized cost, adjusted for the
                           accretion of discounts and amortization of premiums.

         Management determines the appropriate classification of its investments
         at the time of purchase and may only change the classification in
         certain limited circumstances. All transfers between categories are
         accounted for at fair value.

         Gains or losses on the sale of securities are computed on the specific
         identification method. Interest earned on investment securities is
         reported in interest income, net of applicable adjustments for
         accretion of discounts and amortization of premiums. In addition,
         unrealized losses that are other than temporary are recognized in
         earnings for all investments.

         As a member of the Federal Reserve System, the Federal Home Loan Bank
         System and the Farmer Mac Home Administration System, the Bank is
         required to maintain an investment in restricted capital stock of each
         system. These investments are carried at cost as investment securities.

         Loans
         -----

         Loans are stated at principal balances outstanding, except for loans
         transferred from loans held for sale which are carried at the lower of
         principal balance or market value at the date of transfer, adjusted for
         accretion of discounts. Interest is accrued daily based upon
         outstanding loan balances. However, when, in the opinion of management,
         loans are considered to be impaired and the future collectibility of
         interest and principal is in serious doubt, loans are placed on
         nonaccrual status and the accrual of interest income is suspended. Any
         interest accrued but unpaid is charged against income. Payments
         received are applied to reduce principal to the extent necessary to
         ensure collection. Subsequent payments on these loans, or payments
         received on nonaccrual loans for which the ultimate collectibility of
         principal is not in doubt, are applied first to earned but unpaid
         interest and then to principal.

         An impaired loan is measured based on the present value of expected
         future cash flows discounted at the loan's effective interest rate or,
         as a practical matter, at the loan's observable market price or the
         fair value of collateral if the loan is collateral dependent. A loan is
         considered impaired when, based on current information and events, it
         is probable that the Bank will be unable to collect all amounts due
         (including both principal and interest) in accordance with the
         contractual terms of the loan agreement.

         Loan origination fees, commitment fees, direct loan origination costs
         and purchase premiums and discounts on loans are deferred and
         recognized as an adjustment of yield, to be amortized to interest
         income over the contractual term of the loan. The unamortized balance
         of deferred fees and costs is reported as a component of net loans.

                                        9
<PAGE>

                     PACIFIC STATE BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         Loan Sales and Servicing
         ------------------------

         Government Guaranteed Loans

         Included in the portfolio are loans which are 75% to 90% guaranteed by
         the Small Business Administration (SBA), Business and Industrial,
         Farmer Mac and California Capital. The guaranteed portion of these
         loans may be sold to a third party, with the Bank retaining the
         unguaranteed portion. The Bank generally receives a premium in excess
         of the adjusted carrying value of the loan at the time of sale. The
         Bank may be required to refund a portion of the sales premium if the
         borrower defaults or prepays within ninety days of the settlement date.
         At December 31, 2002, there were no premiums subject to these recourse
         provisions.

         The Bank's investment in the loan is allocated between the retained
         portion of the loan, the servicing asset, the interest-only (IO) strip,
         and the sold portion of the loan based on their relative fair values on
         the date the loan is sold. The gain on the sold portion of the loan is
         recognized as income at the time of sale. The carrying value of the
         retained portion of the loan is discounted based on the estimated value
         of a comparable non-guaranteed loan. The servicing asset is amortized
         over the estimated life of the related loan. Assets (accounted for as
         interest-only (IO) strips) are recorded at the fair value of the
         difference between note rates and rates paid to purchasers (the
         interest spread) and contractual servicing fees, if applicable. The IO
         strip asset is not significant at December 31, 2002 and 2001.
         Significant future prepayments of these loans will result in the
         recognition of additional amortization of related servicing assets and
         an adjustment to the carrying value of related IO strips.

         The Bank serviced government-guaranteed loans for others totaling
         $25,697,000 and $20,175,000 as of December 31, 2002 and 2001
         respectively.

         Servicing Rights

         Servicing rights acquired through 1) a purchase or 2) the origination
         of loans which are sold or securitized with servicing rights retained
         are recognized as separate assets or liabilities. Servicing assets or
         liabilities are recorded at the difference between the contractual
         servicing fees and adequate compensation for performing the servicing,
         and are subsequently amortized in proportion to and over the period of
         the related net servicing income or expense. Servicing assets are
         periodically evaluated for impairment. Servicing rights were not
         considered material for separate disclosure purposes.

         Allowance for Loan Losses
         -------------------------

         The allowance for loan losses is maintained to provide for losses
         related to impaired loans and other losses that can be expected to
         occur in the normal course of business. The determination of the
         allowance is based on estimates made by management, to include
         consideration of the character of the loan portfolio, specifically
         identified problem loans, potential losses inherent in the portfolio
         taken as a whole and economic conditions in the Bank's service area.

         Loans determined to be impaired or classified are individually
         evaluated by management for specific risk of loss. In addition, reserve
         factors are assigned to currently performing loans based on
         management's assessment of the following for each identified loan type:
         (1) inherent credit risk, (2) historical losses and, (3) where the Bank
         has not experienced losses, the loss experience of peer banks.
         Management also computes specific and expected loss reserves for loan
         commitments. These estimates are particularly susceptible to changes in
         the economic environment and market conditions.

                                       10
<PAGE>

                     PACIFIC STATE BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         Allowance for Loan Losses (Continued)
         -------------------------

         The Bank's Loan Committee reviews the adequacy of the allowance for
         loan losses at least quarterly, to include consideration of the
         relative risks in the portfolio and current economic conditions. The
         allowance is adjusted based on that review if, in the judgment of the
         Loan Committee and management, changes are warranted.

         This allowance is established through a provision for loan losses which
         is charged to expense. Additions to the allowance are expected to
         maintain the adequacy of the total allowance after net charge-offs and
         loan growth. The allowance for loan losses at December 31, 2002 and
         2001, respectively, reflects management's estimate of possible losses
         in the portfolio.

         Other Real Estate
         -----------------

         Other real estate includes real estate acquired in full or partial
         settlement of loan obligations. When property is acquired, any excess
         of the Bank's recorded investment in the loan balance and accrued
         interest income over the estimated fair market value of the property,
         net of estimated selling costs, is charged against the allowance for
         loan losses. A valuation allowance for losses on other real estate is
         maintained to provide for temporary declines in value. The allowance is
         established through a provision for losses on other real estate which
         is included in other expenses. Subsequent gains or losses on sales or
         writedowns resulting from permanent impairments are recorded in other
         income or expenses as incurred.

         Bank Premises and Equipment
         ---------------------------

         Bank premises and equipment are carried at cost. Depreciation is
         determined using the straight-line method over the estimated useful
         lives of the related assets. The useful lives of Bank premises are
         estimated to be twenty to twenty-seven years. The useful lives of
         furniture, fixtures and equipment are estimated to be two to seven
         years. Leasehold improvements are amortized over the life of the asset
         or the life of the related lease, whichever is shorter. When assets are
         sold or otherwise disposed of, the cost and related accumulated
         depreciation and amortization are removed from the accounts, and any
         resulting gain or loss is recognized in income for the period. The cost
         of maintenance and repairs is charged to expense as incurred.

         Intangible Assets
         -----------------

         The Company adopted SFAS No. 141, Business Combinations, and SFAS No.
         142, Goodwill and Other Intangible Assets, on January 1, 2002. The
         Company recorded the acquisition in 2002 of the assets and liabilities
         of the Stockton branch of California Bank & Trust (see Note 17) in
         accordance with SFAS No. 141 and SFAS No. 142 resulting in recognition
         of a core deposit intangible asset of $448,426 and goodwill of
         $717,919. The initial valuation of the core deposit intangible is based
         on the estimated fair value of deposits acquired and is amortized on a
         straight-line basis over a period of ten years. Goodwill is not
         amortized, but is measured annually for impairment. At December 31,
         2002, no impairment of goodwill has been recognized in the Company's
         consolidated financial statements.

         Income Taxes
         ------------

         Bancorp files its income taxes on a consolidated basis with its
         subsidiaries. The allocation of income tax expense (benefit) represents
         each entity's proportionate share of the consolidated provision for
         income taxes.

                                       11
<PAGE>

                     PACIFIC STATE BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         Income Taxes (Continued)
         ------------

         Deferred tax assets and liabilities are recognized for the tax
         consequences of temporary differences between the financial statement
         and tax bases of existing assets and liabilities. Deferred tax assets
         and liabilities are adjusted for the effects of changes in tax laws and
         rates on the date of enactment. On the balance sheet, net deferred tax
         assets are included in accrued interest receivable and other assets.

         Earnings Per Share
         ------------------

         Basic earnings per share (EPS), which excludes dilution, is computed by
         dividing income available to common shareholders by the
         weighted-average number of common shares outstanding for the period.
         Diluted EPS reflects the potential dilution that could occur if
         securities or other contracts to issue common stock, such as stock
         options, result in the issuance of common stock which shares in the
         earnings of the Company. The treasury stock method has been applied to
         determine the dilutive effect of stock options in computing diluted
         EPS.

         Stock-Based Compensation
         ------------------------

         At December 31, 2002, the Company had two stock-based employee
         compensation plans, the Pacific State Bancorp 1997 Stock Option Plan
         and the Pacific State Bancorp 1987 Stock Option Plan (the "Plans"),
         which are described more fully in Note 10. The Company accounts for
         these plans under the recognition and measurement principles of APB
         Opinion No. 25, Accounting for Stock Issued to Employees, and related
         Interpretations. No stock-based employee compensation cost is reflected
         in net income, as all options granted under these plans had an exercise
         price equal to the market value of the underlying common stock on the
         date of grant.

         Pro forma adjustments to the Company's consolidated net earnings and
         earnings per share are disclosed during the years in which the options
         become vested. The following table illustrates the effect on net income
         and earnings per share if the Company had applied the fair value
         recognition provisions of FASB Statement No. 123, Accounting for
         Stock-Based Compensation, to stock-based employee compensation.

<TABLE>
<CAPTION>
                                                             2002          2001          2000
                                                         -----------   -----------   -----------

<S>                                                      <C>           <C>           <C>
         Net income, as reported                         $ 1,162,620   $ 1,035,980   $ 1,008,682
         Deduct: Total stock-based employee com-
           pensation expense determined under
           the fair value based method for all awards,
           net of related tax effects                         29,900        28,600        12,400
                                                         -----------   -----------   -----------

         Pro forma net income                            $ 1,132,720   $ 1,007,380   $   996,282
                                                         ===========   ===========   ===========

         Basic earnings per share - as reported          $      1.44   $      1.40   $      1.41
         Basic earnings per share - pro forma            $      1.40   $      1.36   $      1.39

         Diluted earnings per share - as reported        $      1.37   $      1.32   $      1.35
         Diluted earnings per share - pro forma          $      1.35   $      1.29   $      1.35

         Weighted average fair value of options
           granted during the year                       $      3.66   $      2.67   $      3.04
</TABLE>

                                       12
<PAGE>

                     PACIFIC STATE BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         Stock-Based Compensation (Continued)
         ------------------------

         The fair value of each option is estimated on the date of grant using
         an option-pricing model with the following assumptions:

<TABLE>
<CAPTION>
                                         2002               2001               2000
                                   ----------------   ----------------   ----------------

<S>                                <C>                         <C>       <C>
         Dividend yield                         N/A                N/A                .7%
         Expected volatility       12.45% to 12.80%             14.90%   19.12% to 19.65%
         Risk-free interest rate     4.87% to 5.39%              5.35%     6.04% to 6.75%
         Expected option life               5 years            5 years            5 years
</TABLE>

         Impact of New Financial Accounting Standards (see comments in MD&A)
         -------------------------------------------------------------------

         In October 2002, the Financial Accounting Standards Board (FASB) issued
         Statement of Financial Accounting Standards (SFAS) No. 147,
         Acquisitions of Certain Financial Institutions. This statement, which
         addresses financial accounting and reporting matters for the
         acquisition of all or part of a financial institution, applies to all
         such transactions except those between two or more mutual enterprises.
         This Statement removes acquisitions of financial institutions, other
         than transactions between two or more mutual enterprises, from the
         scope of SFAS No. 72, Accounting for Certain Acquisitions of Banking or
         Thrift Institutions, and related interpretations, and instead requires
         a financial institution to apply SFAS No. 144 and evaluate long-term
         customer relationship intangible assets (core deposit intangibles) for
         impairment. Under SFAS No. 72, a financial institution may have
         recorded an unidentifiable intangible asset arising from a business
         combination. If certain criteria in SFAS No. 147 are met, the amount of
         the unidentifiable intangible asset will be reclassified to goodwill
         upon adoption of SFAS No. 147 and any amortization amounts that were
         incurred after the adoption of SFAS No. 142 must be reversed.
         Reclassified goodwill would then be measured for impairment under the
         provisions of SFAS No. 142. Provisions of SFAS No. 147 are applicable
         on or after October 1, 2002. In management's opinion, the adoption of
         this Statement did not have a material effect on the Company's
         consolidated financial position or results of operations.

         In December 2002, the FASB issued SFAS No. 148, Accounting for
         Stock-Based Compensation--Transition and Disclosure--an amendment of
         SFAS Statement No. 123. This Statement amends SFAS No. 123, Accounting
         for Stock-Based Compensation, to provide alternative methods of
         transition for a voluntary change to the fair value based method of
         accounting for stock-based employee compensation. In addition, this
         Statement amends the disclosure requirements of SFAS No. 123 to require
         prominent disclosures in both annual and interim financial statements
         about the method of accounting for stock-based employee compensation
         and the effect of the method used on reported results. The transition
         guidance and annual disclosure provisions of SFAS No. 148 are effective
         for fiscal years ending after December 15, 2002. The interim disclosure
         provisions are effective for financial reporting containing financial
         statements for interim periods beginning after December 15, 2002.
         Because the Company accounts for the compensation cost associated with
         its stock option plan under the intrinsic value method, the alternative
         methods of transition will not apply to the Company. The additional
         disclosure requirements of the Statement are included in these
         consolidated financial statements. In management's opinion, the
         adoption of this Statement did not have a material impact on the
         Company's consolidated financial position or results of operations.

