##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION

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Form 10-K
Annual Report
Under
THE SECURITIES EXCHANGE ACT OF 1934


|                                            |  |                      
|------------------------------------------- |  | ---------------------
|For the fiscal year
Ended December 31, 2001 |  | File Number
000-33361

HEMET BANCORP(Exact name of registrant as specified in charter)

|                                                                          |  |                                             
|------------------------------------------------------------------------- |  | --------------------------------------------
|California
(State or other jurisdiction of
incorporation or organization) |  | 91-2155043
(IRS Employer Identification No.)



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3715 Sunnyside Drive
Riverside, California 92506
(909) 784-5771
(Address, including zip code, and telephone number, including area code, or registrants principal executive offices)




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

Securities registered pursuant to Section 12(g) of the Act:
Common Stock

Indicate by check mark whether the Company: (1) has filed all
reports required to be filed by Section 13 of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Company was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.

Yes [X] No [   ]

Indicate by check mark if disclosure of delinquent filers pursuant
to item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Companys knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [   ]

The aggregate market value of voting stock held by nonaffiliates of
the Company as of January 31, 2002 was $15,250,000.

At January 31, 2002, the registrant had 805,120 shares of Common
Stock outstanding.

Documents incorporated by reference  none.





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TABLE OF CONTENTS



|             |                                                                                               |  |  |  |  |  |  | 
|------------ | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I      
|             | ITEM 1. DESCRIPTION OF BUSINESS                                                              
|             | ITEM 2. PROPERTIES                                                                           
|             | ITEM 3. LEGAL PROCEEDINGS                                                                    
|             | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II     
|             | ITEM 5. MARKET FOR COMPANYS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                   
|             | ITEM 6. SELECTED FINANCIAL DATA                                                              
|             | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|             | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|             | A. Principles of Consolidation and Nature of Operations                                      
|PART III    
|             | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|             | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY                                     
|             | ITEM 11. EXECUTIVE COMPENSATION                                                              
|             | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|             | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|PART IV     
|             | ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS OF FORM 8-K                    
|SIGNATURES  
|EXHIBIT 10.3
|EXHIBIT 10.4
|EXHIBIT 10.5
|EXHIBIT 10.6
|EXHIBIT 10.7
|EXHIBIT 10.8
|EXHIBIT 21  
|EXHIBIT 99  



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##### Table of Contents






PART I

Forward Looking Statements

Certain statements in this Form 10-K, including without limitation statements
containing the words believes, anticipates, intends, expects, pro
forma and words of similar import, constitute forward-looking statements.
Such forward-looking statements involve known and unknown risks, uncertainties,
and other factors that may cause the actual results, performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following: general economic
conditions in the Companys market areas; variances in interest rates; changes
in or amendments to regulatory authorities capital requirements or other
regulations applicable to the Company; increased competition for loans and
deposits; and other factors referred to elsewhere in this Form 10-K. Given
these uncertainties, shareholders are cautioned not to place undue reliance on
forward-looking statements.The Company disclaims any obligation to update any
such factors which are not considered to be material or to publicly announce
the result of any revisions to any of the forward-looking statements included
herein which are not considered to be material or to reflect future events or
developments




ITEM 1. DESCRIPTION OF BUSINESS

The Company

Hemet Bancorp (Company), a bank holding company, was incorporated on
January 31, 2001 in the State of California for the purpose of acquiring and
holding all of the outstanding stock of its wholly owned subsidiary, The Bank
of Hemet (Bank). Hemet Bancorp acquired all of the outstanding stock of the
Bank on November 21, 2001. The Bank was incorporated in California in 1974 and
operates five branches located in the Inland Empire area of Southern
California. BankLink Corporation, (BankLink) is the wholly owned data
processing subsidiary of the Bank. BankLink provides data processing services
to the Bank and three other clients. Hemet Statutory Trust I, a
wholly owned trust subsidiary of the Company was established
on November 8, 2001 in the State of Connecticut for the purpose of issuing and
selling Trust Preferred Securities and using the proceeds to acquire the junior
subordinated debentures issued by the Company.

The Companys principal source of income is currently dividends from the
Bank. At December 31, 2001, the Company had consolidated assets of $303.6
million, deposits of $271.9 million and stockholders equity of $20.6 million.

On March 1, 2002, the Company announced its intention to qualify to become an S Corporation for income tax purposes. As an S
corporation, substantially all of the Companys tax liability would be
assumed by its shareholders, thus eliminating the double-taxation of dividends.
For Hemet Bancorp to meet the Internal Revenue Service eligibility
requirements to become an S corporation, it will need to reduce the number of
its shareholders to no more than 75, from its current number of approximately
382. Reducing the number of shareholders will involve the merger of
the Company, with Hemet Financial Group, a newly formed California corporation.
Immediately prior to the merger of Hemet Financial Group and the
Company,
certain shareholders of the
Company will exchange their shares of Company common stock for an equivalent number of shares of common stock of
Hemet Financial Group. It is proposed that Hemet Financial Group will have as
its shareholders those shareholders of the
Company, including directors and
officers of the
Company and the Bank, whose form of ownership is
eligible to be a shareholder of an S corporation and who currently are among
the 74 largest shareholders of the
Company.

The selection of such eligible shareholders will be made based on the
shareholder records maintained by the
Company. Only those Hemet Bancorp
shareholders who provide a written commitment to maintaining their eligibility
to be a shareholder of Hemet Financial Group will be included in the exchange
and the proposed merger of the
Company with Hemet Financial Group. All of
the remaining shareholders of the Company will be cashed out in the proposed
merger. The
Company will base the cash out price for the
Company common
stock upon an appraisal and an independent fairness opinion report obtained
from its investment banking firm. The proposed merger will be contingent upon
Hemet Financial Group owning in excess of 90% of the outstanding shares of
the
Company prior to the merger and the receipt by Hemet Financial Group of
the necessary regulatory approvals of the Federal Reserve Board and the
California Department of Financial Institutions. The
Companys shareholder
records as of

1



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##### Table of Contents



December 31, 2001 indicate that the 74 largest shareholders currently own
approximately 90% of the outstanding shares of common stock, with the remaining
10% of outstanding shares owned by approximately 325 other shareholders.

In the event that any of the proposed shareholders of Hemet Financial
Group prove to be ineligible to become an S corporation shareholder, certain
eligible shareholders, including officers and directors of the Company may be
purchasing additional shares of the Company common stock in the open market
and in private transactions prior to the proposed merger to insure that the
aggregate ownership of the proposed shareholders of Hemet Financial Group will
be in excess of 90%. It is expected that the proposed merger will occur in
late 2002.

The Bank

The Bank was incorporated in 1974 under the California General Corporation
Law and is licensed by the California Department of Financial Institutions (the
Department) to conduct a general banking business. Its deposits are insured
up to the applicable legal limits by the Federal Deposit Insurance Corporation.
The Bank is not a member of the Federal Reserve System.

The Bank emphasizes community-based commercial banking. It serves
small-to-medium size businesses, professionals, retired individuals and
residents in the Hemet area, as well as businesses and real estate
owners/developers primarily throughout Riverside, San Bernardino, Orange, Los
Angeles and San Diego counties. The Bank also makes commercial real estate
loans meeting its underwriting criteria in the San Francisco bay area, in the
Sacramento area and in other areas outside of its primary service area,
including Arizona and Nevada.

The Banks primary service area is the area of California commonly
referred to as the Inland Empire, a region primarily consisting of Riverside
and San Bernardino counties. These counties are experiencing significant
population and economic growth, much of which has been fueled by the migration
of manufacturing, distribution and export service firms from adjacent Los
Angeles, Orange and San Diego counties.

The Bank offers a full range of commercial, real estate, personal, home
improvement, automobile and other installment and term loans. The Banks
primary lending focus has historically been and continues to be commercial real
estate and construction lending.

Deposit services offered by the Bank include personal and business
checking and savings accounts, money market deposit accounts, certificates of
deposit, and individual retirement accounts. Other operational services
include safe deposit boxes, travelers checks, wire transfers, overdraft lines
of credit, electronic banking for businesses, 24-hour telephone banking,
merchant bankcard, automated clearing house origination, automatic teller
machines on the Instant Teller, Maestro and Cirrus networks and other standard
depository functions.

At December 31, 2001, the Banks wholly owned subsidiary, BankLink
Corporation (BankLink), provided data processing services to the Bank and
three other banks. At December 31, 2001, BankLink had total assets of $705,000
and pre-tax earnings for the year ended December 31, 2001 of $150,000. In
April 2001, BankLink entered into a contract with Financial Data Solutions,
Inc. (FDSI) to assign the item processing contracts of four client banks to
FDSI. The FDSI contract provides for BankLink to receive a small percentage of
the item processing fees billed for the assigned contracts over the various
lives of the four client contracts. The FDSI contract also provides for
BankLink to lease certain item processing equipment to FDSI. The conversion of
item processing services from BankLink to FDSI was completed in June 2001.
BankLink continues to perform data processing services for client banks.

The Bank has four other subsidiaries which are not active.

On September 8, 1999, the Bank announced that its Board of Directors
approved the termination of the Acquisition Agreement with Pacific Community
Banking Group (PCBG). The Acquisition Agreement provided for the acquisition
of the Bank by PCBG and the payment of the merger consideration to the Banks
shareholders upon consummation of the acquisition. The merger consideration
that was to be paid would have been funded in part with proceeds from an
initial public offering of PCBG expected to have been underwritten by an
underwriting group. A major condition of the Acquisition Agreement was that
PCBG shall have entered into a firm commitment underwriting agreement for an
initial public offering by PCBG. PCBG was not able to satisfy that condition
by the time provided in the Acquisition Agreement. The Banks write-off of
$216,000 in PCBG merger related professional fees and other expenses were
recorded in noninterest expense for the year ended December 31, 1999.

2



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Recent Developments

Hemet Statutory Trust I (the Trust) is a Connecticut statutory trust which
was formed with the purpose of issuing the Guaranteed Preferred
Beneficial Interests in  Company Debentures (Trust Preferred Securities). Effective December 18, 2001, the
Trust completed a private issuance of $6,500,000 in Trust Preferred Securities.
The Trust Preferred Securities bear a floating rate of interest of 3.60% over
the three month LIBOR, payable quarterly, with the initial rate set at 5.6%.
Following the issuance of the Trust Preferred Securities, the Trust used the
proceeds from the Trust Preferred Securities offering to purchase $6,500,000 of
Junior Subordinated Debt Securities (the Debt Securities) of the
Company.
The Debt Securities bear the same terms and interest rates as the related Trust
Preferred Securities. The Debt Securities are the sole assets of the Trust and
are eliminated, along with the related income statement effects, in the
consolidated financial statements. The Company has fully and unconditionally
guaranteed all of the obligations of the Trust including the Trust Preferred
Securities. The Trust Preferred Securities mature on December 18, 2031 and can
be redeemed commencing on December 18, 2006 without a prepayment penalty.
Redemption of the Trust Preferred Securities prior to December 18, 2006 would
result in a prepayment penalty of 107.5% of the principal amount being redeemed
plus any accrued and unpaid interest. Under applicable regulatory guidelines,
the Trust Preferred Securities will qualify as Tier 1 Capital. Distributions
on the Trust Preferred Securities are recorded on the income statement in
Minority Interest in Income of Subsidiary. The costs associated with the Trust
Preferred Securities issuance have been capitalized and are being amortized
using a method which approximates the effective interest method over the life
of the Trust Preferred Securities. On December 27, 2001, the
Company invested
$3,000,000 of the net proceeds in the Bank to increase the Banks capital
levels.