                                       13
<PAGE>

                     PACIFIC STATE BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


3.       INVESTMENT SECURITIES

         The amortized cost and estimated market value of investment securities
         at December 31, 2002 and 2001 consisted of the following:

         Available-for-Sale:
         ------------------

<TABLE>
<CAPTION>
                                                               2002
                                   ------------------------------------------------------------
                                                       Gross           Gross        Estimated
                                    Amortized       Unrealized      Unrealized        Market
                                       Cost            Gains          Losses           Value
                                   ------------    ------------    ------------    ------------

<S>                                <C>             <C>             <C>             <C>
         U.S. Government
           agencies                $  2,521,098    $      6,133    $     (6,531)   $  2,520,700
         Obligations of states
           and political sub-
           divisions                  6,096,947          33,353         (94,200)      6,036,100
         Government guaranteed
           mortgage-backed
           securities                 2,025,449          45,964         (10,913)      2,060,500
         Corporate bonds              1,236,518          27,615          (1,033)      1,263,100
         Federal Reserve
           Bank stock                   335,100                                         335,100
         Federal Home Loan
           Bank stock                   250,000                                         250,000
         Farmer Mac Home
           Administration stock           9,800                                           9,800
                                   ------------    ------------    ------------    ------------

                                   $ 12,474,912    $    113,065    $   (112,677)   $ 12,475,300
                                   ============    ============    ============    ============
</TABLE>

         Net unrealized gains on available-for-sale investment securities
         totaling $388 were recorded, net of $138 in tax benefits, as
         accumulated other comprehensive income within shareholders' equity at
         December 31, 2002. Proceeds, gross realized gains and gross realized
         losses from the sale of available-for-sale investment securities for
         the year ended December 31, 2002 totaled $1,977,707, $31,765 and
         $(2,808), respectively.

<TABLE>
<CAPTION>
                                                               2001
                                   ------------------------------------------------------------
                                                       Gross           Gross        Estimated
                                    Amortized       Unrealized      Unrealized        Market
                                       Cost            Gains          Losses           Value
                                   ------------    ------------    ------------    ------------

<S>                                <C>             <C>             <C>             <C>
         U.S. Government
           agencies                $  3,616,277    $     56,148    $     (3,925)   $  3,668,500
         Obligations of states
           and political sub-
           divisions                  5,592,590          63,321        (220,011)      5,435,900
         Government guaranteed
           mortgage-backed
           securities                   626,928          18,834            (862)        644,900
         Corporate bonds                501,724             313            (237)        501,800
         Federal Reserve
           Bank stock                   177,600                                         177,600
         Farmer Mac Home
           Administration stock           3,100                                           3,100
                                   ------------    ------------    ------------    ------------

                                   $ 10,518,219    $    138,616    $   (225,035)   $ 10,431,800
                                   ============    ============    ============    ============
</TABLE>

                                       14
<PAGE>

                     PACIFIC STATE BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


3.       INVESTMENT SECURITIES (Continued)

         Available-for-Sale: (Continued)
         ------------------

         Net unrealized losses on available-for-sale investment securities
         totaling $86,419 were recorded, net of $30,712 in tax benefits, as
         accumulated other comprehensive loss within shareholders' equity at
         December 31, 2001. Proceeds, gross realized gains and gross realized
         losses from the sale of available-for-sale investment securities for
         the year ended December 31, 2001 totaled $3,551,478, $73,111 and
         $(4,044), respectively. There were no sales of available-for-sale
         investment securities for the year ended December 31, 2000.

         Held-to-Maturity:
         ----------------

<TABLE>
<CAPTION>
                                                               2002
                                   ------------------------------------------------------------
                                                       Gross           Gross        Estimated
                                    Amortized       Unrealized      Unrealized        Market
                                       Cost            Gains          Losses           Value
                                   ------------    ------------    ------------    ------------

<S>                                <C>             <C>             <C>             <C>
         Government guaranteed
           mortgage-backed
           securities              $    292,100    $      1,245    $     (4,345)   $    289,000
                                   ============    ============    ============    ============
</TABLE>



<TABLE>
<CAPTION>
                                                               2001
                                   ------------------------------------------------------------
                                                       Gross           Gross        Estimated
                                    Amortized       Unrealized      Unrealized        Market
                                       Cost            Gains          Losses           Value
                                   ------------    ------------    ------------    ------------

<S>                                <C>             <C>             <C>             <C>
         Government guaranteed
           mortgage-backed
           securities              $    356,800    $      2,534    $     (1,734)   $    357,600
                                   ============    ============    ============    ============
</TABLE>


         There were no sales or transfers of held-to-maturity investment
         securities during the years ended December 31, 2002, 2001 and 2000.

                                       15
<PAGE>

                     PACIFIC STATE BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


3.       INVESTMENT SECURITIES (Continued)

         The amortized cost and estimated market value of investment securities
         at December 31, 2002 by contractual maturity are shown below. Expected
         maturities will differ from contractual maturities because the issuers
         of the securities may have the right to call or prepay obligations with
         or without call or prepayment penalties.

<TABLE>
<CAPTION>
                                       Available-for-Sale           Held-to-Maturity
                                   -------------------------   -------------------------
                                                  Estimated                   Estimated
                                    Amortized       Market      Amortized       Market
                                       Cost         Value          Cost         Value
                                   -----------   -----------   -----------   -----------

<S>                                <C>           <C>           <C>           <C>
         Within one year           $ 3,819,310   $ 3,844,300
         After one year
           through five years        3,797,561     3,854,600
         After five years
           through ten years           205,000       209,600
         After ten years             3,575,527     3,492,100
                                   -----------   -----------   -----------   -----------

                                    11,397,398    11,400,600

         Investment securities
           not due at a single
           maturity date:
             Government guar-
               anteed mortgage-
               backed securities       482,614       479,800   $   292,100   $   289,000
             Federal Reserve
               Bank stock              335,100       335,100
             Federal Home Loan
               Bank stock              250,000       250,000
             Farmer Mac Home
               Administration
               stock                     9,800         9,800
                                   -----------   -----------   -----------   -----------

                                   $12,474,912   $12,475,300   $   292,100   $   289,000
                                   ===========   ===========   ===========   ===========
</TABLE>

         Investment securities with amortized costs totaling $4,071,719 and
         $5,520,059 and market values totaling $4,043,000 and $5,534,000 were
         pledged to secure treasury tax and loan accounts, public deposits and
         short-term borrowings at December 31, 2002 and 2001, respectively.

                                       16
<PAGE>

                     PACIFIC STATE BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


4.       LOANS

         Outstanding loans are summarized below:

                                                         December 31,
                                                ------------------------------

                                                     2002             2001
                                                -------------    -------------

         Commercial                             $  30,938,399       26,147,571
         Agricultural                               9,287,655        7,930,969
         Real estate - commercial mortgage         53,159,804       36,830,356
         Real estate - construction                33,887,183       23,561,128
         Installment                                7,734,199        3,493,095
                                                -------------    -------------

                                                  135,007,240       97,963,119

         Deferred loan origination costs, net         264,983          317,193
         Allowance for loan losses                 (1,306,309)      (1,171,608)
                                                -------------    -------------

                                                $ 133,965,914    $  97,108,704
                                                =============    =============

         Changes in the allowance for loan losses were as follows:

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                           -----------------------------------------

                                               2002           2001           2000
                                           -----------    -----------    -----------

<S>                                        <C>            <C>            <C>
         Balance, beginning of year        $ 1,171,608    $ 1,000,999    $   796,030
         Provision charged to operations       285,500        382,500        300,000
         Losses charged to allowance          (198,934)      (228,401)       (96,183)
         Recoveries                             48,135         16,510          1,152
                                           -----------    -----------    -----------

               Balance, end of year        $ 1,306,309    $ 1,171,608    $ 1,000,999
                                           ===========    ===========    ===========
</TABLE>

         The recorded investment in impaired loans totaled $199,000 and $585,000
         at December 31, 2002 and 2001, respectively. There were no valuation
         allowances for impaired loans as determined under SFAS No. 114 at
         December 31, 2002 and 2001. The average recorded investment in impaired
         loans for the years ended December 31, 2002, 2001 and 2000 was
         $293,000, $787,000 and $418,000, respectively. The Bank recognized
         $106,000 in interest income on these loans under the cash basis method
         during 2000. The Bank did not recognize interest income on impaired
         loans during 2002 and 2001.

         At December 31, 2002 and 2001, nonaccrual loans totaled $199,000 and
         $585,000, respectively. Interest foregone on nonaccrual loans totaled
         $71,582, $73,755 and $39,973 for the years ended December 31, 2002,
         2001 and 2000, respectively.

         Salaries and employee benefits totaling $554,824, $654,941 and $387,362
         have been deferred as loan origination costs for the years ended
         December 31, 2002, 2001 and 2000, respectively.

                                       17
<PAGE>

                     PACIFIC STATE BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


5.       BANK PREMISES AND EQUIPMENT

         Bank premises and equipment consisted of the following:

                                                           December 31,
                                                  -----------------------------

                                                      2002             2001
                                                  ------------     ------------

         Land                                     $  1,793,101     $  1,793,101
         Bank premises                               1,487,797        1,487,797
         Furniture, fixtures and equipment           3,560,604        3,026,275
         Leasehold improvements                        526,778          512,154
         Construction in progress                    2,023,133          321,516
                                                  ------------     ------------

                                                     9,391,413        7,140,843

               Less accumulated depreciation
                 and amortization                   (2,961,514)      (2,520,696)
                                                  ------------     ------------

                                                  $  6,429,899     $  4,620,147
                                                  ============     ============

         Depreciation and amortization included in occupancy, furniture and
         equipment expense totaled $470,937, $505,327 and $404,852 for the years
         ended December 31, 2002, 2001 and 2000, respectively.

6.       INTEREST-BEARING DEPOSITS

         Interest-bearing deposits consisted of the following:

                                                           December 31,
                                                  -----------------------------

                                                      2002             2001
                                                  ------------     ------------

         Savings                                  $  6,574,174     $  3,980,262
         Money market                               35,964,405       26,763,115
         NOW accounts                               15,640,384       11,245,505
         Time, $100,000 or more                     37,589,426       23,723,826
         Other time                                 31,674,071       24,185,615
                                                  ------------     ------------

                                                  $127,442,460     $ 89,898,323
                                                  ============     ============

         Aggregate annual maturities of time deposits are as follows:

                  Year Ending
                  December 31,
                  ------------

                      2003                        $ 64,510,238
                      2004                           4,077,955
                      2005                             613,524
                      2006                              28,000
                      2007                              33,780
                                                  ------------

                                                  $ 69,263,497
                                                  ============

                                       18
<PAGE>

                     PACIFIC STATE BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


6.       INTEREST-BEARING DEPOSITS (Continued)

         Interest expense recognized on interest-bearing deposits consisted of
         the following:

                                             Year Ended December 31,
                                   ------------------------------------------

                                       2002           2001           2000
                                   ------------   ------------   ------------

         Savings                   $     11,892   $     23,352   $     84,728
         Money market                   653,261        613,333        837,483
         NOW accounts                    44,372         65,619        140,510
         Time, $100,000 or more         883,141      1,100,273      1,071,334
         Other time                   1,203,053      1,778,388      1,843,495
                                   ------------   ------------   ------------

                                   $  2,795,719   $  3,580,965   $  3,977,550
                                   ============   ============   ============

7.       BORROWING ARRANGEMENTS

         The Bank has unsecured short-term borrowing arrangements totaling
         $5,000,000 with two of its correspondent banks. There were no
         borrowings outstanding under these arrangements at December 31, 2002
         and 2001.

         Additionally, the Bank has a borrowing arrangement with the Federal
         Reserve Bank secured by investment securities with amortized costs
         totaling $172,000 and estimated market values totaling $171,000. At
         December 31, 2002 and 2001, the Bank had no outstanding borrowings
         under this arrangement.

         During 2002, the Bank entered into a borrowing arrangement with the
         Federal Home Loan Bank of San Francisco which allowed the Bank to
         borrow on either a short-term or long-term basis up to approximately
         $5,398,000 as of December 31, 2002 based on specific percentages of the
         collateral pledged. Various residential mortgage loans totaling
         approximately $8,892,000 secure this borrowing arrangement. At December
         31, 2002, the Bank had $1,000,000 in short-term advances outstanding
         from the Federal Home Loan Bank with an interest rate of 1.55% and a
         maturity date of December 9, 2003. At December 31, 2002, the Bank had
         $4,000,000 in long-term advances outstanding from the Federal Home Loan
         Bank with an interest rate of 2.79% and a maturity date of December 9,
         2005.