Business Strategy

The Companys business strategy is to:



| |  | maintain asset quality;                                                                       
|- |  | ----------------------------------------------------------------------------------------------
| 
| |  | increase the volume and diversity of good quality, mini-perm real estate and commercial loans;
| 
| |  | remix its deposit base to lower its cost of funds;                                            
| 
| |  | provide high quality value based banking services and products to its customers;              
| 
| |  | continue a pace of moderate growth; and                                                       
| 
| |  | increase operating efficiencies.                                                              

The Company has focused on, and will continue to focus on, marketing
efforts to implement its business strategy. These efforts include obtaining
increased loan and deposit business from existing customers, word-of-mouth
referrals, advertising and personal solicitation of customers by officers,
directors and stockholders. Management assigns responsibility to all loan and
business development officers to make regular calls on potential customers and
obtain referrals from existing customers. The Company directs promotional
efforts toward individuals and small-to-medium sized businesses.

3



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##### Table of Contents



Investment Portfolio

The following table sets forth the book values of securities at the dates
indicated. Under Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, the Bank
has designated all of its U.S. government agency and treasury securities and
other securities as held-to-maturity. The Company does not have any
tax-exempt securities in its investment portfolio.

|                              |       |   |                        |        |      |   |        |        |  |   |        |        | 
|----------------------------- | ----- | - | ---------------------- | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                              |       |   | At December 31,       
|                              |       |   |                       
|                              |       |   | 2001                   |        | 2000 |   | 1999  
|                              |       |   |                        |        |      |   |       
|                              |       |   | (dollars in thousands)
|U.S. government agencies(1)   |       | $ | 5,993                  |        |      | $ | 18,016 |        |  | $ | 24,033 |       
|U.S.
government treasuries(1) |       |   | 10,154                 |        |      |   | 0      |        |  |   | 0      |       
|Other securities(2)           |       |   | 223                    |        |      |   | 326    |        |  |   | 939    |       
|                              |       |   |                        |        |      |   |        |        |  |   |        |       
|                              | Total |   | $                      | 16,370 |      |   | $      | 18,342 |  |   | $      | 24,972 | 
|                              |       |   |                        |        |      |   |        |        |  |   |        |       



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|(1) |  | At December 31, 2001,
$12.2 million of U.S. government agencies and treasuries were pledged to secure public funds deposited with
the Bank, compared with $14.0 million at December 31, 2000
and $12.1 million at December 31, 1999.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Consists of perpetual preferred stock of the
Federal Home Loan Bank of San Francisco.                                                                                                                                               

The following table sets forth the maturities of the Companys investment
securities at December 31, 2001 and the weighted average yields of such
securities calculated on the basis of the cost and effective yields based on
the scheduled maturity of each security.

|                             |            |   |                        |        |              |  |               |      |                 |   |        |   |       |  |        |      |       |   |        |   |       |  |      |      |   |   |     |   |  |  |      |      |   |   |        |        |  |  |      |      |  
|---------------------------- | ---------- | - | ---------------------- | ------ | ------------ |  | ------------- | ---- | --------------- | - | ------ | - | ----- |  | ------ | ---- | ----- | - | ------ | - | ----- |  | ---- | ---- | - | - | --- | - |  |  | ---- | ---- | - | - | ------ | ------ |  |  | ---- | ---- | -
|                             |            |   |                        |        | After one to |  | After five to |      |                 |   |       
|                             |            |   | One year or less       |        | five years   |  | ten years     |      | After ten years |   | Total 
|                             |            |   |                        |        |              |  |               |      |                 |   |       
|                             |            |   | Amount                 |        | Yield        |  | Amount        |      | Yield           |   | Amount |   | Yield |  | Amount |      | Yield |   | Amount |   | Yield
|                             |            |   |                        |        |              |  |               |      |                 |   |        |   |       |  |        |      |       |   |        |   |      
|                             |            |   | (dollars in thousands)
|U.S. government              |            |   |                        |        |              |  |               |      |                 |   |        |   |       |  |        |      |       |   |        |   |       |  |      |      |   |   |     |   |  |  |      |      |   |   |        |        |  |  |      |     
|                             | Agencies   |   | $                      | 5,993  |              |  |               | 4.99 | %               |   | $      | 0 |       |  |        | 0.00 | %     |   | $      | 0 |       |  |      | 0.00 | % |   | $   | 0 |  |  |      | 0.00 | % |   | $      | 5,993  |  |  |      | 4.99 | %
|                             | Treasuries |   |                        | 10,154 |              |  |               | 2.10 |                 |   |        | 0 |       |  |        | 0.00 |       |   | $      | 0 |       |  |      | 0.00 |   |   | $   | 0 |  |  |      | 0.00 |   |   |        | 10,154 |  |  |      | 2.10 |  
|Other securities(1)          |            |   | 0                      |        |              |  | 0.00          |      |                 |   | 0      |   |       |  | 0.00   |      |       |   | 0      |   |       |  | 0.00 |      |   |   | 223 |   |  |  | 5.31 |      |   |   | 223    |        |  |  | 5.31 |     
|                             |            |   |                        |        |              |  |               |      |                 |   |        |   |       |  |        |      |       |   |        |   |       |  |      |      |   |   |     |   |  |  |      |      |   |   |        |        |  |  |      |     
|Total                        |            | $ | 16,147                 |        |              |  | 3.17          | %    |                 | $ | 0      |   |       |  | 0.00   | %    |       | $ | 0      |   |       |  | 0.00 | %    |   | $ | 223 |   |  |  | 5.31 | %    |   | $ | 16,370 |        |  |  | 3.20 | %   
|                             |            |   |                        |        |              |  |               |      |                 |   |        |   |       |  |        |      |       |   |        |   |       |  |      |      |   |   |     |   |  |  |      |      |   |   |        |        |  |  |      |     
|Estimated
        fair value |            | $ | 16,194                 |        |              |  |               |      |                 | $ | 0      |   |       |  |        |      |       | $ | 0      |   |       |  |      |      |   | $ | 223 |   |  |  |      |      |   | $ | 16,417 |        |  |  |      |     
|                             |            |   |                        |        |              |  |               |      |                 |   |        |   |       |  |        |      |       |   |        |   |       |  |      |      |   |   |     |   |  |  |      |      |   |   |        |        |  |  |      |     



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|(1) |  | Consists of perpetual preferred stock of the Federal Home Loan Bank of
San Francisco.
|--- |  | -------------------------------------------------------------------------------------

The Company does not own securities of a single issuer (other than U.S.
government agencies and treasuries) whose aggregate book value is in excess of
10% of its total equity.

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##### Table of Contents



Lending Activities

The Company originates loans for its own portfolio. Lending activities
include commercial real estate mortgage, real estate construction, commercial
and consumer loans. The Companys primary asset category continues to be its
loan portfolio, which comprised 83.5% of average total assets in 2001. At
December 31, 2001, the Company had no foreign loans outstanding and has not
engaged in the business of making foreign loans.

Loan Portfolio

Composition of Loans. The following table shows the composition of loans
by type of loan or type of borrower at the dates indicated.

|                                |                           |   |                        |      |      |   |         |      |      |   |         |      |   |   |         |      |   |   |         |      |  
|------------------------------- | ------------------------- | - | ---------------------- | ---- | ---- | - | ------- | ---- | ---- | - | ------- | ---- | - | - | ------- | ---- | - | - | ------- | ---- | -
|                                |                           |   | December 31,          
|                                |                           |   |                       
|                                |                           |   | 2001                   |      | 2000 |   | 1999    |      | 1998 |   | 1997   
|                                |                           |   |                        |      |      |   |         |      |      |   |        
|                                |                           |   | (dollars in thousands)
|Real estate-construction & land |                           | $ | 4,887                  |      |      | $ | 1,254   |      |      | $ | 1,560   |      |   | $ | 1,941   |      |   | $ | 6,627   |     
|Real estate-mortgage(1)         |                           |   | 248,259                |      |      |   | 233,795 |      |      |   | 209,278 |      |   |   | 195,248 |      |   |   | 174,897 |     
|Commercial                      |                           |   | 6,781                  |      |      |   | 7,481   |      |      |   | 8,932   |      |   |   | 10,016  |      |   |   | 10,033  |     
|Consumer                        |                           |   | 2,055                  |      |      |   | 580     |      |      |   | 580     |      |   |   | 1,002   |      |   |   | 1,065   |     
|All other loans                 |                           |   | 277                    |      |      |   | 233     |      |      |   | 1,277   |      |   |   | 391     |      |   |   | 411     |     
|                                |                           |   |                        |      |      |   |         |      |      |   |         |      |   |   |         |      |   |   |         |     
|                                |                           |   | 262,259                |      |      |   | 243,343 |      |      |   | 221,627 |      |   |   | 208,598 |      |   |   | 193,033 |     
|                                | Deferred origination fees |   |                        | (740 | )    |   |         | (574 | )    |   |         | (635 | ) |   |         | (796 | ) |   |         | (746 | )
|                                |                           |   |                        |      |      |   |         |      |      |   |         |      |   |   |         |      |   |   |         |     
|Total loans                     |                           | $ | 261,519                |      |      | $ | 242,769 |      |      | $ | 220,992 |      |   | $ | 207,802 |      |   | $ | 192,287 |     
|                                |                           |   |                        |      |      |   |         |      |      |   |         |      |   |   |         |      |   |   |         |     



---

|(1) |  | Includes commercial real estate and residential mortgage
loans.
|--- |  | ---------------------------------------------------------------

Maturities and sensitivities of loans to changes in interest rates. The
following table shows the maturity distribution of the loan portfolio excluding
nonaccrual loans and deferred origination fees at December 31, 2001, and the
loan portfolios sensitivity to changes in interest rates. The principal
balances of loans maturing or repricing after one year are indicated by both
fixed and floating rate categories.

|                                |  |                        |         |            |  |            |         |           |  |              |       |      |  |            |        |  |  |   |        | 
|------------------------------- |  | ---------------------- | ------- | ---------- |  | ---------- | ------- | --------- |  | ------------ | ----- | ---- |  | ---------- | ------ |  |  | - | ------ | 
|                                |  | Maturing or repricing  |         |            |  |            |         |           |  |             
|                                |  |                        |         | Floating   |  |            |         |          
|                                |  |                        |         |            |  | After one  |         |           |  |              |       | rate |  | Fixed rate
|                                |  | Within                 |         | but within |  | After      |         | due after |  | due after   
|                                |  | one year               |         | five years |  | five years |         | one year  |  | one year (1)
|                                |  |                        |         |            |  |            |         |           |  |             
|                                |  | (dollars in thousands)
|Real estate-construction & land |  | $                      | 4,524   |            |  | $          | 363     |           |  | $            | 0     |      |  | $          | 363    |  |  | $ | 0      | 
|Real estate-mortgage            |  |                        | 140,248 |            |  |            | 99,720  |           |  |              | 8,291 |      |  |            | 48,611 |  |  |   | 59,400 | 
|Commercial                      |  |                        | 6,234   |            |  |            | 547     |           |  |              | 0     |      |  |            | 0      |  |  |   | 547    | 
|Consumer                        |  |                        | 1,809   |            |  |            | 162     |           |  |              | 84    |      |  |            | 0      |  |  |   | 246    | 
|All other loans                 |  |                        | 277     |            |  |            | 0       |           |  |              | 0     |      |  |            | 0      |  |  |   | 0      | 
|                                |  |                        |         |            |  |            |         |           |  |              |       |      |  |            |        |  |  |   |        | 
|                                |  | $                      | 153,092 |            |  | $          | 100,792 |           |  | $            | 8,375 |      |  | $          | 48,974 |  |  | $ | 60,193 | 
|                                |  |                        |         |            |  |            |         |           |  |              |       |      |  |            |        |  |  |   |        | 



---

|(1) |  | Includes real estate-mortgage
floating rate loans of $58.2
million which are accruing interest at floor rates.
|--- |  | --------------------------------------------------------------------------------------------------------------

Loans Secured By Real Estate

At December 31, 2001, $253.0 million, or approximately 96.8% of the
Companys loans were secured by first deeds of trust on real estate. The
concentration in loans secured by real estate is monitored on a quarterly basis
and taken into account in the computation of the adequacy of the allowance for
loan losses. The non-residential real estate loan portfolio is segregated into
various categories on which annual concentration limits are recommended by

5



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##### Table of Contents



management and approved by the board of directors. The categories include
industrial, medical office, commercial office, mini-storage and retail.
Retail is further broken down into subcategories, including anchored,
automotive, office and strip center. Additionally, the portfolio is
geographically categorized by state and county.

The three largest categories of loans secured by real estate are shown in
the following table:

|                           |                         |                        |                   |                    |               |  |      |      |  
|-------------------------- | ----------------------- | ---------------------- | ----------------- | ------------------ | ------------- |  | ---- | ---- | -
|                           |                         |                        | Amount at         |                    |               |  |     
|                           |                         |                        | December 31, 2001 |                    | Percentage of
|Type of Real Estate Loan   |                         | (Dollars in thousands) |                   | Loans in Portfolio
|                           |                         |                        |                   |                   
|Commercial mortgage loans  |                         | $                      | 234,777           |                    |               |  | 89.8 | %   
|Residential mortgage loans |                         |                        | 13,482            |                    |               |  | 5.2  |     
|Construction & land loans  |                         |                        | 4,887             |                    |               |  | 1.9  |     
|                           |                         |                        |                   |                    |               |  |      |     
|                           | Total real estate loans |                        | $                 | 253,146            |               |  |      | 96.8 | %
|                           |                         |                        |                   |                    |               |  |      |     

Commercial mortgage loans. The Company provides intermediate term commercial
real estate loans collateralized by first deeds of trust on real property.
The following table details Commercial mortgage loans by location:

|                          |  |                        |         |   |  |      |       |   |  |   |         |  |  |  |       |  
|------------------------- |  | ---------------------- | ------- | - |  | ---- | ----- | - |  | - | ------- |  |  |  | ----- | -
|                          |  | (Dollars in thousands)
|                          |  |                       
|                          |  | 2001                   |         | % |  | 2000 |       | %
|                          |  |                        |         |   |  |      |       |  
|Riverside County          |  | $                      | 76,313  |   |  |      | 32.5  | % |  | $ | 77,045  |  |  |  | 35.7  | %
|Orange County             |  |                        | 50,133  |   |  |      | 21.4  |   |  |   | 46,425  |  |  |  | 21.5  |  
|Los Angeles County        |  |                        | 23,083  |   |  |      | 9.8   |   |  |   | 26,573  |  |  |  | 12.3  |  
|San Bernardino County     |  |                        | 22,447  |   |  |      | 9.6   |   |  |   | 16,024  |  |  |  | 7.5   |  
|Other California Counties |  |                        | 42,572  |   |  |      | 18.1  |   |  |   | 37,374  |  |  |  | 17.3  |  
|Out of State              |  |                        | 20,229  |   |  |      | 8.6   |   |  |   | 12,401  |  |  |  | 5.7   |  
|                          |  |                        |         |   |  |      |       |   |  |   |         |  |  |  |       |  
|Total                     |  | $                      | 234,777 |   |  |      | 100.0 | % |  | $ | 215,842 |  |  |  | 100.0 | %
|                          |  |                        |         |   |  |      |       |   |  |   |         |  |  |  |       |  

The following table details Commercial mortgage loans by use/type:

|                         |  |                        |         |   |  |      |       |   |  |   |         |  |  |  |       |  
|------------------------ |  | ---------------------- | ------- | - |  | ---- | ----- | - |  | - | ------- |  |  |  | ----- | -
|                         |  | (Dollars in thousands)
|                         |  |                       
|                         |  | 2001                   |         | % |  | 2000 |       | %
|                         |  |                        |         |   |  |      |       |  
|Industrial/Warehouse     |  | $                      | 43,052  |   |  |      | 18.3  | % |  | $ | 49,427  |  |  |  | 22.9  | %
|Medical Office Buildings |  |                        | 10,705  |   |  |      | 4.6   |   |  |   | 11,650  |  |  |  | 5.4   |  
|Office Buildings         |  |                        | 48,236  |   |  |      | 20.6  |   |  |   | 51,965  |  |  |  | 24.1  |  
|Mini-Storage Facilities  |  |                        | 22,911  |   |  |      | 9.6   |   |  |   | 13,269  |  |  |  | 6.1   |  
|Mobile Home Parks        |  |                        | 5,531   |   |  |      | 2.4   |   |  |   | 4,798   |  |  |  | 2.2   |  
|Restaurant Buildings     |  |                        | 16,284  |   |  |      | 6.9   |   |  |   | 10,531  |  |  |  | 4.9   |  
|Retail Buildings         |  |                        | 65,305  |   |  |      | 27.8  |   |  |   | 57,935  |  |  |  | 26.9  |  
|Other Property           |  |                        | 22,753  |   |  |      | 9.7   |   |  |   | 16,267  |  |  |  | 7.5   |  
|                         |  |                        |         |   |  |      |       |   |  |   |         |  |  |  |       |  
|Total                    |  | $                      | 234,777 |   |  |      | 100.0 | % |  | $ | 215,842 |  |  |  | 100.0 | %
|                         |  |                        |         |   |  |      |       |   |  |   |         |  |  |  |       |  

The value of real estate collateral is supported by formal appraisals in
compliance with applicable federal regulations. A review appraisal is then
conducted internally. Generally, these types of loans are made for a period of
up to five years, loan-to-value ratios are 65% or less, and debt coverage
ratios of 1.30:1 or higher. The loans generally carry adjustable interest
rates indexed to the one-year or, to a lesser extent, the three-or five-year
Treasury constant maturity index. Rate adjustments vary from quarterly to five
years. Amortization may be up to 30 years.

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Repayment on loans secured by such properties depends on successful
operation and management of the collateral properties. The value of the
collateral is also subject to the real estate market and general economic
conditions. The Company attempts to address these risks through its
underwriting criteria, including the loan-to-value ratios and debt service
coverages described above. The collateral quality and type must meet the
Companys standards, the property typically has quality leases extended beyond
the maturity date, and the borrower/guarantor must have strong liquidity. The
Company generally requires continuing guaranties from borrowers/owners. All of
the properties securing the Companys real estate portfolio are inspected by
the Companys lending administration personnel before the loan is made.

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

Residential mortgage loans. As of December 31, 2001, the total of all
residential mortgage loans held in portfolio by the Company was $13.5 million,
or 5.2% of total loans. The portfolio is primarily secured by first deeds of
trust on single-family residences located in the Riverside and San Bernardino
counties of California. Approximately $11.9 million or 88.3% of this portfolio
consists of variable rate loans.

Prior to the implementation of SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, the Company
originated first mortgages for resale on the secondary market to Federal Home
Loan Mortgage Corporation (FHLMC) and Federal National Mortgage Association
(FNMA). Gains or losses on the sales of these loans were recognized at the
time of sale. The Company retained servicing rights to these loans. Servicing
arrangements provide for the Company to maintain records related to the
servicing agreement, to assume responsibility for billing mortgagors, to
collect periodic mortgage payments, and to perform various other activities
necessary to the mortgage servicing function. The Company receives as
compensation a servicing fee based on the principal balance of the outstanding
loans. Servicing fee income amounted to approximately $33,000 during 2001, and
the total unpaid principal balance of the mortgage-servicing portfolio amounted
to approximately $9.2 million at December 31, 2001.

Real estate construction and loans.The Company finances the construction
of residential, commercial and industrial properties. The Companys
construction loans typically have the following characteristics:



| |  | First mortgages on the collateral real estate;                         
|- |  | -----------------------------------------------------------------------
| 
| |  | Maturities of one year or less;                                        
| 
| |  | A floating rate of interest based the Bank of America prime rate;      
| 
| |  | Minimum cash equity of 30% of project cost;                            
| 
| |  | Reserve for anticipated interest costs during construction;            
| 
| |  | Loan-to-value ratios generally not exceeding 65%; and                  
| 
| |  | Recourse against the borrower or a guarantor in the event of a default.

For commercial and industrial properties, the Company typically issues a
stand-by commitment for a take-out mini-perm loan on the property. The
Company does not participate in joint ventures nor takes an equity interest in
connection with its construction lending.

Construction loans involve additional risks compared with loans secured by
existing improved real property. These include:



| |  | The uncertain value of the project prior to completion;                                                 
|- |  | --------------------------------------------------------------------------------------------------------
| 
| |  | The inherent uncertainty in estimating construction costs;                                              
| 
| |  | Possible difficulties encountered by municipal or other governmental regulation during construction; and
| 
| |  | The inherent uncertainty of the market value of the completed project.                                  

As a result of these uncertainties, repayment is dependent, in large part,
on the success of the ultimate project. If the Company is forced to foreclose
on a project prior to or at completion because of a default, the Company may
not be able to recover all of the unpaid balance of, and accrued interest on,
the loan as well as the related foreclosure and

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holding costs. In addition, the Company may be required to fund additional
amounts to complete a project and may have to hold the property for an
indeterminate period of time. Further, future local or national economic
conditions could have an adverse impact on the potential success of
construction projects financed by the Company and on collateral securing these
loans.

Commercial Loans

At December 31, 2001, approximately $6.8 million, or 2.6% of the Companys
total loan portfolio, consisted of commercial loans. The Company provides
intermediate and short-term commercial loans that are either unsecured,
partially secured or fully secured. The majority of these loans are in
Riverside and San Bernardino counties. Loan maturities range from 90 days to
five years. A complete re-analysis is required prior to any extension
of an existing loan. These
loans are made to individuals, professionals and businesses. The Company takes
collateral whenever possible regardless of the loan purpose. Collateral may
include cash, liens on accounts receivable and/or equipment. As a matter of
policy, the Company requires all principals of a business to be guarantors on
all commercial loans. All borrowers must demonstrate the ability to service
and repay not only the Company debt but all outstanding debt, on the basis of
historical cash flow or conversion of assets.

Consumer Loans

As of December 31, 2001, the total of all consumer loans held by the
Company was $2,332,000 or 0.9% of total loans. Consumer loans may be secured
or unsecured, and are extended for a variety of purposes, including the
purchase or finance of automobiles, home improvement, home equity lines and
overdraft protection. However, in 2001, the Bank began an outsourcing
arrangement with Client Financial Service (CFS), a subsidiary of
Union Bank of California, whereby CFS would provide lending services
to the Bank. Specifically, auto, recreation vehicle, personal, and
home equity loans would be offered through CFS. The Bank now receives
a referral fee for applications referred and successfully funded by
CFS. The purpose of this alliance was three-fold. First, it shifted
the portfolio risk from the Bank to an outside source specializing in
consumer lending products. Secondly, it allowed for cost savings with
the elimination of the consumer loan department. Thirdly, it allowed
the Bank to offer superior products to its customers, based on the
economics of scale pricing through CFS.

Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
rapidly depreciating assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not
warrant further substantial collection efforts against the borrower beyond
obtaining a deficiency judgment. In addition, consumer loan collections are
dependent on the borrowers continuing financial stability. Furthermore, the
application of various federal and state laws, including federal and state
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans.

Off-Balance Sheet Commitments

The Company may issue formal commitments or lines of credit to a limited
number of well established, financially responsible, local commercial
enterprises. Such commitments can be either secured or unsecured. These
commitments may take the form of revolving lines of credit, letters of credit,
real estate construction or real estate mortgage loans. Standby letters of
credit are conditional commitments issued by the Company to guarantee the
performance of a customer to a third party. The Company does not enter into
any interest rate swaps or caps, or forward or future contracts.