                                       19
<PAGE>

                     PACIFIC STATE BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


8.       MANDATORILY REDEEMABLE CUMULATIVE TRUST PREFERRED SECURITIES OF
         SUBSIDIARY GRANTOR TRUST

         Pacific State Statutory Trust I is a Delaware business trust formed by
         the Company for the sole purpose of issuing trust preferred securities
         fully and unconditionally guaranteed by the Company. During the second
         quarter of 2002, Pacific State Statutory Trust I issued 5,000 Floating
         Rate Capital Trust Pass-Through Securities (Trust Preferred
         Securities), with a liquidation value of $1,000 per security, for gross
         proceeds of $5,000,000. The entire proceeds of the issuance were
         invested by Pacific State Statutory Trust I in $5,000,000 of Floating
         Rate Junior Subordinated Deferrable Interest Debentures (the
         "Subordinated Debentures") issued by the Company, with identical
         maturity, repricing and payment terms as the Trust Preferred Securities
         issued by the Trust. The Subordinated Debentures represent the sole
         assets of Pacific State Statutory Trust I. The Subordinated Debentures
         mature on December 8, 2031, bear an initial interest rate of 5.34%
         (based on 6-month London Interbank Offered Rate (LIBOR) plus 3.45%),
         with repricing and payments due semi-annually. The Subordinated
         Debentures are redeemable by the Company, subject to receipt by the
         Company of prior approval from the Federal Reserve Bank of San
         Francisco, on any June 26th or December 26th on or after June 26, 2007.
         The redemption price is par plus accrued and unpaid interest, except in
         the case of redemption under a special event which is defined in the
         Subordinated Debentures. The Trust Preferred Securities are subject to
         mandatory redemption to the extent of any early redemption of the
         Subordinated Debentures and upon maturity of the Subordinated
         Debentures on June 26, 2032.

         Holders of the Trust Preferred Securities are entitled to a cumulative
         cash distribution on the liquidation amount of $1,000 per security at
         an initial rate per annum of 5.34%. For each successive period
         beginning on June 26th of each year, the rate will be adjusted to equal
         the 6-month LIBOR plus 3.45%; provided, however, that prior to June 26,
         2007, such annual rate does not exceed 11.95%. The distributions on the
         Trust Preferred Securities are treated as interest expense in the
         consolidated statement of income. The Company has the option to defer
         payment of the distributions for a period of up to five years, as long
         as the Company is not in default on the payment of interest on the
         Subordinated Debentures. The Trust Preferred Securities issued in the
         offering were sold in private transactions pursuant to an exemption
         from registration under the Securities Act of 1933, as amended. The
         Company has guaranteed, on a subordinated basis, distributions and
         other payments due on the Trust Preferred Securities.

         The Subordinated Debentures and related trust investments in the
         Subordinated Debentures have been eliminated in consolidation and the
         Trust Preferred Securities are reflected as outstanding in the
         accompanying consolidated financial statements. Under applicable
         regulatory guidelines, a significant portion of the Trust Preferred
         Securities currently qualify as Tier 1 capital.

                                       20
<PAGE>

                     PACIFIC STATE BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


9.       COMMITMENTS AND CONTINGENCIES

         Leases
         ------

         The Bank leases branch offices and certain equipment under
         non-cancelable operating leases. The leases expire on various dates
         through 2009 and have various renewal options ranging from five to ten
         years. The lease on one branch office includes scheduled rent
         increases. The total amount of the rent payments is being charged to
         expense using a straight-line method over the term of the lease. The
         Bank has recorded a deferred credit to reflect the excess of rent
         expense over cash payments since inception of the lease. Future minimum
         lease payments are as follows:

                  Year Ending
                  December 31,
                  ------------

                      2003                         $    264,000
                      2004                              242,000
                      2005                              237,000
                      2006                              219,000
                      2007                              219,000
                   Thereafter                           288,000
                                                   ------------

                                                   $  1,469,000
                                                   ============

         Rental expense included in occupancy, furniture and equipment expense
         totaled $273,000, $267,000 and $271,000 for the years ended December
         31, 2002, 2001 and 2000, respectively.

         Financial Instruments With Off-Balance-Sheet Risk
         -------------------------------------------------

         The Bank is a party to financial instruments with off-balance-sheet
         risk in the normal course of business in order to meet the financing
         needs of its customers and to reduce its own exposure to fluctuations
         in interest rates. These financial instruments consist of commitments
         to extend credit and letters of credit. These instruments involve, to
         varying degrees, elements of credit and interest rate risk in excess of
         the amount recognized on the balance sheet.

         The Bank's exposure to credit loss in the event of nonperformance by
         the other party for commitments to extend credit and letters of credit
         is represented by the contractual amount of those instruments. The Bank
         uses the same credit policies in making commitments and letters of
         credit as it does for loans included on the balance sheet.

         The following financial instruments represent off-balance-sheet credit
         risk:

                                                     December 31,
                                             ----------------------------

                                                 2002            2001
                                             ------------    ------------

         Commitments to extend credit        $ 50,935,000    $ 39,564,000
         Letters of credit                   $    639,000    $  2,211,000

                                       21
<PAGE>

                     PACIFIC STATE BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


9.       COMMITMENTS AND CONTINGENCIES (Continued)

         Financial Instruments With Off-Balance-Sheet Risk (Continued)
         -------------------------------------------------

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

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

         At December 31, 2002, commercial loan commitments represented
         approximately 58% of total commitments and were generally secured by
         various assets of the borrower. Real estate loan commitments
         represented approximately 39% of total commitments and were generally
         secured by property with a loan-to-value ratio not to exceed 75% to
         80%. Consumer loan commitments represent the remaining 3% of total
         commitments and were generally unsecured. In addition, the majority of
         the Bank's commitments have variable interest rates.

         Significant Concentrations of Credit Risk
         -----------------------------------------

         The Bank's customers are primarily located in San Joaquin, Stanislaus,
         Calaveras and Tuolumne Counties. Approximately 23% of the Bank's loans
         are for general commercial uses, including professional, retail and
         small business, and 7% are for agricultural uses. Additionally, 25% of
         the Bank's loans are for the construction of residential and commercial
         real estate and 39% are loans which are collateralized by mortgages on
         residential and commercial real estate. Generally, real estate loans
         are secured by real property while commercial and other loans are
         secured by funds on deposit and business or personal assets. The
         remaining 6% of the Bank's loans are consumer installment loans.
         Repayment is generally expected from the proceeds of property sales and
         permanent financing for real estate construction loans and borrower
         cash flows for other loans.

         Contingencies
         -------------

         The Company is subject to legal proceedings and claims which arise in
         the ordinary course of business. In the opinion of management, the
         amount of ultimate liability with respect to such actions will not
         materially affect the financial position or results of operations of
         the Company.

         Federal Reserve Requirements
         ----------------------------

         Banks are required to maintain a combination of reserves with the
         Federal Reserve Bank and vault cash equal to a percentage of their
         reservable deposits. The reserve balances held with the Federal Reserve
         Bank or in the form of vault cash totaled $711,000 and $551,000 as of
         December 31, 2002 and 2001, respectively.

                                       22
<PAGE>

                     PACIFIC STATE BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


10.      SHAREHOLDERS' EQUITY

         Dividends
         ---------

         Upon declaration by the Board of Directors of the Company, all
         shareholders of record will be entitled to receive dividends. A
         significant source of cash for the Company is dividends from the Bank.
         The California Financial Code restricts the total dividend payment of
         any bank in any calendar year to the lesser of (1) the bank's retained
         earnings or (2) the bank's net income for its last three fiscal years,
         less distributions made to shareholders during the same three-year
         period. As a member of the Federal Reserve System, the Bank is also
         subject to similar restrictions imposed by Federal law. At December 31,
         2002, Bank retained earnings of $3,256,674 were free of such
         restrictions and available for dividend payments to Bancorp.

         Earnings Per Share
         ------------------

         A reconciliation of the numerators and denominators of the basic and
         diluted earnings per share computations is as follows:

<TABLE>
<CAPTION>
                                                        Year Ended December 31,
                                                 ------------------------------------

                                                    2002         2001         2000
                                                 ----------   ----------   ----------
<S>                                              <C>          <C>          <C>
         Basic Earnings Per Share
         ------------------------

         Numerator:
           Net income                            $1,162,620   $1,035,980   $1,008,682

         Denominator:
           Weighted average shares outstanding      806,546      742,241      714,548
                                                 ----------   ----------   ----------

         Basic earnings per share                $     1.44   $     1.40   $     1.41
                                                 ==========   ==========   ==========

         Diluted Earnings Per Share
         --------------------------

         Numerator:
           Net income                            $1,162,620   $1,035,980   $1,008,682

         Denominator:
           Weighted average shares outstanding      806,546      742,241      714,548
           Dilutive effect of stock options          41,332       42,531       34,407
                                                 ----------   ----------   ----------

                                                    847,878      784,772      748,955
                                                 ----------   ----------   ----------

         Diluted earnings per share              $     1.37   $     1.32   $     1.35
                                                 ==========   ==========   ==========
</TABLE>

         Options to purchase 11,500 shares of common stock at a price of $10.38
         outstanding during the first quarter were not included in the
         computation of diluted earnings per share for the year ended December
         31, 2001 because their exercise prices were greater than the average
         market prices of the Company's common shares. The following options
         were not included in the computation of diluted earnings per share for
         the year ended December 31, 2000 because their exercise prices were
         greater than the average market prices of the Company's common shares:
         options to purchase 12,500 shares of common stock at a price of $10.38
         outstanding during the third quarter; and options to purchase 250
         shares at a price of $10.13 outstanding during the first and second
         quarters. All of the options were included in the computation of
         diluted earnings per share for the year ended December 31, 2002.

                                       23
<PAGE>

                     PACIFIC STATE BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


10.      SHAREHOLDERS' EQUITY (Continued)

         Stock Options
         -------------

         At December 31, 2002, 84,215 shares of common stock were reserved under
         the Company's 1997 Stock Option Plan for issuance to employees and
         directors through incentive and nonstatutory agreements. Outstanding
         options for 6,860 shares under the Bank's 1987 Plan which were assumed
         by the Company when the Bank was reorganized as its subsidiary are
         exercisable until their expiration. The plans require that the option
         price may not be less than the fair market value of the stock at the
         date the option is granted, and that the stock must be paid in full at
         the time the option is exercised. The options under the plans expire on
         dates determined by the Board of Directors, but not later than ten
         years from the date of grant. The vesting period is determined by the
         Board of Directors and is generally over five to ten years.

         A summary of the combined activity within the plans follows:

<TABLE>
<CAPTION>
                                         2002                2001                2000
                                  -----------------   -----------------   -----------------
                                           Weighted            Weighted            Weighted
                                            Average             Average             Average
                                           Exercise            Exercise            Exercise
                                   Shares    Price     Shares    Price     Shares    Price
                                  -------   -------   -------   -------   -------   -------

<S>                               <C>       <C>       <C>       <C>       <C>       <C>
         Options outstanding,
           beginning of year       92,318   $  6.88   121,213   $  6.51   121,800   $  5.98

           Options granted         28,750   $ 14.98     2,500   $ 10.00    28,000   $  9.50
           Options exercised      (28,993)  $  5.87   (28,395)  $  5.18    (8,276)  $  4.69
           Options canceled        (1,000)  $ 15.00    (3,000)  $ 10.38   (20,311)  $  8.02
                                  -------             -------             -------

         Options outstanding,
           end of year             91,075   $  9.66    92,318   $  6.88   121,213   $  6.51
                                  =======             =======             =======

         Options exercisable,
           end of year             49,715   $  6.75    68,298   $  6.02    86,563   $  5.39
                                  =======             =======             =======
</TABLE>

         A summary of options outstanding at December 31, 2002 follows:

<TABLE>
<CAPTION>
                                        Number of       Weighted       Number of
                                         Options         Average        Options
                                       Outstanding      Remaining     Exercisable
                                       December 31,    Contractual    December 31,
         Range of Exercise Prices          2002            Life           2002
         ------------------------      ------------    -----------    ------------

<S>                                          <C>         <C>                <C>
         $  5.00                             20,476      0.3 years          20,476
         $  4.00                              3,799      1.3 years           3,799
         $  5.00                              2,500      1.3 years           2,500
         $  8.50                              6,200      4.0 years           6,200
         $  8.88                              7,900      4.5 years           7,900
         $ 10.13                                250      5.3 years             200
         $  8.75                              1,400      5.7 years           1,120
         $  8.80                             11,100      7.0 years           4,440
         $ 10.38                              6,700      7.6 years           2,680
         $ 10.00                              2,000      8.5 years             400
         $ 15.00                             23,750      9.0 years
         $ 14.90                              5,000      9.2 years
                                       ------------                   ------------

                                             91,075                         49,715
                                       ============                   ============
</TABLE>

                                       24
<PAGE>

                     PACIFIC STATE BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


10.      SHAREHOLDERS' EQUITY (Continued)

         Stock Offering
         --------------

         In February 2000, the Bank issued 66,500 shares of the Bank's no par
         value common stock to a director in a private placement at a price of
         $7.50 per share resulting in proceeds to the Bank of $498,750.

         Regulatory Capital
         ------------------

         The Company and the Bank are subject to certain regulatory capital
         requirements administered by the Board of Governors of the Federal
         Reserve System and the Federal Deposit Insurance Corporation (FDIC).
         Failure to meet these minimum capital requirements can initiate certain
         mandatory, and possibly additional discretionary, actions by regulators
         that, if undertaken, could have a direct material effect on the
         Company's consolidated financial statements. Under capital adequacy
         guidelines and the regulatory framework for prompt corrective action,
         the Bank must meet specific capital guidelines that involve
         quantitative measures of their assets, liabilities and certain
         off-balance-sheet items as calculated under regulatory accounting
         practices. The Company's and the Bank's capital amounts and
         classification are also subject to qualitative judgments by the
         regulators about components, risk weightings and other factors.

         Quantitative measures established by regulation to ensure capital
         adequacy require the Company and the Bank to maintain minimum amounts
         and ratios of total and Tier 1 capital to risk-weighted assets and of
         Tier 1 capital to average assets as set forth on the following table.
         Each of these components is defined in the regulations. Management
         believes that the Company and the Bank meet all their capital adequacy
         requirements as of December 31, 2002 and 2001.