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The following table shows the distribution of the Companys off-balance
sheet commitments at the dates indicated.

|                            |       |   |                        |        |      |   |       |       | 
|--------------------------- | ----- | - | ---------------------- | ------ | ---- | - | ----- | ----- | 
|                            |       |   | At December 31,       
|                            |       |   |                       
|                            |       |   | 2001                   |        | 2000
|                            |       |   |                        |        |     
|                            |       |   | (dollars in thousands)
|Real estate  construction  |       | $ | 1,616                  |        |      | $ | 884   |      
|Real estate  mortgage      |       |   | 781                    |        |      |   | 1,233 |      
|Standby letters of credit   |       |   | 703                    |        |      |   | 459   |      
|Undisbursed lines of credit |       |   | 8,762                  |        |      |   | 7,260 |      
|                            |       |   |                        |        |      |   |       |      
|                            | Total |   | $                      | 11,862 |      |   | $     | 9,836 | 
|                            |       |   |                        |        |      |   |       |      

Lending Procedures and Credit Approval Process

The Banks Board of Directors loan committee (the DLC) approves all loans
above $500,000, and reviews all loans under $500,000. Lending limits are
authorized for the Banks Chief Executive Officer by the DLC through
authority delegated by the Board of Directors of the Bank. The DLC approves
all loans that would create a total borrower liability in excess of a lending
officers lending authority. The Banks Chief Executive Officer is responsible for
evaluating the authority limits for individual credit officers and recommends
lending limits to the DLC for approval.

The highest individual lending authority in the Company is currently
$500,000, which requires the approval and signature of the
Banks Chief Executive
Officer. The second highest lending authority is $250,000 for both
the Banks Chief Operating Officer and the Banks manager of
the real estate loan department. All other individual lending authorities are
substantially less, with the next largest authority being $100,000.

At December 31,
2001, the Banks authorized legal lending limits were
approximately $4.0 million for unsecured loans and approximately $6.6 million
for secured loans. Legal lending limits are calculated in conformance with
California law, which prohibits a bank from lending to any one individual or
entity or its related interests an aggregate amount which exceeds 15% of
primary capital plus the allowance for loan losses on an unsecured basis and
25% on a secured basis. The Banks largest
borrower as of December 31, 2001 had an aggregate loan liability totaling $6.2
million from the Bank, which was reduced to $5.6 million as of
January 3, 2002. At December 31, 2001, the Company had a
loan to the same borrower as the Banks largest borrower
totaling $1.0 million which was underwritten using the same
criteria as used by the Bank.

The Company seeks to mitigate the risks inherent in its loan portfolio by
adhering to certain underwriting practices. These practices include analysis of
prior credit histories, financial statements, tax returns and cash flow
projections, valuation of collateral based on reports of independent appraisers
and verification of liquid assets. Although management believes that its
underwriting criteria are appropriate for the various kinds of loans it makes,
the Company may incur losses on loans which meet its underwriting criteria, and
these losses may exceed the amounts set aside as reserves for such losses in
the allowance for loan losses.

Asset Quality

Nonperforming assets. Nonperforming assets include nonperforming loans
and other real estate owned (OREO).

Nonperforming loans.Nonperforming loans are those which the borrower
fails to perform in accordance with the original terms of the obligation and
fall into two categories:



| |  |  | Nonaccrual loans. The Company generally places loans on
nonaccrual status when interest or principal payments become 90 days
or more past due unless the outstanding principal and interest is
well-secured and, in the opinion of management, is deemed in the
process of collection. When loans are placed on nonaccrual status,
accrued but unpaid interest is reversed against the current years
income. Payments may be treated as interest income or return of
principal depending upon managements opinion of the ultimate risk of
loss on the individual loan. Cash payments are treated as interest
income where
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |   |  | management believes the remaining principal balance is fully
collectible. Additionally, loans not 90 days past due may also be
placed on nonaccrual status if management reasonably believes the
borrower will not be able to comply with the contractual loan repayment
terms and collection of principal or interest is in question.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Accruing loans 90 days or more past due. The Company
classifies a loan in this category when the borrower is more than 90
days late in making a payment of principal or interest and have not
been placed on nonaccrual status.                                                                                                       

Other real estate owned (OREO).This category of nonperforming assets
consists of real estate to which the Company has taken title by reason of
foreclosure or by taking a deed in lieu of foreclosure from the borrower. The
Company has been actively managing its OREO while attempting to expeditiously
dispose of the properties. At December 31, 2001, the Company owned one OREO
property, consisting of a minor interest in a single family residence valued at
$2,000.

The following table summarizes the Companys nonperforming assets at the
dates indicated.

|                                                  |                            |   |                        |   |      |   |      |    |      |   |      |     |  |   |       |       |  |   |       |       | 
|------------------------------------------------- | -------------------------- | - | ---------------------- | - | ---- | - | ---- | -- | ---- | - | ---- | --- |  | - | ----- | ----- |  | - | ----- | ----- | 
|                                                  |                            |   | December 31,          
|                                                  |                            |   |                       
|                                                  |                            |   | 2001                   |   | 2000 |   | 1999 |    | 1998 |   | 1997
|                                                  |                            |   |                        |   |      |   |      |    |      |   |     
|                                                  |                            |   | (dollars in thousands)
|Nonaccrual loans                                  |                            | $ | 0                      |   |      | $ | 48   |    |      | $ | 702  |     |  | $ | 1,578 |       |  | $ | 2,902 |      
|Loans past due 90 days or more                    |                            |   | 0                      |   |      |   | 8    |    |      |   | 3    |     |  |   | 3     |       |  |   | 0     |      
|                                                  | Total nonperforming loans  |   |                        | 0 |      |   |      | 56 |      |   |      | 705 |  |   |       | 1,581 |  |   |       | 2,902 | 
|Other real estate owned                           |                            |   | 2                      |   |      |   | 2    |    |      |   | 54   |     |  |   | 77    |       |  |   | 779   |      
|                                                  | Total nonperforming assets |   | $                      | 2 |      |   | $    | 58 |      |   | $    | 759 |  |   | $     | 1,658 |  |   | $     | 3,681 | 
|                                                  |                            |   |                        |   |      |   |      |    |      |   |      |     |  |   |       |       |  |   |       |      
|Nonperforming loans as a percent
of total loans   |                            |   | 0.00                   | % |      |   | 0.32 | %  |      |   | 0.76 | %   |  |   | 1.51  | %     |  |   | 1.60  | %    
|Nonperforming assets as a percent
of total assets |                            |   | 0.00                   | % |      |   | 0.28 | %  |      |   | 0.66 | %   |  |   | 1.53  | %     |  |   | 2.21  | %    

Impaired loans. Management defines impaired loans, regardless of past due
status on loans, as those on which principal and interest are not expected to
be collected under the original contractual loan repayment terms. Impaired
loans are valued based on the present value of future cash flows discounted at
the loans effective rate, the loans observable market price or the fair value
of collateral if the loan is collateral-dependent. Impaired loans at December
31, 2001 were $1.9 million. The related allowance for loan losses includes
$22,000 allocated to impaired loans. The average outstanding principal
balance of impaired loans was $1.9 million during 2001. Substantially all of
the impaired loans at December 31, 2001 were collateral dependent and were
measured using the fair value of the collateral.

Substandard and doubtful loans. The Company classifies loans as
substandard in accordance with regulatory requirements, when they are
inadequately protected by the current sound worth and paying capacity of the
borrower or of the loan collateral, if any. Substandard loans generally have
well-defined weaknesses that jeopardize repayment. They are characterized by
the distinct possibility that the Company will sustain some loss if the
deficiencies are not corrected.

The Company classifies loans as doubtful, in accordance with regulatory
requirements, when they have the inherent weaknesses of substandard loans and,
in addition, the weaknesses make collection or repayment in full, on the basis
of currently existing facts, conditions, and values, highly questionable and
improbable. However, in such loans,

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certain important and reasonably specific pending factors may work to the
advantage and strengthening of the asset. Accordingly, with respect to such
loans, the estimated loss is deferred until its more exact status may be
determined.

Restructured
loans.The Company considers restructured loans as loans which
have been amended such that interest accrues at a below market rate or upon which certain principal
has been forgiven so as to aid the borrower in the final repayment of the loan.
Any interest previously accrued, but not yet collected, is reversed against
current income when the loan is placed in this category. Interest is then
reported on a cash basis until the borrowers ability to service the
restructured loans in accordance with its terms is established. The Company
does not have any loans categorized as restructured loans.

Except as disclosed above, there were no assets as of December 31, 2001
where known information about possible credit problems of borrowers caused
management to have serious doubts as to the ability of the borrower to comply
with the present loan repayment terms. However, it is always possible that
current credit problems may exist that may not have been discovered by
management. Given the high percentage of the Companys loans that are secured
by real estate, the real estate market in Southern California and the overall
economy in the Companys market area are likely to continue to have a
significant effect on the quality of the Companys assets in the future.

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Allowances and Provisions for Loan Losses

The following table sets forth an analysis of the allowance for loan
losses and provisions for loan losses for the periods indicated.

|                                                   |                          |                   |         |                        |     |      |         |      |    |      |         |      |     |   |         |     |     |   |         |     |     | 
|-------------------------------------------------- | ------------------------ | ----------------- | ------- | ---------------------- | --- | ---- | ------- | ---- | -- | ---- | ------- | ---- | --- | - | ------- | --- | --- | - | ------- | --- | --- | 
|                                                   |                          |                   |         | December 31,          
|                                                   |                          |                   |         |                       
|                                                   |                          |                   |         | 2001                   |     | 2000 |         | 1999 |    | 1998 |         | 1997
|                                                   |                          |                   |         |                        |     |      |         |      |    |      |         |     
|                                                   |                          |                   |         | (dollars in thousands)
|Balance at beginning of period                     |                          | $                 | 2,466   |                        |     | $    | 2,416   |      |    | $    | 2,232   |      |     | $ | 2,116   |     |     | $ | 2,241   |    
|Loans charged-off:                                 |                          |                   |         |                        |     |      |         |      |    |      |         |      |     |   |         |     |     |   |         |    
|                                                   | Real estate-construction |                   |         | 0                      |     |      |         | 0    |    |      |         | 0    |     |   |         | 0   |     |   |         | 0   |    
|                                                   | Real estate-mortgage     |                   |         | 0                      |     |      |         | 11   |    |      |         | 25   |     |   |         | 139 |     |   |         | 274 |    
|                                                   | Commercial               |                   |         | 0                      |     |      |         | 0    |    |      |         | 7    |     |   |         | 0   |     |   |         | 159 |    
|                                                   | Consumer                 |                   |         | 4                      |     |      |         | 5    |    |      |         | 6    |     |   |         | 43  |     |   |         | 18  |    
|                                                   |                          |                   |         |                        |     |      |         |      |    |      |         |      |     |   |         |     |     |   |         |    
|                                                   |                          | Total charge-offs |         |                        | 4   |      |         |      | 16 |      |         |      | 38  |   |         |     | 182 |   |         |     | 451 | 
|                                                   |                          |                   |         |                        |     |      |         |      |    |      |         |      |     |   |         |     |     |   |         |    
|Recoveries:                                        |                          |                   |         |                        |     |      |         |      |    |      |         |      |     |   |         |     |     |   |         |    
|                                                   | Real estate-construction |                   |         | 160                    |     |      |         | 0    |    |      |         | 0    |     |   |         | 0   |     |   |         | 0   |    
|                                                   | Real estate-mortgage     |                   |         | 320                    |     |      |         | 65   |    |      |         | 222  |     |   |         | 225 |     |   |         | 57  |    
|                                                   | Commercial               |                   |         | 0                      |     |      |         | 0    |    |      |         | 0    |     |   |         | 47  |     |   |         | 10  |    
|                                                   | Consumer                 |                   |         | 8                      |     |      |         | 1    |    |      |         | 0    |     |   |         | 26  |     |   |         | 9   |    
|                                                   |                          |                   |         |                        |     |      |         |      |    |      |         |      |     |   |         |     |     |   |         |    
|                                                   |                          | Total recoveries  |         |                        | 488 |      |         |      | 66 |      |         |      | 222 |   |         |     | 298 |   |         |     | 76  | 
|                                                   |                          |                   |         |                        |     |      |         |      |    |      |         |      |     |   |         |     |     |   |         |    
|Net charge-offs (recoveries)                       |                          |                   | (484    | )                      |     |      | (50     | )    |    |      | (184    | )    |     |   | (116    | )   |     |   | 375     |    
|                                                   |                          |                   |         |                        |     |      |         |      |    |      |         |      |     |   |         |     |     |   |         |    
|Provision for loan losses                          |                          |                   | 0       |                        |     |      | 0       |      |    |      | 0       |      |     |   | 0       |     |     |   | 250     |    
|                                                   |                          |                   |         |                        |     |      |         |      |    |      |         |      |     |   |         |     |     |   |         |    
|Balance at end of period                           |                          | $                 | 2,950   |                        |     | $    | 2,466   |      |    | $    | 2,416   |      |     | $ | 2,232   |     |     | $ | 2,116   |    
|                                                   |                          |                   |         |                        |     |      |         |      |    |      |         |      |     |   |         |     |     |   |         |    
|Average total loans outstanding(1)                 |                          | $                 | 252,160 |                        |     | $    | 230,944 |      |    | $    | 210,878 |      |     | $ | 196,675 |     |     | $ | 187,298 |    
|Total loans at end period(1)                       |                          | $                 | 261,519 |                        |     | $    | 242,769 |      |    | $    | 220,992 |      |     | $ | 207,802 |     |     | $ | 192,287 |    
|Net charge-offs/average total
loans outstanding    |                          |                   | (0.19   | )%                     |     |      | (0.02   | )%   |    |      | (0.09   | )%   |     |   | (0.06   | )%  |     |   | 0.20    | %  
|Allowance at end of period/total
loans outstanding |                          |                   | 1.13    | %                      |     |      | 1.02    | %    |    |      | 1.09    | %    |     |   | 1.07    | %   |     |   | 1.10    | %  
|Nonperforming loans                                |                          | $                 | 0       |                        |     | $    | 56      |      |    | $    | 705     |      |     | $ | 1,581   |     |     | $ | 2,902   |    
|Allowance/nonperforming loans                      |                          |                   | >100.00 | %                      |     |      | >100.00 | %    |    |      | >100.00 | %    |     |   | 141.16  | %   |     |   | 72.90   | %  



---

|(1) |  | Net of deferred loan origination fees.
|--- |  | --------------------------------------

The Company maintains an allowance for loan losses at a level considered
by management to be adequate to cover the inherent risks of loss associated
with its loan portfolio under prevailing and anticipated economic conditions.
In determining the adequacy of the allowance, management takes into
consideration primarily the credit quality of the portfolio and prior loan loss
experience. The specific calculation of the allowance for loan losses is based
on the risk rating system that the Company uses to grade its loans. This
system classifies all loans into one of eight grades according to a risk-rating
matrix that evaluates each of the five following factors:



| |  | the dependability of the primary repayment source;                                                   
|- |  | -----------------------------------------------------------------------------------------------------
| 
| |  | the dependability of the secondary repayment source;                                                 
| 
| |  | the value of the collateral in relation to the size of the loan, and the liquidity of the collateral;
| 
| |  | the character/relationship of the borrower; and                                                      
| 
| |  | the strength, stability and potential of the industry in which the borrower is operating.            

12



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##### Table of Contents



Different reserve percentages are assigned to each different class of
loan, as summarized in the following table.

|                           |  |                                        |  | 
|-------------------------- |  | -------------------------------------- |  | 
|Loan Grade                 |  | Reserve Percentage                    
|                           |  |                                       
|Class I (Pass)           |  | 0.10%                                 
|Class II (Pass)          |  | 0.20%                                 
|Class III (Pass)         |  | Historical loan loss experience factor
|Class IV (Watch)         |  | Calculated on a loan by loan basis    
|Class V (Special Mention) |  | Calculated on a loan by loan basis    
|Class VI (Substandard)   |  | Calculated on a loan by loan basis    
|Class VII (Doubtful)     |  | Minimum of 50.00%                     
|Class VIII (Loss)        |  | 100.00%                               

The first two classes are assigned reserve percentages, reflecting
managements judgment of the likelihood of loss in each risk category. For the
third grade, to which most pass loans are assigned, a reserve percentage is
assigned to each of the following kinds of loans: commercial loans, commercial
real estate loans, residential real estate loans, construction loans and
consumer loans. The reserve percentage represents the historical loss rate on
this category of loans for the preceding 36 months. For the next three
categories, specific reserves are assigned based on a risk analysis of each
loan. The Companys board of directors approves the adequacy of the allowance
for loan losses on a quarterly basis.

The balance in the allowance is affected by amounts provided from
operations, amounts charged-off and recoveries of previously charged-off loans.
For 2001, 2000 and 1999 the Company recorded no provision for loan losses.
The lack of a provision in 2001, 2000 and 1999 was the result of managements
determination, in accordance with the policy discussed above, that the
allowance was adequate at December 31, 2001, December 31, 2000, and December
31, 1999, respectively. In fact, the allowance had grown in 2001, 2000 and
1999 by reason of net recoveries on loans previously charged off in the amount
of $484,000, $50,000 and $184,000, respectively. These trends reflected, among
other factors, the strengthening of the Southern California economy.

At December 31, 2001 the allowance for loan losses stood at $3.0 million
or 1.13% of total loans outstanding, compared with $2.5 million or 1.02% of
total loans outstanding at December 31, 2000, and $2.4 million, or 1.09% of
total loans outstanding at December 31, 1999.

Management anticipates the continued stabilization of the economy in
segments of the Companys market area. However, credit quality will be
influenced by underlying trends in the economic cycle, particularly in Southern
California, which management cannot completely predict. Consequently, the
Company may sustain loan losses, in any particular period, that are sizable in
relation to the allowance for loan losses. Additionally, a subsequent
evaluation of the loan portfolio, in light of factors then prevailing, by the
Company and its regulators may indicate a requirement for increases in the
allowance for loan losses through charges to the provision for loan losses.

The following table summarizes a breakdown of the allowance for loan
losses by loan category and the allocation in each category as a percentage of
total loans in each category at the dates indicated:

|                                    |  |                        |       |          |  |           |       |          |  |        |       |           |  |        |       |          |  |           |       |          |  |  |       |           |  |   |       |  |  |           |       |   |  |   |       |  |  |  |       |  
|----------------------------------- |  | ---------------------- | ----- | -------- |  | --------- | ----- | -------- |  | ------ | ----- | --------- |  | ------ | ----- | -------- |  | --------- | ----- | -------- |  |  | ----- | --------- |  | - | ----- |  |  | --------- | ----- | - |  | - | ----- |  |  |  | ----- | -
|                                    |  | December 31,          
|                                    |  |                       
|                                    |  | 2001                   |       | 2000     |  | 1999      |       | 1998     |  | 1997  
|                                    |  |                        |       |          |  |           |       |          |  |       
|                                    |  | (dollars in thousands)
|                                    |  |                        |       |          |  | % of      |       |          |  |        |       | % of      |  |        |       |          |  | % of      |       |          |  |  |       | % of      |  |   |       |  |  | % of     
|                                    |  |                        |       |          |  | allowance |       |          |  |        |       | allowance |  |        |       |          |  | allowance |       |          |  |  |       | allowance |  |   |       |  |  | allowance
|                                    |  |                        |       |          |  | in        |       |          |  |        |       | in        |  |        |       |          |  | in        |       |          |  |  |       | in        |  |   |       |  |  | in       
|                                    |  | Amount                 |       | category |  | Amount    |       | category |  | Amount |       | category  |  | Amount |       | category |  | Amount    |       | category
|                                    |  |                        |       |          |  |           |       |          |  |        |       |           |  |        |       |          |  |           |       |         
|Real
estate  construction and land |  | $                      | 18    |          |  |           | 0.6   | %        |  | $      | 0     |           |  |        | 0.0   | %        |  | $         | 1     |          |  |  | 0.0   | %         |  | $ | 3     |  |  |           | 0.1   | % |  | $ | 66    |  |  |  | 3.1   | %
|Real estate  mortgage              |  |                        | 2,780 |          |  |           | 94.2  |          |  |        | 2,402 |           |  |        | 97.4  |          |  |           | 2,283 |          |  |  | 94.5  |           |  |   | 2,042 |  |  |           | 91.5  |   |  |   | 1,984 |  |  |  | 93.8  |  
|Commercial                          |  |                        | 141   |          |  |           | 4.8   |          |  |        | 52    |           |  |        | 2.1   |          |  |           | 123   |          |  |  | 5.1   |           |  |   | 171   |  |  |           | 7.7   |   |  |   | 47    |  |  |  | 2.2   |  
|Consumer                            |  |                        | 11    |          |  |           | 0.4   |          |  |        | 12    |           |  |        | 0.5   |          |  |           | 9     |          |  |  | 0.4   |           |  |   | 16    |  |  |           | 0.7   |   |  |   | 19    |  |  |  | 0.9   |  
|                                    |  |                        |       |          |  |           |       |          |  |        |       |           |  |        |       |          |  |           |       |          |  |  |       |           |  |   |       |  |  |           |       |   |  |   |       |  |  |  |       |  
|Total                               |  | $                      | 2,950 |          |  |           | 100.0 | %        |  | $      | 2,466 |           |  |        | 100.0 | %        |  | $         | 2,416 |          |  |  | 100.0 | %         |  | $ | 2,232 |  |  |           | 100.0 | % |  | $ | 2,116 |  |  |  | 100.0 | %
|                                    |  |                        |       |          |  |           |       |          |  |        |       |           |  |        |       |          |  |           |       |          |  |  |       |           |  |   |       |  |  |           |       |   |  |   |       |  |  |  |       |  

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##### Table of Contents



The allocation of the allowance to loan categories is an estimate by
management of the relative risk characteristics of loans in those categories.
Losses in one or more loan categories may exceed the portion of the allowance
allocated to that category or even exceed the entire allowance.

Deposits

Deposits are the Companys primary source of funds. At December 31, 2001,
the Company had a deposit mix of 57.3% in time deposits, 26.1% in savings and
interest-bearing checking accounts, 13.9% in noninterest-bearing demand
accounts and 2.7% in money market accounts.

Noninterest-bearing demand deposits enhance the Companys net interest
income by lowering its cost of funds. The Company is committed to continuing
its recent efforts to increase core deposits through increased business
development efforts, diversification of its customer base, product line
enhancements and superior customer service.

The Company obtains deposits primarily from the communities it serves. No
material portion of its deposits has been obtained from or is dependent on any
one person or industry. The Companys business is not seasonal in nature. The
Company accepts deposits in excess of $100,000 from customers. These deposits
are priced to remain competitive. At December 31, 2001, the Company had no
brokered deposits.