         In addition, the most recent notification from the FDIC categorized the
         Bank as well capitalized under the regulatory framework for prompt
         correction action. To be considered well capitalized, the Bank must
         maintain minimum total risk-based, Tier 1 risk-based and Tier 1
         leverage ratios as set forth below. There are no conditions or events
         since December 31, 2002 that management believes have changed the
         Bank's category.


<TABLE>
<CAPTION>
                                                                                        To Be Well Capitalized
                                                                     For Capital       Under Prompt Corrective
                                               Actual             Adequacy Purposes       Action Provisions
                                        --------------------    ---------------------   ---------------------
                                                                  Minimum     Minimum     Minimum     Minimum
                                           Amount      Ratio       Amount      Ratio       Amount      Ratio
                                        ------------   -----    ------------   -----    ------------   -----

<S>                                     <C>             <C>     <C>              <C>    <C>             <C>
         December 31, 2002
         -----------------

         Company:
           Total capital (to risk-
             weighted assets)           $ 16,497,000    11.4%   $ 11,558,000     8.0%            N/A      N/A
           Tier I capital (to risk-
             weighted assets)           $ 13,588,000     9.4%   $  5,779,000     4.0%            N/A      N/A
           Tier I capital (to average
             assets)                    $ 13,588,000     8.1%   $  6,693,000     4.0%            N/A      N/A

         Bank:
           Total capital (to risk-
             weighted assets)           $ 16,293,000    11.0%   $ 11,529,000     8.0%   $ 14,412,000    10.0%
           Tier I capital (to risk-
             weighted assets)           $ 14,617,000    10.1%   $  5,765,000     4.0%   $  8,647,000     6.0%
           Tier I capital (to average
             assets)                    $ 14,617,000     8.9%   $  6,690,000     4.0%   $  8,362,000     5.0%
</TABLE>

                                       25
<PAGE>

                     PACIFIC STATE BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


10.      SHAREHOLDERS' EQUITY (Continued)

         Regulatory Capital (Continued)
         ------------------

<TABLE>
<CAPTION>
                                                                                        To Be Well Capitalized
                                                                     For Capital       Under Prompt Corrective
                                               Actual             Adequacy Purposes       Action Provisions
                                        --------------------    ---------------------   ---------------------
                                                                  Minimum     Minimum     Minimum     Minimum
                                           Amount      Ratio       Amount      Ratio       Amount      Ratio
                                        ------------   -----    ------------   -----    ------------   -----

<S>                                     <C>             <C>     <C>              <C>    <C>             <C>
         December 31, 2001
         -----------------

         Bank:
           Total capital (to risk-
             weighted assets)           $ 10,535,000    10.2%   $  8,245,000     8.0%   $ 10,306,000    10.0%
           Tier I capital (to risk-
             weighted assets)           $  9,363,000     9.1%   $  4,122,000     4.0%   $  6,184,000     6.0%
           Tier I capital (to average
             assets)                    $  9,363,000     7.8%   $  4,779,000     4.0%   $  5,974,000     5.0%
</TABLE>

11.      OTHER EXPENSES

         Other expenses consisted of the following:

                                                  Year Ended December 31,
                                           ------------------------------------

                                              2002         2001         2000
                                           ----------   ----------   ----------

         Professional fees                 $  483,501   $  319,461   $  192,441
         Advertising and promotion            120,333       81,978      149,958
         Postage, stationery and supplies     186,437      177,262      135,392
         Telephone                            150,674      126,226      138,547
         Directors fees                       126,492       57,700      115,877
         Other operating expenses           1,067,785      848,919      689,730
                                           ----------   ----------   ----------

                                           $2,135,222   $1,611,546   $1,421,945
                                           ==========   ==========   ==========

12.      INCOME TAXES

         Income tax expense for the years ended December 31, 2002, 2001 and 2000
         consisted of the following:

                                              2002         2001         2000
                                           ----------   ----------   ----------

         Current:
           Federal                         $  698,000   $  478,000   $  528,000
           State                              123,000      123,000      142,500
                                           ----------   ----------   ----------

                                              821,000      601,000      670,500
                                           ----------   ----------   ----------

         Deferred:
           Federal                           (175,000)     (58,000)     (91,000)
           State                              (16,000)     (23,000)     (25,000)
                                           ----------   ----------   ----------

                                             (191,000)     (81,000)    (116,000)
                                           ----------   ----------   ----------

                                           $  630,000   $  520,000   $  554,500
                                           ==========   ==========   ==========

                                       26
<PAGE>

                     PACIFIC STATE BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


12.      INCOME TAXES (Continued)

         Deferred tax assets (liabilities) consisted of the following:

                                                              December 31,
                                                         ----------------------

                                                            2002         2001
                                                         ---------    ---------

         Deferred tax assets:
            Allowance for loan losses                    $ 493,000    $ 447,000
            Bank premises and equipment                    132,000       47,000
            Future benefit of State tax deduction           51,000       32,000
            Organization costs                              19,000        5,000
            Deposit purchase premium                        49,000       37,000
            Unrealized losses on available-for-sale
               investment securities                                     31,000
                                                         ---------    ---------

                  Total deferred tax assets                744,000      599,000
                                                         ---------    ---------

         Deferred tax liabilities:
            Future federal liability of state deferred
               tax asset                                   (46,000)     (41,000)
            Goodwill                                       (16,000)
            Accretion of discount on investment
               securities                                               (36,000)
                                                         ---------    ---------

                  Total deferred tax liabilities           (62,000)     (77,000)
                                                         ---------    ---------

                  Net deferred tax assets                $ 682,000    $ 522,000
                                                         =========    =========

         The provision for income taxes differs from amounts computed by
         applying the statutory Federal income tax rates to operating income
         before income taxes. The items comprising these differences for the
         years ended December 31, 2002, 2001 and 2000 consisted of the
         following:

<TABLE>
<CAPTION>
                                             2002                  2001                  2000
                                     -------------------   -------------------   -------------------

                                       Amount     Rate %     Amount     Rate %     Amount     Rate %
                                     ---------    ------   ---------    ------   ---------    ------

<S>                                  <C>            <C>    <C>            <C>    <C>            <C>
         Federal income tax
           expense, at statu-
           tory rate                 $ 609,491      34.0   $ 529,033      34.0   $ 531,482      34.0
         State franchise tax,
           net of Federal tax
           effect                       96,924       5.4      62,416       4.0      79,402       5.1
         Interest on obligations
           of states and political
           subdivisions                (72,906)     (4.1)    (81,840)     (5.3)    (40,448)     (2.6)
         Other                          (3,509)      (.2)     10,391        .7     (15,936)     (1.0)
                                     ---------    ------   ---------    ------   ---------    ------

             Total income tax
               expense               $ 630,000      35.1   $ 520,000      33.4   $ 554,500      35.5
                                     =========    ======   =========    ======   =========    ======
</TABLE>

                                       27
<PAGE>

                     PACIFIC STATE BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


13.      RELATED PARTY TRANSACTIONS

         During the normal course of business, the Bank enters into transactions
         with related parties, including executive officers and directors. These
         transactions include borrowings from the Bank with substantially the
         same terms, including rates and collateral, as loans to unrelated
         parties. The following is a summary of the aggregate activity involving
         related party borrowers during 2002:

         Balance, January 1, 2002                                   $ 3,801,000

            Disbursements                                             2,715,000
            Amounts repaid                                           (3,328,000)
                                                                    -----------

         Balance, December 31, 2002                                 $ 3,188,000
                                                                    ===========

         Undisbursed commitments to related
            parties, December 31, 2002                              $ 1,073,000
                                                                    ===========

14.      EMPLOYEE BENEFIT PLAN

         In 1990, the Bank initiated a 401(k) Savings Plan. Under the provisions
         of the plan, the Bank matches one-half of the employees' contributions
         up to a maximum of three percent of an employee's annual salary. All
         employees who are at least 21 years of age and have completed one year
         of service are eligible under the plan. The Bank's contributions vest
         at a rate of 20% after one year of service and an additional 20% for
         each year thereafter. Contributions to the plan totaled $42,000 in
         2002, $28,000 in 2001 and $27,000 for the year ended December 31, 2000.

15.      COMPREHENSIVE INCOME

         Comprehensive income is reported in addition to net income for all
         periods presented. Comprehensive income is a more inclusive financial
         reporting methodology that includes disclosure of other comprehensive
         income that historically has not been recognized in the calculation of
         net income. Unrealized gains and losses on the Company's
         available-for-sale investment securities are included in other
         comprehensive income. Total comprehensive income and the components of
         accumulated other comprehensive income are presented in the Statement
         of Changes in Shareholders' Equity.

         At December 31, 2002, 2001 and 2000, the Company held securities
         classified as available-for-sale which had unrealized gains as follows:

<TABLE>
<CAPTION>
                                                            2002         2001         2000
                                                         ---------    ---------    ---------

<S>                                                      <C>          <C>          <C>
         Other comprehensive income:
           Unrealized holding gains                      $ 115,764    $ 159,498    $ 555,856
           Tax expense on unrealized holding gains         (41,130)     (59,718)    (237,654)
                                                         ---------    ---------    ---------

               Net unrealized holding gains                 74,634       99,780      318,202
                                                         ---------    ---------    ---------

           Less: reclassification adjustment for gains
             included in net income                         28,957       69,067

           Tax benefit on reclassification adjustment      (10,280)     (27,627)
                                                         ---------    ---------    ---------

               Net reclassification adjustment              18,677       41,440
                                                         ---------    ---------    ---------

               Total other comprehensive income          $  55,957    $  58,340    $ 318,202
                                                         =========    =========    =========
</TABLE>

                                       28
<PAGE>

                     PACIFIC STATE BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


16.      DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

         Estimated fair values are disclosed for financial instruments for which
         it is practicable to estimate fair value. These estimates are made at a
         specific point in time based on relevant market data and information
         about the financial instruments. These estimates do not reflect any
         premium or discount that could result from offering the Company's
         entire holdings of a particular financial instrument for sale at one
         time, nor do they attempt to estimate the value of anticipated future
         business related to the instruments. In addition, the tax ramifications
         related to the realization of unrealized gains and losses can have a
         significant effect on fair value estimates and have not been considered
         in any of these estimates.

         Because no market exists for a significant portion of the Company's
         financial instruments, fair value estimates are based on judgments
         regarding current economic conditions, risk characteristics of various
         financial instruments and other factors. These estimates are subjective
         in nature and involve uncertainties and matters of significant judgment
         and therefore cannot be determined with precision. Changes in
         assumptions could significantly affect the fair values presented.

         The following methods and assumptions were used by management to
         estimate the fair value of the Company's financial instruments at
         December 31, 2002 and 2001:

         Cash and cash equivalents: For cash and cash equivalents, the carrying
         amount is estimated to be fair value.

         Investment securities: For investment securities, fair values are based
         on quoted market prices, where available. If quoted market prices are
         not available, fair values are estimated using quoted market prices for
         similar securities and indications of value provided by brokers.

         Loans: For variable-rate loans that reprice frequently with no
         significant change in credit risk, fair values are based on carrying
         values. The fair values for the remaining loans are estimated using
         discounted cash flow analyses, using interest rates being offered at
         each reporting date for loans with similar terms to borrowers of
         comparable creditworthiness. The carrying amount of accrued interest
         receivable approximates its fair value.

         Deposits and short-term borrowings: The fair values for demand deposits
         are, by definition, equal to the amount payable on demand at the
         reporting date represented by their carrying amount. Fair values for
         fixed-rate certificates of deposit are estimated using a discounted
         cash flow analysis using interest rates offered at each reporting date
         by the Bank for certificates with similar remaining maturities. The
         carrying amount of accrued short-term borrowings and interest payable
         approximates their fair value.

         Long-term debt: The fair value of long-term debt is estimated using a
         discounted cash flow analysis using interest rates currently available
         to the Company for similar debt instruments.

         Mandatorily redeemable cumulative trust preferred securities of
         subsidiary grantor trust: The fair value of mandatorily redeemable
         cumulative trust preferred securities of subsidiary grantor trust was
         determined based on the current market value for the like-kind
         instruments of similar rates and terms.

                                       29
<PAGE>

                     PACIFIC STATE BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


16.      DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

         Commitments to extend credit: Commitments to extend credit are
         primarily for variable rate loans. For these commitments, there is no
         difference between the committed amounts and their fair values.
         Commitments to fund fixed rate loans and letters of credit are at rates
         which approximate fair value at each reporting date.

<TABLE>
<CAPTION>
                                               December 31, 2002             December 31, 2001
                                          ---------------------------   ---------------------------

                                            Carrying         Fair         Carrying         Fair
                                             Amount          Value         Amount          Value
                                          ------------   ------------   ------------   ------------

<S>                                       <C>            <C>            <C>            <C>
         Financial assets:
           Cash and due from banks        $ 18,465,668   $ 18,465,668   $  5,439,720   $  5,439,720
           Federal funds sold                5,000,000      5,000,000      1,386,000      1,386,000
           Investment securities            12,767,400     12,764,300     10,788,600     10,789,400
           Loans, net                      133,965,914    134,139,000     97,108,704     97,291,526
           Accrued interest receivable       1,056,680      1,056,680        847,007        847,007

         Financial liabilities:
           Deposits                       $158,140,007   $158,316,211   $111,103,638   $111,302,759
           Short-term borrowings             1,000,000      1,000,000
           Long-term debt                    4,000,000      4,000,000
           Mandatorily redeemable
             cumulative trust preferred
             securities                      5,000,000      5,000,000
           Accrued interest payable            438,640        438,640        773,556        773,556

         Off-balance-sheet financial
           instruments:
           Commitments to extend credit   $ 50,935,000   $ 50,935,000   $ 39,564,000   $ 39,564,000
           Standby letters of credit           639,000        639,000      2,211,000      2,211,000
</TABLE>

17.      SUPPLEMENTAL DISCLOSURES FROM THE SALE AND ACQUISITION OF BRANCH ASSETS
         AND LIABILITIES

         On October 13, 2000, the Bank sold certain assets and liabilities of
         the Columbia branch to another financial institution, summarized as
         follows:

            Cash provided                                          $ 4,015,281
            Fair value of fixed assets sold                             13,153
            Fair value of other assets and liabilities sold, net        58,894
            Gain on sale                                                20,002
                                                                   -----------

            Deposits sold                                          $ 4,107,330
                                                                   ===========

                                       30
<PAGE>

                     PACIFIC STATE BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


17.      SUPPLEMENTAL DISCLOSURES FROM THE SALE AND ACQUISITION OF BRANCH ASSETS
         AND LIABILITIES (Continued)

         On March 18, 2002, the Bank consummated its agreement to acquire assets
         (principally loans) and assume liabilities (consisting mainly of
         deposits) of the Stockton Branch Office of California Bank & Trust. The
         purchase price of $1,082,194 included the issuance of 37,000 shares of
         common stock with an estimated fair value of $481,000 and with the
         remainder paid in cash. An allocation of the settlement of this
         transaction between the fair value of liabilities assumed and assets
         acquired follows.