The following table sets forth the average balances and the average rates
paid for the major categories of deposits for the dates indicated:

|                                          |  |                        |         |      |  |         |      |         |  |         |         |      |  |         |      |   |  |   |         |  |  |  |      |  
|----------------------------------------- |  | ---------------------- | ------- | ---- |  | ------- | ---- | ------- |  | ------- | ------- | ---- |  | ------- | ---- | - |  | - | ------- |  |  |  | ---- | -
|                                          |  | December 31,          
|                                          |  |                       
|                                          |  | 2001                   |         | 2000 |  | 1999   
|                                          |  |                        |         |      |  |        
|                                          |  | (dollars in thousands)
|                                          |  | Average                |         |      |  |         |      | Average |  |         |         |      |  | Average |      |   |  |  
|                                          |  | balance                |         | Rate |  | balance |      | Rate    |  | balance |         | Rate
|                                          |  |                        |         |      |  |         |      |         |  |         |         |     
|Noninterest-bearing
        demand        |  | $                      | 36,583  |      |  |         | 0.00 | %       |  | $       | 33,800  |      |  |         | 0.00 | % |  | $ | 35,505  |  |  |  | 0.00 | %
|Interest-bearing
        demand           |  |                        | 15,400  |      |  |         | 0.48 |         |  |         | 15,671  |      |  |         | 0.97 |   |  |   | 15,312  |  |  |  | 0.96 |  
|Money market
        deposits             |  |                        | 4,328   |      |  |         | 2.23 |         |  |         | 3,982   |      |  |         | 2.59 |   |  |   | 3,523   |  |  |  | 2.61 |  
|Savings
        deposits                  |  |                        | 52,007  |      |  |         | 3.06 |         |  |         | 50,865  |      |  |         | 3.87 |   |  |   | 53,224  |  |  |  | 3.73 |  
|Time deposits
        of $100,000 or more |  |                        | 22,520  |      |  |         | 5.46 |         |  |         | 17,460  |      |  |         | 5.90 |   |  |   | 11,115  |  |  |  | 5.11 |  
|Time deposits
        under $100,000      |  |                        | 139,946 |      |  |         | 5.53 |         |  |         | 130,069 |      |  |         | 5.89 |   |  |   | 117,533 |  |  |  | 5.06 |  
|                                          |  |                        |         |      |  |         |      |         |  |         |         |      |  |         |      |   |  |   |         |  |  |  |      |  
|Total average
        deposits            |  | $                      | 270,784 |      |  |         | 3.96 | %       |  | $       | 251,847 |      |  |         | 4.33 | % |  | $ | 236,212 |  |  |  | 3.70 | %
|                                          |  |                        |         |      |  |         |      |         |  |         |         |      |  |         |      |   |  |   |         |  |  |  |      |  

Maturities of Time Certificates of Deposit

Maturities of time certificates of deposits outstanding at December 31,
2001 are summarized as follows:

|                          |       |   |                        |        |                    |   |        |         | 
|------------------------- | ----- | - | ---------------------- | ------ | ------------------ | - | ------ | ------- | 
|                          |       |   | $100,000 or more       |        | Less than $100,000
|                          |       |   |                        |        |                   
|                          |       |   | (dollars in thousands)
|Three months or less      |       | $ | 8,857                  |        |                    | $ | 54,651 |        
|Over three to six months  |       |   | 8,284                  |        |                    |   | 42,650 |        
|Over six to twelve months |       |   | 6,107                  |        |                    |   | 30,887 |        
|Over twelve months        |       |   | 765                    |        |                    |   | 3,503  |        
|                          |       |   |                        |        |                    |   |        |        
|                          | Total |   | $                      | 24,013 |                    |   | $      | 131,691 | 
|                          |       |   |                        |        |                    |   |        |        

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##### Table of Contents



Borrowings

At December 31, 2001, the Bank had a long term borrowing in the amount of
$3,000,000 scheduled to mature on September 1, 2008. The borrowing is tied to
the Wall Street Journal Prime rate and bears a floating rate of interest of
4.75%. During 2001, the interest rate on the borrowing ranged from 6.00% to
4.75%.

Data Processing Services  BankLink Corporation

BankLink, a wholly owned subsidiary of the Bank located in Riverside,
California, provides data processing services to the Bank and other financial
institutions. BankLink currently serves four client banks. BankLink is a
licensee of Information Technology Incorporated (ITI) application software and
uses that software to provide high volume processing capabilities and systems
support services for deposit and loan transactions, treasury functions and loan
servicing. These services encompass all of the normal banking applications,
including accounts payable, fixed assets, ACH origination, automated exception
processing, asset liability, corporate cash management, voice response systems,
and account analysis.

For the year ended December 31, 2001, BankLink had revenues from its
operations of $150,000.

Recent Legislation and Other Changes

From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial institutions. Proposals to change the laws and regulations governing
the operations and taxation of banks and other financial institutions are
frequently made in Congress, in the California legislature and before various
bank regulatory agencies. Certain of the potentially significant changes which
have been enacted recently and others, which are currently under consideration
by Congress or various regulatory agencies, are discussed below.

The terrorist attacks in September, 2001, have impacted the financial
services industry and have already led to federal legislation that attempts to
address certain issues involving financial institutions. On October 26, 2001,
President Bush signed into law the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of
2001.

Part of the USA Patriot Act is the International Money Laundering
Abatement and Financial Anti-Terrorism Act of 2001 (IMLA). IMLA authorizes
the Secretary of the Treasury, in consultation with the heads of other
government agencies, to adopt special measures applicable to banks, bank
holding companies, and/or other financial institutions. These measures may
include enhanced recordkeeping and reporting requirements for certain financial
transactions that are of primary money laundering concern, due diligence
requirements concerning the beneficial ownership of certain types of accounts,
and restrictions or prohibitions on certain types of accounts with foreign
financial institutions.

Among its other provisions, IMLA requires each financial institution to:
(i) establish an anti-money laundering program; (ii) establish due diligence
policies, procedures and controls with respect to its private banking accounts
and correspondent banking accounts involving foreign individuals and certain
foreign banks; and (iii) avoid establishing, maintaining, administering, or
managing correspondent accounts in the United States for, or on behalf of, a
foreign bank that does not have a physical presence in any country. In
addition, IMLA contains a provision encouraging cooperation among financial
institutions, regulatory authorities and law enforcement authorities with
respect to individuals, entities and organizations engaged in, or reasonably
suspected of engaging in, terrorist acts or money laundering activities. IMLA
expands the circumstances under which funds in a bank account may be forfeited
and requires covered financial institutions to respond under certain
circumstances to requests for information from federal banking agencies within
120 hours. IMLA also amends the Bank Holding Company Act and the Bank Merger
Act to require the federal banking agencies to consider the effectiveness of a
financial institutions anti-money laundering activities when reviewing an
application under these acts.

Whether or not regulations are adopted, IMLA becomes effective July 23,
2002. Additional regulations are to be adopted during 2002 to implement
minimum standards to verify customer identity, to encourage cooperation among
financial institutions, federal banking agencies, and law enforcement
authorities regarding possible money laundering or

15



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##### Table of Contents



terrorist activities, to
prohibit the anonymous use of concentration accounts, and to require all
covered financial institutions to have in place a Bank Secrecy Act compliance
program.

The Federal Reserve Board and the Secretary of the Treasury in January
2001 jointly adopted a final rule governing merchant banking investments made
by financial holding companies. The rule implements provisions of the
Gramm-Leach-Bliley Act discussed below that permit financial holding companies
to make investments as part of a bona fide securities underwriting or merchant
or investment banking activity. The rule provides that a financial holding
company may not, without Federal Reserve Board approval, directly or indirectly
acquire any additional shares, assets or ownership interests or make any
additional capital contribution to any company the shares, assets or ownership
interests of which are held by the financial holding company subject to the
rule if the aggregate carrying value of all merchant banking investments held
by the financial holding company exceeds:



| |  |  | 30 percent of the Tier 1 capital of the financial holding company, or                                                
| | - |  | ---------------------------------------------------------------------------------------------------------------------
|
| |  |  | after excluding interests in private equity funds, 20 percent of the
Tier 1 capital of the financial holding company.

A separate final rule will establish the capital charge of merchant
banking investments for the financial holding company.

The American Homeownership and Economic Opportunity Act of 2000 was
enacted in late 2000 and provides for certain regulatory and financial relief
to depository institutions. With respect to savings and loan associations, the
Home Owners Loan Act was amended to



| |  |  | repeal the savings association liquidity requirements, and                                                                                                                                                     
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | permit a savings and loan holding company with prior approval to
acquire more than 5% of the voting shares of a nonsubsidiary savings
association or nonsubsidiary savings and loan holding company.           
|
| |  |  | With respect to national banks, the Banking Act of 1933 was amended
to allow a national bank to specifically reorganize into a bank holding company structure or
merge with subsidiaries and nonbank affiliates
|
| |  |  | have more than 25 directors as may be allowed by the Comptroller,                                                                                                                                              
|
| |  |  | have director terms of up to three years,                                                                                                                                                                      
|
| |  |  | have a classified board, and                                                                                                                                                                                   
|
| |  |  | allow the repurchase of stock to prevent loss upon a previously
contracted debt without having to dispose of it within a period of six
months.                                                                 

In addition, federal banking law was amended to authorize the Comptroller
to waive the citizenship requirement for a minority of the directors on a
national bank board and to repeal the 20% surplus requirement for national
banks. As to depository institutions, in general, the federal banking agencies
are to develop a system for the electronic filing and dissemination of
depository institution call reports.

The Gramm-Leach-Bliley Act (GLBA) was enacted in late 1999. GLBA, among
other things, repeals the Glass-Steagall Act. The Glass-Steagall Act enacted
in the depression era prohibited banks from affiliating with securities firms.
In addition, GLBA allows for a new type of bank holding company under the Bank
Holding Company Act. The new bank holding company will be allowed to engage in
insurance and securities underwriting, merchant banking and insurance company
portfolio investment activities. Currently, bank holding companies are
strictly limited in the amount of insurance and securities underwriting
activities in which they may engage.

16



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##### Table of Contents



GLBA also allows bank holding company companies to engage in any activity
considered financial in nature or incidental to such financial activities.
Under the existing Bank Holding Company Act, incidental activities are limited
to those that are banking in nature or incidental to such banking activities.

Financial activities include, as well as lending, providing insurance as
an agent, broker or as principal, issuing annuities, underwriting, and dealing
in or making a market in securities. All insurance activities that are to be
conducted must be conducted in compliance with applicable state laws. In
connection with insurance sales the United States Supreme Court case of Barnett
Bank of Marion County N.A. v. Nelson, 116 S. Ct. 1103 (1996) is followed by
GLBA, and GLBA further provides that no state may, by statute, regulation,
order, interpretation, or other action, prevent or significantly interfere with
the ability of an insured depository institution, or a subsidiary or affiliate
thereof, to engage, directly or indirectly, either by itself or in conjunction
with a subsidiary, affiliate, or any other party, in any insurance sales,
solicitation, or cross-marketing activity.

The Community Reinvestment Act provisions in GLBA require that any new
bank holding company that is formed meet the conditions that all of the
companys insured depository institutions are well capitalized, well managed
and received at least a satisfactory rating in the most recent Community
Reinvestment Act examination. Other key aspects of GLBA include the following:



| |  |  | streamlining bank holding company supervision by defining the roles
of the Federal Reserve and other federal and state regulators;                                                                                                                                                                                                                                                                                                            
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | prohibiting FDIC assistance to affiliates and subsidiaries of banks
and thrifts;                                                                                                                                                                                                                                                                                                                                                              
|
| |  |  | allowing a national bank that is well capitalized and well managed to
establish new operating subsidiaries that may engage in financial
activities other than insurance underwriting, merchant banking,
insurance company portfolio investments, real estate development and
real estate investment, so long as the aggregate assets of all financial
subsidiaries do not exceed 45% of the parents assets or $50 billion,
whichever is less;
|
| |  |  | permitting national banks to underwrite municipal bonds;                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  |  | providing that securities activities conducted by a bank subsidiary
will be subject to regulation by the Securities and Exchange Commission;                                                                                                                                                                                                                                                                                                  
|
| |  |  | providing that insurance activities conducted by a bank subsidiary
will be subject to regulation by the applicable state insurance
authority;                                                                                                                                                                                                                                                                                                 
|
| |  |  | replacing broker-dealer exemptions allowed to banks with limited
exemptions;                                                                                                                                                                                                                                                                                                                                                                  
|
| |  |  | providing that de novo unitary thrift holding company applications
received by the Office of Thrift Supervision after May 4, 1999 shall not
be approved;                                                                                                                                                                                                                                                                                      
|
| |  |  | providing that existing unitary thrift holding companies may only be
sold to financial companies;                                                                                                                                                                                                                                                                                                                                             
|
| |  |  | adopting new privacy provisions which allow customers to opt out of
sharing nonpublic personal information with nonaffiliated third parties
subject to certain exceptions;                                                                                                                                                                                                                                                                  
|
| |  |  | requiring that ATMs which impose a fee on noncustomers to disclose
on the ATM screen the amount of the fee prior to a transaction becoming
irrevocable on the ATM;                                                                                                                                                                                                                                                                           
|
| |  |  | providing regulatory relief to smaller banks with less than $250
million in total assets with respect to the frequency of CRA
examinations. The time between examinations may be as long as five
years for small banks and savings and loans; and                                                                                                                                                                                             
|
| |  |  | requiring plain language for federal banking agency regulations.                                                                                                                                                                                                                                                                                                                                                                              

17



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##### Table of Contents



It is impossible to predict what effect the enactment of certain of the
above-mentioned legislation will have on the Company and on the financial
institutions industry in general. Moreover, it is likely that other bills
affecting the business of banks may be introduced in the future by the United
States Congress or California legislature.

Competition

The Company considers its primary service area to include Riverside and
San Bernardino counties of California. The banking business is highly
competitive in California, including this region. A number of major banks and
savings and loan associations have offices in this area. They currently
dominate loan and deposit origination. The Company also competes for deposits
and loans with finance companies, industrial loan companies, securities and
brokerage companies, mortgage companies, insurance companies, money market
funds, credit unions and other financial institutions.

Major banks and savings and loan associations exercise certain competitive
advantages over community banks like the Company. They can finance extensive
advertising campaigns and offer the convenience of many retail outlets. Many
offer certain services, such as trust and international banking services, which
the Company does not offer directly. They are able to invest greater resources
in technology, which may afford them economies of scale, particularly with
respect to consumer financial services, by reason of their larger customer
bases. In addition, these larger institutions are likely to have lower costs of
capital and substantially higher lending limits.

To compete with larger financial institutions, the Company relies upon
responsive handling of customer needs, local promotional activity, and personal
contacts by its officers, directors and staff. For customers whose loan demands
exceed the Companys lending limits, the Company seeks to arrange funding on a
participation basis with its correspondent banks or other independent
commercial banks. The Company also assists customers requiring services not
offered by it to obtain such services from its correspondent banks.

In commercial real estate lending, the Company competes against larger
institutions. Management seeks to assert its competitive advantage in this
market through its depth of experience and ability to respond in customized
ways to the needs of its customers. In its deposit gathering, the Company
competes by having convenient branches located in areas of high bank deposits
per person, and by providing consumer-friendly environments at those branches.

Employees

At December 31, 2001, the Company employed a total of 74 full-time
equivalent employees, including four executive officers. None is presently
represented by a union or covered by a collective bargaining agreement. The
Company believes its employee relations are excellent.

Insurance

The Company maintains financial institution bond and commercial insurance
at levels deemed adequate by the Companys management to protect it from some
types of damage.

18



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##### Table of Contents






ITEM 2. PROPERTIES

The following table sets forth information about the Companys offices.

|                                     |  |                                                  |  |        |  |                |     |       |  |            |  |  |              
|------------------------------------ |  | ------------------------------------------------ |  | ------ |  | -------------- | --- | ----- |  | ---------- |  |  | -------------
|                                     |  |                                                  |  | Owned/ |  |                |     |       |  |            |  | 
|Location                             |  | Type of Office                                   |  | Leased |  | Size           |     | Since |  | Expiration
|                                     |  |                                                  |  |        |  |                |     |       |  |           
|1600 E. Florida Ave., Hemet          |  | Main Branch                                      |  | Leased |  | 7,200 sq. / ft |     |       |  | 1988       |  |  | March 2003   
|1555 W. Florida Ave., Hemet          |  | Branch                                           |  | Leased |  | 5,300 sq. / ft |     |       |  | 1986       |  |  | November 2006
|1497 S. San Jacinto St., San Jacinto |  | Branch                                           |  | Leased |  | 3,300 sq. / ft |     |       |  | 1992       |  |  | February 2004
|56525 Highway 371, Anza              |  | Branch                                           |  | Owned  |  | 1,920 sq. / ft |     |       |  | 1992       |  |  |              
|3715 Sunnyside Drive, Riverside      |  | Branch and
      Administrative
      Offices(1) |  | Owned  |  | 7,100 sq. / ft | (2) |       |  | 1993       |  |  |              



---

|(1) |  | These premises are occupied by the Companys loan, note, human
resources, marketing and finance departments. BankLink Corporation
also occupies space in this location.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Includes enclosed parking area.                                                                                                                                        

Aggregate annual rentals for the Company and its subsidiaries for leased
premises were $346,000 for the year ended December 31, 2001.




ITEM 3. LEGAL PROCEEDINGS

On May 2, 2000, the Bank announced that it settled a class action lawsuit
filed by former Inland Savings and Loan shareholders on terms which were not
material to the Banks business, results of operation, or financial condition.
In connection with the 1992 acquisition of Inland, the Bank had issued
Preferred stock to shareholders of Inland. The Preferred stock was
automatically converted to the Banks common stock in 1995. In 1997 the named
plaintiffs sued the Bank and certain of its directors regarding the manner in
which the Bank implemented the conversion, as governed by certain provisions of
the merger agreement. The settlement was approved by the Superior Court of
Riverside County, California on June 16, 2000. Distribution of settlement
proceeds was made by a court appointed fund administrator to class members on
August 25, 2000.

In addition, the Bank is a defendant in various legal proceedings
resulting from normal banking business. In the opinion of management, and the
Companys legal counsel, the disposition of such litigation will not have a
material effect on the Companys consolidated financial condition or results of
operations.




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

Inapplicable

19



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##### Table of Contents






PART II




ITEM 5. MARKET FOR COMPANYS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Companys
common stock is registered with the SEC under the
Securities Exchange Act of 1934. The Company common stock is not listed on a
national exchange, and there is no established public market for the Company
common stock. Company management is not aware of any market makers for the
Company common stock. The high and low sales prices and per share cash
dividends on the common stock are provided in the chart below. The source of
information for the high and low sales prices for the chart below was from the
internet at Yahoo.

|                                  |  |      |       |     |  |             |       |  |  |   |      | 
|--------------------------------- |  | ---- | ----- | --- |  | ----------- | ----- |  |  | - | ---- | 
|                                  |  | High |       | Low |  | Dividend(1)
|                                  |  |      |       |     |  |            
|2000                              |  |      |       |     |  |             |       |  |  |   |      | 
|First quarter                     |  | $    | 32.50 |     |  | $           | 26.50 |  |  | $ | 0.60 | 
|Second quarter                    |  |      | 31.00 |     |  |             | 27.59 |  |  |   | 0.60 | 
|Third quarter                     |  |      | 33.00 |     |  |             | 28.75 |  |  |   | 0.60 | 
|Fourth quarter                    |  |      | 34.25 |     |  |             | 31.00 |  |  |   | 0.60 | 
|                                 
|2001                              |  |      |       |     |  |             |       |  |  |   |      | 
|First quarter                     |  |      | 36.00 |     |  |             | 32.00 |  |  |   | 0.60 | 
|Second quarter                    |  |      | 39.50 |     |  |             | 34.25 |  |  |   | 0.60 | 
|Third quarter                     |  |      | 42.00 |     |  |             | 38.00 |  |  |   | 0.60 | 
|Fourth quarter                    |  |      | 50.00 |     |  |             | 48.00 |  |  |   | 0.60 | 
|                                 
|2002                              |  |      |       |     |  |             |       |  |  |   |      | 
|First Quarter to January 31, 2002 |  |      | 49.50 |     |  |             | 44.00 |  |  |   | 0.60 | 



---

|(1) |  | The Company did not pay any stock dividends in the periods
indicated.
|--- |  | ---------------------------------------------------------------------

As of January 31, 2002, there were approximately 382 stockholders of
record of the Companys common stock.

The frequency and amount of dividends to be paid are determined by the
Companys board of directors. In issuing dividends, the board of directors
considers the experience and expectations of the Company, including net income
generated, strategic plans, and the level of capital of the Company.
The Companys payment of dividends is dependent on the
Banks payment of dividends to the Company. The Bank is limited
in the amount of dividends it can pay pursuant to California banking
and corporation law and federal banking law. The Bank currently
must request prior approval of the California Commissioner of the
Department of Financial Institutions for the payment of dividends.

20



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##### Table of Contents






ITEM 6. SELECTED FINANCIAL DATA

The following tables present selected historical consolidated financial
data, including per share information, for the Company. The following
financial data should be read in conjunction with the consolidated financial
statements of the Company included or incorporated by reference in this Form
10-K and the notes to such statements.