<TABLE>
<CAPTION>
<S>                                                                     <C>
                  Liabilities assumed and equity issued:
                    Demand, interest-bearing transaction and savings
                      and savings accounts                              $ 12,645,067
                    Time deposits                                          9,776,230
                    Other liabilities                                         22,756
                    Common stock issued                                      481,000
                                                                        ------------

                                                                          22,925,053
                                                                        ------------

                  Assets acquired:
                    Loans                                                  8,002,294
                    Other assets                                              34,642
                    Core deposit intangible                                  448,426
                    Goodwill                                                 717,919
                                                                        ------------

                                                                           9,203,281
                                                                        ------------

                  Net cash received                                     $ 13,721,772
                                                                        ============
</TABLE>

                                       31
<PAGE>

                     PACIFIC STATE BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


18.      PARENT ONLY CONDENSED FINANCIAL STATEMENTS

         The Company commenced operation on June 24, 2002. As a result,
         comparative financial information is not available. The information
         below is presented as of December 31, 2002 and for the year then ended
         as if the reorganization had taken place on January 1, 2002.

                                  BALANCE SHEET

                                December 31, 2002


                               ASSETS

         Cash and due from banks                                    $    72,279
         Investment in bank subsidiary                               15,746,394
         Investment in Pacific State Statutory Trust I                  159,251
         Investment in other securities                                 204,988
         Other assets                                                   298,934
                                                                    -----------

               Total assets                                         $16,481,846
                                                                    ===========

                           LIABILITIES AND
                        SHAREHOLDERS' EQUITY

         Liabilities:
           Junior subordinated debentures due to subsidiary
             grantor trust                                          $ 5,159,251
           Other liabilities                                              2,733
                                                                    -----------

               Total liabilities                                      5,161,984
                                                                    -----------

         Shareholders' equity:
           Common stock                                               6,915,534
           Retained earnings                                          4,404,078
           Accumulated other comprehensive income                           250
                                                                    -----------

               Total shareholders' equity                            11,319,862
                                                                    -----------

               Total liabilities and shareholders' equity           $16,481,846
                                                                    ===========

                                       32
<PAGE>

                     PACIFIC STATE BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


18.      PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)

                               STATEMENT OF INCOME

                      For the Year Ended December 31, 2002


         Income:
           Dividends declared by bank subsidiary                    $   123,000
           Interest on investment securities                              1,820
                                                                    -----------

                 Total income                                           124,820
                                                                    -----------

         Expenses:
           Interest on junior subordinated debentures due to
             subsidiary grantor trust                                   141,380
           Salaries and employee benefits                                42,824
           Professional                                                  77,228
           Other expenses                                                 7,031
                                                                    -----------

                 Total expenses                                         268,463
                                                                    -----------

                 Loss before equity in undistributed income
                   of subsidiary                                       (143,643)

         Equity in undistributed income of subsidiary                 1,216,263
                                                                    -----------

                 Income before income tax benefit                     1,072,620

         Income tax benefit                                             (90,000)
                                                                    -----------

                 Net income                                         $ 1,162,620
                                                                    ===========

                                       33
<PAGE>

                     PACIFIC STATE BANCORP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


18.      PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)

                             STATEMENT OF CASH FLOWS

                      For the Year Ended December 31, 2002


         Cash flows from operating activities:
           Net income                                               $ 1,162,620
           Adjustments to reconcile net income to net cash
             used in operating activities:
               Undistributed net income of subsidiary                (1,216,263)
               Increase in other assets                                (298,934)
               Increase in other liabilities                              2,733
                                                                    -----------

                 Net cash used in operating activities                 (349,844)
                                                                    -----------

         Cash flows from investing activities:
           Investment in bank subsidiary                             (4,543,199)
           Investment in Pacific State Statutory Trust I               (159,251)
           Investment in other securities                              (204,988)
                                                                    -----------

                 Net cash used in investing activities               (4,907,438)
                                                                    -----------

         Cash flows from financing activities:
           Proceeds from the issuance of junior subordinated
             debentures due to subsidiary grantor trust               5,159,251
           Proceeds from exercise of stock options                      170,310
                                                                    -----------

                 Net cash provided by financing activities            5,329,561
                                                                    -----------

         Cash and cash equivalents at end of year                   $    72,279
                                                                    ===========

         Non-cash investing activities:

           Net change in unrealized gain on available-for-
             sale investment securities                             $    86,807

           Common stock issued in connection with
             branch acquisition                                     $   481,000

                                       34
<PAGE>
                             BUSINESS OF THE COMPANY
                             -----------------------

         This report includes forward-looking statements within the meaning of
the Securities Exchange Act of 1934 (the "Exchange Act"). These statements are
based on management's beliefs and assumptions, and on information currently
available to management. Forward-looking statements include the information
concerning possible or assumed future results of operations of the Company set
forth under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Forward-looking statements also include
statements in which words such as "expect," "anticipate," "intend," "plan,"
"believe," "estimate," "consider" or similar expressions are used. The Company's
actual future results and shareholder values may differ materially from those
anticipated and expressed in these forward-looking statements. Many of the
factors that will determine these results and values are beyond the Company's
ability to control or predict. Investors are cautioned not to put undue reliance
on any forward-looking statements. In addition, the Company does not have any
intention or obligation to update forward-looking statements after the filing of
this report, even if new information, future events or other circumstances have
made them incorrect or misleading. Except as specifically noted herein all
references to the "Company" refer to Pacific State Bancorp, a California
corporation.

General Description of Business
-------------------------------

         Pacific State Bancorp is a newly formed holding company with one bank
subsidiary, Pacific State Bank, (the "Bank"), and a subsidiary trust, Pacific
State Statutory Trust I. Pacific State Bancorp commenced operations on June 24,
2002 when it acquired all the then issued and outstanding shares of Pacific
State Bank under a plan of reorganization approved by the Bank's shareholders on
May 9, 2002. The Bank is a California state chartered bank. The Bank's primary
source of revenue is providing loans to customers who are predominately small to
middle-market businesses and middle-income individuals. Pacific State Statuatory
Trust I is a statuatory business trust formed in June 2002 for the exclusive
purpose of issuing and selling trust preferred securities.

         The Bank has engaged since November 2, 1987 in a general commercial
banking business, primarily in Stockton and San Joaquin County, and offers
commercial banking services to residents and employers of businesses in the
Bank's service area, including professional firms and small to medium sized
retail and wholesale businesses and manufacturers. The Company as of January 22,
2003 had 56 employees, including 25 officers. The Bank does not engage in any
non-bank lines of business. The business of the Bank is not to any significant
degree seasonal in nature. The Bank has no operations outside California and has
no material amount of loans or deposits concentrated among any one or few
persons, groups or industries. The Bank is a member of the Federal Reserve
System.

         The Bank's main office is located at 6 So. El Dorado Street; additional
branches are located elsewhere in Stockton and in the communities of Angels
Camp, Arnold, Groveland, Modesto and Tracy, California. Executive offices for
the Company are located at 1889 W. March Lane, adjacent to the Bank's second
Stockton branch. Total deposits of $158.1 million as of December 31, 2002, were

                                       35
<PAGE>

held by the Bank, $28.1 million (17.7%) in the Main Office, $54.5 million
(34.5%) in the March Lane (Stockton) branch, $21.3 million (13.5%) in the
Modesto branch, $14.7 million (9.3%) in the Angels Camp branch, $10.7 million
(6.8%) in the Arnold branch, $9.2 million (5.8%) in the Groveland branch and
$19.7 million (12.4%) in the Tracy branch. On March 15, the Bank completed the
acquisition of certain assets (principally cash and loans) and deposit
liabilities of the Stockton branch of California Bank & Trust at a purchase
price which included the issuance of $481,000 of the Bank's common stock and
$601,194 in cash. In the transaction, the Bank acquired approximately $22.4
million in deposit liabilities and loans valued at approximately $8.0 million.
These assets and liabilities were transferred to the Bank's March Lane branch.

Business Plan
-------------

         The focus of the Company's business plan is to attract "middle market"
accounts, but not to the exclusion of any other business which the Company can
reasonably and profitably attract. In order to provide a level of service to
attract such customers, the Company has structured its specific services and
charges on a basis which management believes to be profitable, taking into
consideration other aspects of the account relationship. The Company offers a
range of banking services to its customers intended to attract the following
specific types of accounts: relatively large consumer accounts; professional
group and association accounts, including the accounts of groups or firms of
physicians, dentists, attorneys and accountants; and accounts of small to
medium-sized businesses engaged in retail, wholesale, light industrial and
service activities.

Trust Subsidiary
----------------

         The Company during 2002 established a business trust subsidiary (the
"Trust") for the sole purpose of issuing capital securities ("Capital
Securities") pursuant to a declaration of trust (the "Declaration"). The
proceeds from the sale of the Capital Securities were loaned to the Company
under deeply subordinated debentures (the "Debentures") issued to the Trust
pursuant to an indenture (the "Indenture"). Interest payments on the Debentures
will flow through the Trust to the Pooling Vehicle, which is the holder of the
Capital Securities and similar securities issued by other financial
institutions. Payments of distributions by the Trust to the Pooling Vehicle are
guaranteed by the Company pursuant to a guarantee agreement (the "Guarantee").
The terms of the Declaration, Indenture and Guarantee are described in more
detail below.

         The Pooling Vehicle used the proceeds from the sale of notes in the
private market to purchase the Capital Securities and similar securities issued
by other financial institutions. Proceeds from the distributions payable on the
Capital Securities (as well as the proceeds from distributions payable on
capital securities issued by other pool participants) will be used to pay for
the costs of maintaining the Pooling Vehicle and to make interest payments on
the notes issued by the Pooling Vehicle.

                  o        The Trust endures for 35 years, unless earlier
                           dissolved.

                  o        The Capital Securities and Debentures have terms of
                           30 years. -

                  o        The Trust issued the Capital Securities and common
                           securities (the "Common Securities"), for $5,000,000,
                           the Common Securities are held by the Company. The
                           Company issued the Debentures to the Trust, which
                           holds them for the benefit of the Capital Security
                           holders.

                                       36
<PAGE>

                  o        For the period beginning on (and including) December
                           26, 2002 and ending on (but excluding) March 25,
                           2003, the rate per annum is 4.85% For each successive
                           period beginning on (and including) March 26, 2003,
                           and each succeeding interest payment date, interest
                           is payable quarterly at a floating rate per annum
                           equal to the 3-month London Interbank Offered Rate
                           (LIBOR) plus 3.45%; provided however that prior to
                           June 26, 2007, this interest rate shall not exceed
                           11.95%.

                  o        The Company has irrevocably and unconditionally
                           guaranteed, with respect to the Capital Securities
                           and to the extent not paid by the Trust, accrued and
                           unpaid distributions on the Capital Securities and
                           the redemption price payable to the holders of the
                           Capital Securities, in each case to the extent the
                           Trust has funds available.

         The purpose of this transaction was to infuse the Bank with an
additional $4.5 million in capital in order to fuel the continued growth of the
Bank. The remaining $500, 000 was placed in the Company for general operations.

Product Lines and Services
--------------------------

         The Bank currently offers the following general banking services at all
of its branches: commercial, construction and real estate loans and personal
credit lines, interest on checking, U.S. Savings bond services, domestic and
foreign drafts, banking by appointment, automatic transfer of funds between
savings and checking accounts, business courier services, checking and savings
accounts for personal and business purposes, domestic letters of credit, a
depository for MasterCard and Visa drafts, federal depository services, cash
management assistance, wire and telephone transfers, travelers' checks,
Individual Retirement Accounts, time certificates of deposit, courier service
for non-cash deposits, Visa and MasterCard, revolving lines of credit to
consumers secured by deeds of trust on private residences, unsecured overdraft
protection credit lines attached to checking accounts, ATM cards and MasterMoney
debit cards via the Star, Cirrus, Plus, Mastercard and Visa networks.

         The Bank is not authorized to offer trust services. The Federal Reserve
Bank of San Francisco is the Company's primary correspondent relationship. The
Bank currently also has correspondent relationships with City National Bank in
Beverly Hills, Bank of America in San Francisco, First Tennessee Bank in
Memphis, Tennessee, Compass Bank in Birmingham, Alabama, Wells Fargo Bank and
Pacific Coast Bankers Bank.

         The Bank recognizes that, in order to be competitive, it must attract a
certain number of consumer accounts. Travelers checks, Individual Retirement
Accounts, Visa and MasterCard, revolving lines of credit to consumers secured by
deeds of trust on private residences, and unsecured overdraft protection credit
lines attached to checking accounts currently offered by the Bank are designed
to appeal particularly to consumers. Moreover, participation in a large-scale
ATM network assists the Company in competing for consumer accounts.

         The Bank is an approved Small Business Administration and 504 lender,
FarmerMac I and II, USDA, USDA Part-time Farmer Program, FHA and VA lender and
California Capital lender. The Bank is a national leader in the underwriting of
U.S. Department of Agriculture business and industry loans, as well as a
Preferred Lender for this program.

                                       37
<PAGE>

         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATIONS

         Certain statements discussed or incorporated by reference in this
Annual Report including, but not limited to, matters described in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations, are forward-looking statements that are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected. Changes to such risks and uncertainties, which could impact future
financial performance, include, among others, (1) competitive pressures in the
banking industry; (2) changes in the interest rate environment; (3) general
economic conditions, either nationally or regionally; (4) changes in the
regulatory environment; (5) changes in business conditions and inflation; and
(6) changes in securities markets.


Critical Accounting Policies

General

         Pacific State Bancorp's financial statements are prepared in accordance
with accounting principles generally accepted in the United States of America
(GAAP). The financial information contained within our statements is, to a
significant extent, financial information that is based on measures of the
financial effects of transactions and events that have already occurred. A
variety of factors could affect the ultimate value that is obtained either when
earning income, recognizing an expense, recovering an asset or relieving a
liability. We use historical loss factors as one factor in determining the
inherent loss that may be present in our loan portfolio. Actual losses could
differ significantly from the historical factors that we use. Other estimates
that we use are related to the expected useful lives of our depreciable assets.
In addition, GAAP itself may change from one previously acceptable method to
another method. Although the economics of our transactions would be the same,
the timing of events that would impact our transactions could change.

Allowance for Loan Losses

         The allowance for loan losses is an estimate of the losses that may be
sustained in our loan portfolio. The allowance is based on two basic principles
of accounting. (1) Statement of Financial Accountings Standards (SFAS) No. 5
"Accounting for Contingencies", which requires that losses be accrued when they
are probable of occurring and estimable and (2) SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan", which requires that losses be accrued based
on the differences between the value of collateral, present value of future cash
flows or values that are observable in the secondary market and the loan
balance.


Results of Operations

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

         Net income for the year ended December 31, 2002, was $1,163,000,
representing an increase of $127,000, or 12.3%, over net income of $1,036,000
for the year ended December 31, 2001. A contributing factor to the increase in
net income is a slight increase in interest income of $37,000 and an increase in
noninterest income of 29.4%, due to an increase in the sale of loans.

                                       38
<PAGE>

         Return on average assets (ROA) was .77% and return on average common
equity (ROE) was 11.27% in 2002 compared with .87% and 12.04% respectively in
2001. Diluted earnings per share for 2002 and 2001 were $1.37 and $1.32,
respectively, a increase of 3.8%. The increase in earnings per share is due to
the increase in income of 12.3%.

         The Company's average total assets increased to $151.7 million or 28.2%
over $118.3 million in 2001. Net loans increased to $134.0 million over $97.1
million in 2001, an increase of $36.9 million or 38.0%. Deposits in 2002 grew to
$158.1 million, or 42.4%, compared to $111.1 million at December 31, 2001. The
increases reflected on the balance sheet are attributable in part to the
acquisition of $22.4 million in deposits and $8.0 million in loans from a branch
of California Bank & Trust.

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

         Net income for the year ended December 31, 2001, was $1,036,000,
representing an increase of $27,000, or 2.7%, over net income of $1,009,000 for
the year ended December 31, 2000. A contributing factor to the increase in net
income was an increase in noninterest income of 68.9%, due to an increase in the
sale of loans.

         Return on average assets (ROA) was .87% and return on average common
equity (ROE) was 12.04% in 2001 compared with .92% and 13.93% respectively in
2000. Diluted earnings per share for 2001 and 2000 were $1.32 and $1.35,
respectively, a decrease of 2.2%. The decrease in earnings per share was due to
the increase in the number of shares outstanding due to stock options exercised.

         The Company's average total assets increased to $118.8 million or 7.7%
over $110.3 million in 2000. Net loans increased to $97.1 million over $82.6
million in 2000, an increase of $14.5 million or 17.6%. Deposits in 2001 grew to
$111.1 million, or 6.1%, compared to $104.7 million at December 31, 2000.


Net Interest Income

         The primary source of income for the Company is derived from net
interest income. Net interest income represents the excess of interest and fees
earned on interest-earning assets (loans, securities and federal funds sold)
over the interest paid on deposits and borrowed funds. Net interest margin is
net interest income expressed as a percentage of average earning assets.

         Net interest income increased to $6.3 million in 2002 versus $5.6
million in 2001 and $5.7 million in 2000, representing a 12.0% increase in 2002
over 2001, and 1.8% decrease in 2001 over 2000. The average balance of total
earning assets during 2002 increased 24.7% to $135.9 million from $109.0
million. Average loan balances outstanding during 2002 increased $26.2 million
or 28.7%, while average balances of investments and federal funds sold increased
by $.9 million or 5.2%. The average yields on loans and federal funds sold in
2002 were lower by 162 and 235 basis points respectively, while the average
yield on U.S. government securities decreased by 217 basis points. The decrease
in average yields on loans is attributed to eleven decreases in the prime
lending rate or 475 basis points during 2001 which fully impacted all of 2002,
as well as a further decrease of 50 basis points in early 2002. During 2001, the
prime rate dropped from 9.5% to 4.75% to 4.25% in 2002. The overall yield on
average earning assets during 2002 declined 164 basis points to 6.80% from 8.44%
for 2001.

         Total interest expense decreased to $2.9 million in 2002, from $3.6
million for 2001, and $4.0 million for 2000, representing a 19.4% decrease for
2002 over 2001, and a 10.0% decrease for 2001 over 2000. Average balances of
interest-bearing liabilities increased to $111.1 million from $82.4 million for
the year ended December 31, 2001, or 34.8%.

                                       39
<PAGE>

         Average certificates of deposit increased to $55.8 million in 2002 from
$50.0 million in 2001, an 11.6% increase. The average rate paid on certificates
of deposit during 2002 decreased 203 basis points, while the overall average
rate paid on interest bearing deposits and borrowings decreased 125 basis points
to 2.03% from 3.28% for 2001.

         The Company's net interest margin (net interest income divided by
average earning assets) was 4.63% in 2002, 5.15% in 2001 and 5.67% in 2000. The
combined effect of the increase in volume of earning assets and decrease in
yield on earning assets, coupled with stable funding sources resulted in an
increase of $.675 million (12.0%) in net interest income for the year ended
December 31, 2002 over 2001. The decrease in the Company's net interest margin
from 2001 to 2002 is directly attributable to the ongoing effect of a decrease
in prime rate of 475 basis points during 2001 and an additional decrease of 50
basis points during 2002, since most of the Bank's loans reprice when the prime
rate changes. In spite of the prime rate changes, the net interest margin only
dropped 52 basis points which is attributed to growth and change in mix of
earning assets, which was funded by growth of both interest-bearing and
non-interest-bearing demand deposits.

                                       40
<PAGE>

         The following table sets forth the Company's daily average balance
sheet, related interest income or expense and yield or rate paid for the periods
indicated. The yield on tax-exempt securities has not been adjusted to a
tax-equivalent yield basis.

<TABLE>
<CAPTION>
                                   Average Balances, Interest Income/Expense and Yields/Rates Paid

                                                       (Dollars in thousands)


                                                                     Years Ended December 31,

                                            2002                               2001                               2000
                              -------------------------------    -------------------------------    --------------------------------

------------------------------------------------------------------------------------------------------------------------------------
                               Average                 Yield/     Average                 Yield/     Average                 Yield/
                               Balance     Interest     Rate      Balance     Interest     Rate      Balance     Interest     Rate
------------------------------------------------------------------------------------------------------------------------------------

<S>                           <C>         <C>            <C>     <C>         <C>            <C>     <C>         <C>           <C>
Earning Assets
 Loans(1)                     $ 115,742   $   8,508      7.35%   $  90,675   $   8,168      9.00%   $  77,166   $   8,245     10.68%
 Investment Securities           15,838         660      4.17%      12,741         808      6.34%      14,346         870      6.06%
 Federal Funds Sold               4,183          64      1.53%       5,579         219      3.93%       9,622         605      6.29%
                              ---------   ---------   -------    ---------   ---------   -------    ---------   ---------   -------
 Average Earning Assets       $ 135,763   $   9,232      6.80%   $ 108,995   $   9,195      8.44%   $ 101,134   $   9,720      9.61%
                                          ---------                          ---------                          ---------

 Cash & Due From Banks        $   9,286                          $   5,000                          $   4,831
 Bank Premises                    5,136                              4,109                              3,593
 Other Assets                     2,803                              1,839                              1,724
 Less: Allowance for loan
 loss                            (1,264)                             1,128)                              (910)
                              ---------                          ---------                          ---------
 Average Total Assets         $ 151,724                          $ 118,815                          $ 110,372
                              =========                          =========                          =========


Interest Bearing Liabilities
 Demand Interest Bearing      $  50,190   $     698      1.39%   $  34,515   $     679      1.97%   $  29,890   $     978      3.27%
 Savings Deposits                 5,084          14       .28%       3,814          24       .63%       4,437          89      2.01%
 Certificates of Deposit         55,849       2,084      3.73%      49,961       2,878      5.76%      47,944       2,911      6.07%
 Other Borrowings                 2,914         147      5.04%          --          --        --%          86           7      8.14%
                              ---------   ---------   -------    ---------   ---------   -------    ---------   ---------   -------
                                114,037   $   2,943      2.58%      88,290   $   3,581      4.06%      82,357   $   3,985      4.84%
                                          ---------                          ---------                          ---------

 Noninterest Demand              26,381                             20,931                             19,676
 Other Liabilities                  985                                991                              1,097
 Shareholder Equity              10.321                              8,603                              7,242
                              ---------                          ---------                          ---------
 Average Liabilities and
 Shareholders Equity          $ 151,724                          $ 118,815                          $ 110,372
                              =========                          =========                          =========


 Net Income and Net
 Interest Margin                          $   6,289      4.63%               $   5,614      5.15%               $   5,735      5.67%
                                          =========                          =========                          =========
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Interest income on loans includes fee income of $121,000, $127,000 and
$265,000 for the years ended December 31, 2002, 2001 and 2000, respectively.

         The Company's average total assets increased from $110.3 million in
2000 to $118.8 million in 2001 and $151.7 million in 2002, representing a 7.7%
increase during 2001 over 2000, and a 27.7% increase in 2002 over 2001. Average
portfolio loans increased from $77.2 million to $90.7 million in 2001 and $115.7
million in 2002, representing a 17.5% and 27.6% increase respectively. In
addition the Company's average non-interest bearing demand deposits increased
from $19.7 million in 2000 to $20.9 million in 2001 and $26.4 million in 2002,
representing a 6.1% and 26.3% increase respectively. The growth was attributable
in part to the purchase of assets and liabilities of the Stockton branch of
California Bank & Trust, which increased deposits by $22.4 million and loans by
$8.0 million. The remaining growth came from the Bank's current market share.

                                       41
<PAGE>

         The following table sets forth changes in interest income and expense
for each major category of earning assets and interest-bearing liabilities, and
the amount of change attributable to volume and rate changes for the periods
indicated. Changes attributable to rate/volume have been allocated to volume
changes. The yield on tax-exempt securities has not been adjusted to a
tax-equivalent yield basis.

<TABLE>
<CAPTION>
                         Analysis of Changes in Net Interest Income

                                                 Years ended December 31,

(Dollars in thousands)                2002 over 2001                   2001 over 2000
--------------------------------------------------------------------------------------------
                               Volume      Rate      Total      Volume      Rate      Total
--------------------------------------------------------------------------------------------

<S>                           <C>        <C>        <C>        <C>        <C>        <C>
Increase (Decrease)
In Interest Income:
------------------
  Loans                       $ 1,843    $(1,503)   $   340    $ 1,217    $(1,294)   $   (77)
  Investment securities           130       (274)      (144)      (102)        40        (62)
  Federal Funds sold              (21)      (134)      (155)      (159)      (227)      (386)
                              -------    -------    -------    -------    -------    -------
  Total Increase (Decrease)   $ 1,952    $(1,911)   $    41    $   956    $(1,481)   $  (525)
                              -------    -------    -------    -------    -------    -------

Increase (Decrease)
In Interest Expense:
-------------------
  Interest-bearing Demand     $   218    $  (199)   $    19    $    91    $  (390)   $  (299)
  Savings Deposits                  3        (13)       (10)        (4)       (61)       (65)
  Certificates of Deposit         220     (1,014)      (794)       116       (149)       (33)
  Other Borrowings                151          0        151         (7)        --         (7)
                              -------    -------    -------    -------    -------    -------
  Total Increase (Decrease)   $   592    $(1,226)   $  (634)   $   196    $  (600)   $  (404)
                              -------    -------    -------    -------    -------    -------

  Net Increase (Decrease)     $ 1,360    $  (685)   $   675    $   760    $  (881)   $  (121)
                              =======    =======    =======    =======    =======    =======

--------------------------------------------------------------------------------------------
</TABLE>


                               Non-interest Income

         The Company's non-interest income consists primarily of service charges
on deposit accounts, gain on sale of loans and other service fees. Non-interest
income also includes ATM fees earned at various locations. For the year ended
December 31, 2002, non-interest income represented 15.07% of the Company's
revenues versus 12.08% in 2001, and 7.1% in 2000. Historically, the Company's
service charges on deposit accounts have lagged peer levels for similar
services. This is consistent with the Company's philosophy of allowing customers
to pay for services with compensating balances and the emphasis on core deposits
as a significant funding source.

         Total non-interest income increased to $1.6 million in 2002 over $1.3
million in 2001, and $748,000 in 2000, representing an increase of 29.4% and an
increase of 69.0% respectively. The increase in 2002 is directly attributable to
the 36.5% increase in the gain from the sale of loans, because of the increase
in demand for these types of loans, an increase of 36.5% in other income on fees
collected from brokering mortgage loans and an increase of 31.8% in service
charges.

                                       42
<PAGE>

         The following table sets forth a summary of non-interest income for the
periods indicated.

                                                     Years Ended December 31,
(Dollars in thousands)
--------------------------------------------------------------------------------
                                                   2002        2001        2000
--------------------------------------------------------------------------------
Non-interest Income:

Service Charges                                   $  531      $  403      $  347
Rental Income from Other Real Estate                  21          12           4
Gain on Sale of Guaranteed Loans                     584         428         152
Gain on Sale of Investment Securities                 29          69          --
Other Income                                         470         347         245
                                                  ------      ------      ------

Total Non-interest Income                         $1,635      $1,259      $  748
                                                  ======      ======      ======
--------------------------------------------------------------------------------


                              Non-interest Expense

         Non-interest expense consists of salaries and related employee
benefits, occupancy and equipment expenses, data processing fees, professional
fees, directors' fees and other operating expenses. Non-interest expense for
2002 was $5.8 million compared to $4.9 million for 2001 and $4.6 million in
2000, representing an increase of $914,000, or 18.5% for 2002, and $319,000 or
6.9% for 2001. Increases in salaries and benefits are indicative of the
additions to staff to expand branch operations in line with their respective
growth for the year. The increase in occupancy and equipment is attributable to
the general upgrade of technology systems. The $164,000 increase in professional
fees is mostly attributable to legal and accounting costs associated in the
formation of the Company as holding company for the Bank

         The following table sets forth a summary of non-interest expense for
the periods indicated.

                                                     Years Ended December 31,
(Dollars in thousands)
--------------------------------------------------------------------------------
                                                   2002        2001        2000
--------------------------------------------------------------------------------
Non-interest Expense:

Salaries & Benefits                               $2,601      $2,217      $2,256
Occupancy & Equipment                              1,110       1,106         942
Professional Fees                                    484         320         192
Advertising & Promotion                              120          82         150
Postage, Stationery & Supplies                       186         178         136
Telephone                                            151         126         139
Director Fees                                        126          58         116
Data Processing                                        5          23          27
Other Expense                                      1,063         825         662
                                                  ------      ------      ------

Total Non-Interest Expenses                       $5,846      $4,935      $4,620
                                                  ======      ======      ======
--------------------------------------------------------------------------------

                                       43
<PAGE>

                                  Income Taxes

         The Company's provision for income taxes includes both federal income
and state franchise taxes and reflects the application of federal and state
statutory rates to the Company's net income before taxes. The principal
difference between statutory tax rates and the Company's effective tax rate is
the benefit derived from investing in tax-exempt securities. Increases and
decreases in the provision for taxes reflect changes in the Company's net income
before tax.

         The following table reflects the Company's tax provision and the
related effective tax rate for the periods indicated.

(Dollars in thousands)                              Years Ended December 31,
-------------------------------------------------------------------------------
                                                  2002        2001        2000
-------------------------------------------------------------------------------

Tax Provision                                    $  630      $  520      $  555
Effective Tax Rate                                 35.1%       33.4%       35.5%

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


                                  Asset Quality

         The Company concentrates its lending activities primarily within
Calaveras, San Joaquin, Stanislaus and Tuolumne Counties.

         The Company manages its credit risk through diversification of its loan
portfolio and the application of underwriting policies and procedures and credit
monitoring practices. Although the Company has a diversified loan portfolio, a
significant portion of its borrowers' ability to repay the loans is dependent
upon the professional services and residential real estate development industry
sectors. Generally, the loans are secured by real estate or other assets and are
expected to be repaid from cash flows of the borrower or proceeds from the sale
of collateral.

         The following table sets forth the amounts of loans outstanding by
category as of the dates indicated:

(Dollars in thousands)                                    As of December 31,
--------------------------------------------------------------------------------
                                                        2002             2001
--------------------------------------------------------------------------------

Commercial and Agricultural                          $  40,226        $  34,079

Real estate-construction                                33,887           23,561

Real estate - commercial                                53,160           36,831

Installment & Other                                      7,734            3,493

Deferred Loan Fees and Costs                               265              317

Allowance for Loan and Lease Losses                     (1,306)          (1,172)
                                                     ---------        ---------

Total Net Loans                                      $ 133,966        $  97,109
                                                     =========        =========

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

                                       44
<PAGE>

         Net portfolio loans have increased $36.9 million or 38.0%, to $134.0
million at December 31, 2002 over $97.1 million at December 31, 2001. Commercial
and agricultural loans have increased $6.1 million or 18.0%, real estate
construction projects have increased $6.7 million or 43.6%, real estate mortgage
loans have increased by $16.3 million or 44.3% and installment loans have
increased by $4.2 million or 121.4% over 2001. The portfolio mix remains stable
as compared with the mix of a year ago, with commercial and agricultural loans
of approximately 29.8% of total loans, real estate construction loans of 25.1%,
commercial and residential real estate loans at 39.4%, and 5.7% for installment
loans.

         The Company's practice is to place an asset on nonaccrual status when
one of the following events occurs:(i) Any installment of principal or interest
is 90 days or more past due (unless in management's opinion the loan is
well-secured and in the process of collection), (ii) management determines the
ultimate collection of principal or interest to be unlikely or iii) the terms of
the loan have been renegotiated due to a serious weakening of the borrower's
financial condition. Nonperforming loans are loans that are on nonaccrual, are
90 days past due and still accruing or have been restructured.

         The following table sets forth a summary of the Company's nonperforming
loans and other assets as of the dates indicated:

(Dollars in thousands)                                     As of December 31,
--------------------------------------------------------------------------------
                                                        2002               2001
--------------------------------------------------------------------------------

Nonaccrual loans                                       $  199             $  585

Other Real Estate Owned                                    49                182

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

         The Company's nonaccrual loans decreased from $585,000 to $199,000
during 2002 and are comprised of eight loans. Other real estate owned ("OREO")
decreased to $49,000 in 2002 from $182,000 in 2001. The charge offs of $226,000
accounted for most of the decrease in nonaccrual loans.

         The Company assigns all loans a credit risk rating and monitors ratings
for accuracy. The aggregate credit risk ratings are used to determine the
allowance for loan losses. Management reviews the credit risk report with the
Director Loan Committee on a weekly basis as well as with the full Board
monthly.

                                       45
<PAGE>

         The following table in the named categories sets forth the maturity
distribution of the Company's loans outstanding as of December 31, 2002, which,
based on remaining scheduled repayments of principal, were due within the
periods indicated.

(Dollars in thousands)
--------------------------------------------------------------------------------
                                              After One
                                Within One     through       After
                                   Year      Five Years   Five Years      Total
--------------------------------------------------------------------------------
Commercial and
 agricultural loans              $ 23,886      $12,716      $ 3,624      $40,226
Construction Loans                 28,629        5,258           --       33,887
                                 --------      -------      -------      -------

Total                            $ 52,515      $17,974      $ 3,624      $74,113
                                 ========      =======      =======      =======

Loans due after one
 year with:
 Fixed Rates                                   $ 7,964      $ 1,049      $ 9,013

 Variable Rates                                 10,010        2,575       12,585
                                               -------      -------      -------

Total                                          $17,974      $ 3,624      $21,598
                                               =======      =======      =======

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


Allowance for Loan and Lease Losses (ALLL)

         In determining the amount of the Company's Allowance for Loan and Lease
Losses ("ALLL"), management assesses the diversification of the portfolio. Each
credit is assigned a credit risk rating factor, and this factor, multiplied by
the dollars associated with the credit risk rating, is used to calculate one
component of the ALLL. In addition, management estimates the probable loss on
individual credits that are receiving increased management attention due to
actual or perceived increases in credit risk.

         The Company makes provisions to the ALLL on a regular basis through
charges to operations that are reflected in the Company's statements of income
as a provision for loan losses. When a loan is deemed uncollectible, it is
charged against the allowance. Any recoveries of previously charged-off loans
are credited back to the allowance. There is no precise method of predicting
specific losses or amounts that ultimately may be charged-off on particular
categories of the loan portfolio. Similarly, the adequacy of the ALLL and the
level of the related provision for possible loan losses is determined on a
judgement basis by management based on consideration of a number of factors
including (i) economic conditions, (ii) borrowers' financial condition, (iii)
loan impairment, (iv) evaluation of industry trends, (v) industry and other
concentrations, (vi) loans which are contractually current as to payment terms
but demonstrate a higher degree of risk as identified by management, (vii)
continuing evaluation of the performing loan portfolio, (viii) monthly review
and evaluation of problem loans identified as having a loss potential, (ix)
monthly review by the Board of Directors, (x) off balance sheet risks and (xi)
assessments by regulators and other third parties. Management and the Board of
Directors evaluate the allowance and determine its desired level considering
objective and subjective measures, such as knowledge of the borrowers'
businesses, valuation of collateral, the determination of impaired loans and
exposure to potential losses.

                                       46
<PAGE>

         While management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based on changes in
economic conditions and other qualitative factors. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's ALLL. Such agencies may require the Company to
provide additions to the allowance based on their judgment of information
available to them at the time of their examination. There is uncertainty
concerning future economic trends. Accordingly it is not possible to predict the
effect future economic trends may have on the level of the provision for
possible loan losses in future periods.

         The Company's principal lines of lending are (i) commercial and
agricultural, (ii) real estate construction and (iii) commercial and residential
real estate. The primary sources of repayment of the Company's commercial loans
are the borrowers' conversion of short-term assets to cash and operating cash
flow. The net assets of the borrower or guarantor are usually identified as a
secondary source of repayment. The principal factors affecting the Company's
risk of loss from commercial lending include each borrower's ability to manage
its business affairs and cash flows, local and general economic conditions and
real estate values in the Company's service area. The Company manages its
commercial loan portfolio by monitoring its borrowers' payment performance and
their respective financial condition and makes periodic adjustments, if
necessary, to the risk grade assigned to each loan in the portfolio. The
Company's evaluations of its borrowers are facilitated by management's knowledge
of local market conditions and periodic reviews by a consultant of the Company's
credit administration policies.

         The principal source of repayment of the Company's real estate
construction loans is the sale of the underlying collateral or the availability
of permanent financing from the Company or other lending source. The principal
risks associated with real estate construction lending include project cost
overruns in the project and deterioration of real estate values as a result of
various factors, including competitive pressures and economic downturns. The
Company manages its credit risk associated with real estate construction lending
by establishing loan-to-value ratios and loan-to-cost ratios on projects on an
as-completed basis, inspecting project status in advance of controlled
disbursements and matching maturities with expected completion dates. Generally,
the Company requires a loan-to-value ratio of not more than 80% on single family
residential construction loans.

         The principal source of repayment of the Company's real estate mortgage
loans is the borrowers' operating cash flow. Similar to commercial loans, the
principal factors affecting the Company's risk of loss in real estate mortgage
lending include each borrower's ability to manage its business affairs and cash
flows, local and general economic conditions and real estate values in the
Company's service area. The Company manages its credit risk associated with real
estate mortgage lending primarily by establishing maximum loan-to-value ratios
and using strategies to match the borrower's cash flow to loan repayment terms.

         The Company's specific underwriting standards and methods for each of
its principal lines of lending include industry-accepted analysis and modeling
and certain proprietary techniques. The Company's underwriting criteria are
designed to comply with applicable regulatory guidelines, including required
loan-to-value ratios. The Company's credit administration policies contain
mandatory lien position and debt service coverage requirements, and the Company
generally requires a guarantee from 20% or more owners of its corporate
borrowers.

         The ALLL should not be interpreted as an indication that charge-offs in
future periods will occur in the stated amounts or proportions. In management's

                                       47
<PAGE>

opinion the estimated charge-offs by loan category for the year ended December
31, 2003 are: $250,000 for commercial and agriculture, $20,000 for installment
and none for real estate construction or real-estate mortgage.

         The adequacy of the ALLL is calculated upon three components. First is
the credit risk rating of the loan portfolio, including all outstanding loans
and leases. Every extension of credit has been assigned a risk rating based upon
a comprehensive definition intended to measure the inherent risk of lending
money. Each rating has an assigned risk factor expressed as a reserve
percentage. Central to this assigned risk factor is the historical loss record
of the Company. Secondly, established specific reserves are available for
individual loans currently on management's watch and high-grade loan lists.
These are the estimated potential losses associated with specific borrowers
based upon the collateral and event(s) causing the risk ratings. The third
component is unallocated. This reserve is for qualitative factors that may
effect the portfolio as a whole, such as those factors described above.

         Management believes the assigned risk grades and our methods for
managing risk are satisfactory.

         The provision for loan losses decreased to $285,000 for 2002 versus
$383,000 in 2001. The decrease in the amount of the provision is a direct result
of the Company's in-depth analysis of the loan portfolio and the loan loss
history of the Company. Net charge-offs were $151,000 or .13% of average loans
during 2002. Management does not believe that there were any trends indicated by
the detail of the aggregate charge-offs for any of the periods discussed.

         The following table summarizes the activity in the ALLL for the periods
indicated.

                                                            Years Ended
(Dollars in thousands)                                      December 31,
-------------------------------------------------------------------------------
                                                       2002               2001
-------------------------------------------------------------------------------

Beginning Balance:                                   $ 1,172            $ 1,001

Provision for loan losses                                286                383
Charge-offs:
         Commercial                                     (171)              (226)
         Real Estate                                     (--)               (--)
         Other                                           (28)                (2)
                                                     -------            -------
Total Charge-offs                                       (199)              (228)
                                                     -------            -------

Recoveries:
         Commercial                                       --                 16
         Other                                            47                 --
                                                     -------            -------
Total Recoveries                                          47                 16
                                                     -------            -------

Ending Balance                                       $ 1,306            $ 1,172
                                                     =======            =======

ALLL to total loans                                      .97%              1.19%
Net Charge-offs to average
loans                                                    .13%               .23%
-------------------------------------------------------------------------------

                                       48
<PAGE>

Investment Portfolio

         The Company classifies its investment securities as "held-to-maturity"
or "available-for-sale" at the time of investment purchase. Generally, all
securities are purchased with the intent and ability to hold the security for
long-term investment, and the Company has both the ability and intent to hold
"held-to-maturity" investments to maturity. The Company does not engage in
trading activities.

         Investment securities held-to-maturity are carried at cost adjusted for
the accretion of discounts and amortization of premiums. Securities
available-for-sale may be sold to implement the Company's asset/liability
management strategies and in response to changes in interest rates, prepayment
rates and similar factors. Securities available-for-sale are recorded at market
value and unrealized gains or losses, net of income taxes, are reported as
accumulated other comprehensive income or loss, in a separate component of
shareholder's equity. Gain or loss on sale of investment securities is based on
the specific identification method.

         Investment securities held-to-maturity at December 31, 2002, consisted
of mortgage-backed securities totaling $292,000 with a remaining contractual
maturity of 12 to 19 years and a weighted-average yield to maturity of 6.55%

         The following table summarizes the contractual maturities of the
Company's investment securities held as available-for-sale at their carrying
value and their weighted-average yields at December 31, 2002. The yield on
tax-exempt securities has not been adjusted to a tax-equivalent yield basis.

<TABLE>
<CAPTION>
                               Within One        One to Five       Five to Ten       Ten Years
                                  Year              Years             Years           And Over            Total
                                  ----              -----             -----           --------            -----
(Dollars in thousands)
-------------------------------------------------------------------------------------------------------------------
                             Amount   Yield    Amount   Yield    Amount   Yield    Amount   Yield    Amount   Yield
-------------------------------------------------------------------------------------------------------------------

<S>                          <C>       <C>     <C>       <C>     <C>       <C>     <C>       <C>     <C>       <C>
U.S.                         $ 3,069   2.52%   $ 1,032   5.84%   $   123   6.79%   $   357   6.00%   $ 4,581   3.65%
Government &
Agencies
Obligations of
State and
Political Subs                 1,845   1.59%     1,590   4.55%       209   3.50%     2,392   4.88%     6,036   3.72%

Equity Securities                                                                      595   3.37%       595   3.37%

Other Securities                                 1,263   5.40%                                         1,263   5.40%

Total                        $ 4,914   2.17%   $ 3,885   5.20%   $   332   4.74%   $ 3,344   4.74%   $12,475   3.85%
                             =======   ====    =======   ====    =======   ====    =======   ====    =======   ====

-------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       49
<PAGE>

         The following table summarizes the carrying value of the Company's
available for sale investment securities held on the dates indicated.


(Dollars in thousands)                                  Years Ended December 31

--------------------------------------------------------------------------------
                                                          2002             2001
--------------------------------------------------------------------------------

U.S. Government & Agencies                              $ 4,546          $ 4,314

Municipal Obligations                                     6,097            5,436
Corporate and Other Bonds                                 1,832              682
                                                        -------          -------
Total                                                   $12,475          $10,432
                                                        =======          =======

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


                                Deposit Structure

         The Company primarily obtains deposits from local businesses and
professionals as well as through certificates of deposits, savings and checking
accounts.

         The following table sets forth the remaining maturities of certificates
of deposit at December 31, 2002

                            Deposit Maturity Schedule
(Dollars in thousands)
--------------------------------------------------------------------------------
                                                  Under $100,000   Over $100,000
--------------------------------------------------------------------------------

Three Months or less                                  $ 5,336         $ 4,957
Over three through six months                          10,562          16,394
Over six through twelve months                         13,598          13,660
Over twelve months                                      2,178           2,578
                                                      -------         -------
Total                                                 $31,674         $37,589
                                                      =======         =======
--------------------------------------------------------------------------------

                                    Liquidity

         The purpose of liquidity management is to ensure efficient and
economical funding of the Company's assets consistent with the needs of the
Company's depositors and, to a lesser extent, shareholders. This process is
managed not by formally monitoring the cash flows from operations, investing and
financing activities as described in the Company's statement of cash flows, but
through an understanding principally of depositor and borrower needs. As loan
demand increases, the Company can use asset liquidity from maturing investments
along with deposit growth to fund the new loans.

         With respect to assets, liquidity is provided by cash and money market
investments such as interest-bearing time deposits, federal-funds sold,
available-for-sale investment securities, and principal and interest payments on
loans. With respect to liabilities, liquidity is provided by core deposits,
shareholders' equity and the ability of the Company to borrow funds and to
generate deposits.

         Because estimates of the liquidity need of the Company may vary from
actual needs, the Company maintains a substantial amount of liquid assets to
absorb short-term increases in loans or reductions in deposits. As loan demand

                                       50
<PAGE>

decreases or loans are paid off, investment assets can absorb these excess funds
or deposit rates can be decreased to run off excess liquidity. Therefore, there
is some correlation between financing activities associated with deposits and
investing activities associated with lending. The Company's liquid assets (cash
and due from banks, federal funds sold, and available-for-sale investment
securities) totaled $36.0 million or 20.0% of total assets at December 31, 2002,
$17.3 million or 14.3% of total assets at December 31, 2001 and $25.2 million or
22.2% of total assets at December 31, 2000. The Company expects that its primary
sources of liquidity will be earnings of the Company, acquisition of core
deposits, and wholesale borrowing arrangements.

Capital Resources

         Capital adequacy is a measure of the amount of capital needed to
sustain asset growth and act as a cushion for losses. Capital protects
depositors and the deposit insurance fund from potential losses and is a source
of funds for the investments the Company needs to remain competitive.
Historically, capital has been generated principally from the retention of
earnings.

         Overall capital adequacy is monitored on a day-to-day basis by the
Company's management and reported to the Company's Board of Directors on a
quarterly basis. The Bank's regulators measure capital adequacy by using a
risk-based capital framework and by monitoring compliance with minimum leverage
ratio guidelines. Under the risk-based capital standard, assets reported on the
Company's balance sheet and certain off-balance sheet items are assigned to risk
categories, each of which is assigned a risk weight.

         This standard characterizes an institution's capital as being "Tier 1"
capital (defined as principally comprising shareholders' equity) and "Tier 2"
capital (defined as principally comprising the qualifying portion of the ALLL).

         The minimum ratio of total risk-based capital to risk-adjusted assets,
including certain off-balance sheet items, is 8%. At least one-half (4%) of the
total risk-based capital is to be comprised of Tier 1 capital; the balance may
consist of debt securities and a limited portion of the ALLL.

         As of December 31, 2002, the most recent notification by the Federal
Reserve Bank of San Francisco (FRBSF) categorized the Company as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Company must meet the minimum ratios as set
forth below. There are no conditions or events since that notification that
management believes have changed the institution's category.

         The Company's and the Bank's risk-based capital ratios are presented
below.


Pacific State Bancorp
                                          December 31,
                                          ------------
                                              2002
                                              ----

Total Risk-Based Capital                      11.4%

Tier 1 Capital to Risk-Based                   9.4%
Assets

Tier 1 Capital to Average Assets              8.10%
(Leverage ratio)

                                       51
<PAGE>

Pacific State Bank                                                   For Bank to
                                                                     -----------
                                       December 31,   December 31,     be well
                                       ------------   ------------     -------
                                           2002           2001       capitalized
                                           ----           ----       -----------

Total Risk-Based Capital                  10.97%          10.2%       > 10.00%

Tier 1 Capital to Risk-Based              10.06%           9.1%       >  6.00%
Assets

Tier 1 Capital to Average Assets           8.74%           7.8%       >  5.00%
(Leverage ratio)


Impact of Inflation

         Inflation affects the Company's financial position as well as its
operating results. It is management's opinion that the effects of inflation on
the financial statements have not been material.


                   QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

         The following table presents the summary results for the stated eight
quarters:

<TABLE>
<CAPTION>
(Dollars in thousands,                       2002                                2001
   except per share)                         ----                                ----
                                 1st      2nd      3rd      4th      1st      2nd      3rd      4th
                               ------   ------   ------   ------   ------   ------   ------   ------
<S>                            <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>
Interest income                $2,024   $2,284   $2,369   $2,558   $2,440   $2,370   $2,127   $2,257

Net interest income             1,316    1,576    1,577    1,820    1,354    1,420    1,322    1,518

Provision for loan loses           77       81       82       46      100      113      113       57

Total non-interest income         397      434      330      474      227      449      379      205

Total non-interest expense      1.332    1,391    1,571    1,551    1,211    1,204    1,267    1,253

Income before taxes               304      538      254      697      270      552      321      413

Net Income                        200      352      174      437      175      358      224      279

Net Income Per Common Share:

     Diluted                   $ 0.25   $ 0.41   $ 0.20   $ 0.51   $ 0.22   $ 0.46   $ 0.29   $ 0.35

     Basic                     $ 0.26   $ 0.44   $ 0.21   $ 0.53   $ 0.24   $ 0.48   $ 0.31   $ 0.37
</TABLE>

                                       52
<PAGE>

      MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
      ---------------------------------------------------------------------

         There is only a limited trading market for the Company's Common stock,
which is not listed on any exchange. Hoefer & Arnett (San Francisco) is the
Company's primary market maker. Trading information is available via the World
Wide Web NASDAQ OTC Electronic Bulletin Board, under the symbol PSBC.

         The following table, which summarizes trading activity during the
Company's last two fiscal years, is based on information provided by Yahoo.com
Historical Quotes. The quotations reflect the price that would be received by
the seller without retail mark-up, mark-down or commissions and may not have
represented actual transactions.

                                                    Sales Price
                                                    -----------
                  Quarter Ended:            High         Low        Volume
                  -------------             ----         ---        ------

                  March 31, 2002          $19.000      $14.500       8,300
                  June 30, 2002           $19.000      $15.000      23,800
                  September 30, 2002      $18.130      $14.750      13,000
                  December 31, 2002       $19.000      $16.100       3,800

                  March 31, 2001          $10.750      $10.250       7,600
                  June 30, 2001           $11.000      $10.440      60,300
                  September 30, 2001      $15.650      $10.850      11,200
                  December 31, 2001       $15.120      $13.050      28,200

         As of March 1, 2003, there were approximately 400 holders of record of
the common stock of the Company.

         The Company's primary source of cash is dividends from the Bank. The
Bank's ability to pay dividends is subject to certain regulatory requirements.
The California Financial Code restricts the total dividend payment of any bank
in any calendar year to the lesser of (1) the bank's retained earnings or (2)
the bank's net income for its last three fiscal years, less distributions made
to shareholders' during the same three-year period. The Company is also subject
to similar restrictions imposed by Federal law. As of December 31, 2002, the
Company had $3,257,000 in retained earnings available for dividends to
shareholders.

         The power of the board of directors of an insured depository
institution to declare a cash dividend or other distribution with respect to
capital is subject to statutory and regulatory restrictions which limit the
amount available for such distribution depending upon the earnings, financial
condition and cash needs of the institution, as well as general business
conditions.

                                       53
<PAGE>
Company and Bank Officers
-------------------------

Steven A. Rosso
President & Chief Executive Officer

Gary A. Stewart
Executive Vice President & Chief Credit Officer

Bank Officers
-------------

Allen Hafizi
Vice President & Note Department Manager

JoAnne Roberts
Vice President & Controller

Glenn Scott
Vice President & MIS Director

Ron Aschwanden
Vice President & Regional Manager- Calaveras County

Patrick MacDonald
Vice President & Manager - Stockton Main

Laura Maffei
Vice President Manager -Tracy

Linda Ogata
Vice President & Manager - March Lane

Rick Simas
Vice President  & Manager -Modesto

Catherine Santa Maria
Vice President & Branch Manager - Groveland

Douglas van den Enden
Vice President & Commercial Loan Officer

Janita Cavanaugh
Assistant Vice President & Assistant Controller

Sylvia Hanania
Senior Operations Officer - Stockton Main

Suzanne Fedi
Operations Officer -March Lane

Kathy Gallo
Operations Officer -Groveland

Joanne Israel
Operations Officer - Angles Camp

Sheila Purser
Operations Officer - Modesto

Shelly Urbanek
Operations Officer - Tracy



Board of Directors
------------------

Harold Hand, M.D.
Chairman of the Board
Owner, Stockton, Eye Surgery

Steven A. Rosso
President & Chief Executive Officer
Pacific State Bancorp & Pacific State Bank

Michael L. Dalton, C.P.A.
Partner, Dalton & Lagorio, C.P.A.

Maxwell M. Freeman
Freeman, D'Auito, Pierce & Gurev
A Professional Law Corporation

Patricia A. Hatton, M.D.
Gynecologist

Gary A. Stewart
Executive Vice President & Chief Credit Officer
Pacific State Bancorp & Pacific State Bank

Steven J. Kikuchi
Landscape Architect

Kathleen M. Verner
Vice President
Verner Construction

Yoshikazu Mataga, Owner
Mataga Buick Pontiac & GMC
Mataga Cadillac
Tracy Pontiac Cadillac & GMC

Phillip B. Wallace
Chairman
Western Empire Management

                                       54