|                                               |  |                                                     |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|---------------------------------------------- |  | --------------------------------------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                               |  | At or for the year ended December 31,              
|                                               |  |                                                    
|                                               |  | 2001                                                |         | 2000 |  | 1999 |         | 1998 |  | 1997
|                                               |  |                                                     |         |      |  |      |         |      |  |     
|                                               |  | (dollars in thousands except per share information)
|Results of operations                          |  |                                                     |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Interest income                                |  | $                                                   | 21,847  |      |  | $    | 22,459  |      |  | $    | 19,381  |   |  | $ | 19,416  |   |  | $ | 18,991  |  
|Interest expense                               |  |                                                     | 10,760  |      |  |      | 10,967  |      |  |      | 8,740   |   |  |   | 9,185   |   |  |   | 8,946   |  
|Net interest income                            |  |                                                     | 11,087  |      |  |      | 11,492  |      |  |      | 10,641  |   |  |   | 10,231  |   |  |   | 10,045  |  
|Provision for loan losses                      |  |                                                     | 0       |      |  |      | 0       |      |  |      | 0       |   |  |   | 0       |   |  |   | 250     |  
|Noninterest income                             |  |                                                     | 1,500   |      |  |      | 1,709   |      |  |      | 1,825   |   |  |   | 1,363   |   |  |   | 1,204   |  
|Noninterest expense                            |  |                                                     | 7,571   |      |  |      | 7,901   |      |  |      | 7,810   |   |  |   | 6,736   |   |  |   | 6,200   |  
|Net income                                     |  |                                                     | 2,922   |      |  |      | 3,101   |      |  |      | 2,708   |   |  |   | 2,823   |   |  |   | 2,802   |  
|                                              
|Balance sheet (end of period)                  |  |                                                     |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Total assets                                   |  | $                                                   | 303,584 |      |  | $    | 292,234 |      |  | $    | 270,269 |   |  | $ | 252,877 |   |  | $ | 241,323 |  
|Total loans                                    |  |                                                     | 261,519 |      |  |      | 242,769 |      |  |      | 220,992 |   |  |   | 207,802 |   |  |   | 192,287 |  
|Allowance for loan losses                      |  |                                                     | 2,950   |      |  |      | 2,466   |      |  |      | 2,416   |   |  |   | 2,232   |   |  |   | 2,116   |  
|Nonperforming loans(1)                         |  |                                                     | 0       |      |  |      | 56      |      |  |      | 705     |   |  |   | 1,581   |   |  |   | 2,902   |  
|Other real estate owned                        |  |                                                     | 2       |      |  |      | 2       |      |  |      | 54      |   |  |   | 77      |   |  |   | 779     |  
|Total deposits                                 |  |                                                     | 271,922 |      |  |      | 267,844 |      |  |      | 246,671 |   |  |   | 230,385 |   |  |   | 219,211 |  
|Shareholders equity                           |  |                                                     | 20,626  |      |  |      | 22,724  |      |  |      | 21,606  |   |  |   | 21,024  |   |  |   | 20,228  |  
|                                              
|Balance sheet (period average)                 |  |                                                     |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Total assets                                   |  | $                                                   | 296,063 |      |  | $    | 276,434 |      |  | $    | 259,214 |   |  | $ | 248,297 |   |  | $ | 236,297 |  
|Total loans                                    |  |                                                     | 252,160 |      |  |      | 230,944 |      |  |      | 210,878 |   |  |   | 196,675 |   |  |   | 187,298 |  
|Earning assets                                 |  |                                                     | 287,097 |      |  |      | 267,089 |      |  |      | 238,910 |   |  |   | 238,910 |   |  |   | 226,311 |  
|Total deposits                                 |  |                                                     | 270,784 |      |  |      | 251,847 |      |  |      | 236,212 |   |  |   | 226,228 |   |  |   | 214,291 |  
|Shareholders equity                           |  |                                                     | 22,731  |      |  |      | 22,151  |      |  |      | 21,370  |   |  |   | 20,594  |   |  |   | 20,146  |  
|                                              
|Capital ratios                                 |  |                                                     |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Leverage ratio                                 |  |                                                     | 8.94    | %    |  |      | 7.97    | %    |  |      | 8.21    | % |  |   | 8.31    | % |  |   | 8.53    | %
|Tier 1 risk-based capital                      |  |                                                     | 10.02   | %    |  |      | 9.13    | %    |  |      | 9.57    | % |  |   | 9.99    | % |  |   | 10.43   | %
|Total risk-based capital                       |  |                                                     | 12.24   | %    |  |      | 10.12   | %    |  |      | 10.64   | % |  |   | 11.06   | % |  |   | 11.53   | %
|                                              
|Asset quality ratios                           |  |                                                     |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Nonperforming loans/total loans (1)            |  |                                                     | 0.00    | %    |  |      | 0.02    | %    |  |      | 0.32    | % |  |   | 0.76    | % |  |   | 1.51    | %
|Nonperforming assets/total assets
(2)          |  |                                                     | 0.00    | %    |  |      | 0.02    | %    |  |      | 0.28    | % |  |   | 0.66    | % |  |   | 1.53    | %
|Allowance for loan losses/
nonperforming loans |  |                                                     | >100.00 | %    |  |      | >100.00 | %    |  |      | >100.00 | % |  |   | 141.16  | % |  |   | 72.90   | %
|Allowance for loan losses/
total loans         |  |                                                     | 1.13    | %    |  |      | 1.02    | %    |  |      | 1.09    | % |  |   | 1.07    | % |  |   | 1.10    | %
|                                              
|Performance ratios                             |  |                                                     |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Return on average assets                       |  |                                                     | 0.99    | %    |  |      | 1.12    | %    |  |      | 1.04    | % |  |   | 1.14    | % |  |   | 1.19    | %
|Return on average equity                       |  |                                                     | 12.85   | %    |  |      | 14.00   | %    |  |      | 12.67   | % |  |   | 13.71   | % |  |   | 13.91   | %
|Net interest margin (3)                        |  |                                                     | 3.86    | %    |  |      | 4.30    | %    |  |      | 4.25    | % |  |   | 4.28    | % |  |   | 4.44    | %
|Net interest spread(4)                         |  |                                                     | 3.03    | %    |  |      | 3.40    | %    |  |      | 3.39    | % |  |   | 3.37    | % |  |   | 3.55    | %
|Average total loans to average
total deposits  |  |                                                     | 93.12   | %    |  |      | 91.70   | %    |  |      | 89.27   | % |  |   | 86.94   | % |  |   | 87.40   | %
|Efficiency ratio (5)                           |  |                                                     | 60.22   | %    |  |      | 59.85   | %    |  |      | 62.65   | % |  |   | 58.10   | % |  |   | 55.11   | %

21



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##### Table of Contents



|                                               |  |                                                     |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|---------------------------------------------- |  | --------------------------------------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                               |  | At or for the year ended December 31,              
|                                               |  |                                                    
|                                               |  | 2001                                                |         | 2000 |  | 1999 |         | 1998 |  | 1997
|                                               |  |                                                     |         |      |  |      |         |      |  |     
|                                               |  | (dollars in thousands except per share information)
|Per share information                          |  |                                                     |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Basic earnings(6)                              |  | $                                                   | 3.41    |      |  | $    | 3.58    |      |  | $    | 3.19    |   |  | $ | 3.34    |   |  | $ | 3.25    |  
|Diluted earnings (7)                           |  | $                                                   | 3.37    |      |  | $    | 3.56    |      |  | $    | 3.15    |   |  | $ | 3.23    |   |  | $ | 3.15    |  
|Common stock dividends declared                |  | $                                                   | 2.40    |      |  | $    | 2.40    |      |  | $    | 2.80    |   |  | $ | 2.40    |   |  | $ | 1.50    |  
|Dividend payout ratio (8)                      |  |                                                     | 70.37   | %    |  |      | 67.04   | %    |  |      | 87.76   | % |  |   | 71.80   | % |  |   | 46.20   | %
|Common stock book value                        |  | $                                                   | 25.62   |      |  | $    | 26.22   |      |  | $    | 24.97   |   |  | $ | 24.90   |   |  | $ | 23.96   |  
|Common shares outstanding at
period end(9)     |  |                                                     | 805,120 |      |  |      | 866,820 |      |  |      | 865,252 |   |  |   | 844,252 |   |  |   | 844,252 |  
|Weighted average common shares
outstanding(10) |  |                                                     | 856,649 |      |  |      | 866,176 |      |  |      | 848,627 |   |  |   | 844,252 |   |  |   | 863,262 |  



---

|(1)  |  | Nonperforming loans consist of loans on nonaccrual and loans past due
90 days or more.                                                                                                                                                                        
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|(2)  |  | Nonperforming assets consist of nonperforming loans and other real
estate owned.                                                                                                                                                                              
|    
|    
|    
|    
|(3)  |  | Net interest margin is net interest income expressed as a percentage
of average total interest-earning assets.                                                                                                                                                
|    
|    
|    
|    
|(4)  |  | Net interest spread is the difference between the yield on average
total interest-earning assets and cost of average total interest-bearing
liabilities.                                                                                                      
|    
|    
|    
|    
|(5)  |  | The efficiency ratio is the ratio of noninterest expense to the sum
of net interest income before provision for loan losses and total
noninterest income.                                                                                                     
|    
|    
|    
|    
|(6)  |  | Basic earnings per share is computed by dividing net income by the
weighted average number of shares outstanding during the period.                                                                                                                           
|    
|    
|    
|    
|(7)  |  | Diluted earnings per share reflects the potential dilution that would
occur if securities or other contracts to issue common stock were
exercised or converted into the common stock or resulted in the issuance
of common stock that then shared in earnings.
|    
|    
|    
|    
|(8)  |  | The dividend payout ratio consists of the common stock dividends paid
per share of common stock divided by basic earnings per share of common
stock.                                                                                                          
|    
|    
|    
|    
|(9)  |  | Based on shares outstanding at period end, excluding shares issuable
upon exercise of outstanding options.                                                                                                                                                    
|    
|    
|    
|    
|(10) |  | Weighted average number of shares of common stock outstanding for the
period, excluding shares issuable upon exercise of outstanding options.                                                                                                                 

22



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##### Table of Contents






ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following information presents managements discussion and analysis of
the consolidated financial condition and operating results of the Company and
its wholly-owned subsidiaries for the years ended December 31, 2001, 2000 and
1999. Averages presented in the tables are daily average balances. This
discussion and analysis of financial condition and results of operations is
intended to provide a better understanding of the significant changes in trends
relating to the Companys financial condition, results of operations, liquidity
and interest rate sensitivity. The following discussion and analysis should be
read in conjunction with the consolidated financial statements and notes
thereto of the Company and subsidiaries.

Financial Condition

Total assets at December 31, 2001 equaled $303.6 million, an increase of
$11.4 million, or 3.9%, over total assets of $292.2 million at December 31,
2000. Total loans equaled $261.5 million at December 31, 2001, an increase of
$18.8 million, or 7.7%, over total loans of $242.8 million at December 31,
2000. The loan to deposit ratio increased to 96.2% at year-end 2001, from
90.6% at year-end 2000. The ratio of average total loans to average deposits
increased to 93.0% in 2001, compared with 91.7% in 2000 and 89.3% in 1999.

The Company continued to decrease its nonperforming loans. At December 31,
2001, nonperforming loans equaled $0. This represented a reduction of $56,000,
or 100%, from nonperforming loans of $56,000, or 0.32% of total loans at
December 31, 2000. The year-end 2000 nonperforming loans of $56,000
represented a reduction of $649,000, or 92.1%, from nonperforming loans of
$705,000 at December 31, 1999.

The allowance for loan losses equaled $3.0 million at December 31, 2001,
compared with an allowance of $2.5 million at December 31, 2000. The allowance
at December 31, 2001 represented 1.13% of total loans, compared with 1.02% of
total loans at December 31, 2000 and 1.09% at December 31, 1999. Net recoveries
were $484,000, $51,000 and 184,000 during 2001, 2000 and 1999, respectively.
In addition, the allowance for loan losses represented >100% of
nonperforming loans at December 31, 2001, December 31, 2000 and December 31,
1999.

OREO remained unchanged at December 31, 2001 at $2,000 compared to
December 31, 2000, the lowest level of OREO in seven years. OREO equaled
$54,000 at December 31, 1999.

These foregoing developments resulted in an improvement of the ratio of
earning assets to total average assets over the last three years. For 2001,
the ratio equaled 97.0%, compared with 96.6% for both 2000 and 1999.

Deposits were $271.9 million at December 31, 2001, an increase of $4.1
million, or 1.5%, over deposits of $267.8 million at December 31, 2000. The
increase was primarily as a result of the remix of deposit balances shifting
away from time deposits totaling $8.3 million and moving towards lower costing
core deposits totaling $12.4 million. Average interest bearing deposits
represented 86.5% of average total deposits for 2001 compared with 86.6% in
2000.

At December 31, 2001, the Bank had a long term borrowing in the amount of
$3,000,000 scheduled to mature on September 1, 2008. The borrowing is tied to
the Wall Street Journal Prime rate and bears a floating rate of interest of
4.75%. During 2001, the interest rate on the borrowing ranged from 6.00% to
4.75%.

Total shareholders equity was $20.6 million at December 31, 2001, a
decrease of $2.1 million, or 9.2%, from $22.7 million at December 31, 2000,
primarily due to the repurchase of 70,000 shares of common stock in October
2001 totaling $3.1 million.

23



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##### Table of Contents



Results of Operations for the Years Ended December 31, 2001, 2000 and 1999

Overview. The Company reported net income for 2001 of $2.9 million
compared with $3.1 million in 2000 and $2.7 million in 1999. The return on
average assets was 0.99% in 2001 compared with 1.12% in 2000 and 1.04% in 1999.
The Companys return on average equity was 12.90% for 2001, 14.00% for 2000 and
12.67% for 1999.

Basic earnings per share equaled $3.41 in 2001 compared with $3.58 in 2000
and $3.19 in 1999. Diluted earnings per share equaled $3.37 in 2001 compared
with $3.56 in 2000 and $3.15 in 1999. Cash dividends were declared at $2.40
per share for 2001, $2.40 per share for 2000 and $2.80 per share for 1999.
This resulted in dividend payout ratios (common stock dividends declared per
share divided by basic earnings per share) of 70.4% in 2001, 67.0% in 2000 and
87.8% in 1999.

Net interest income.Net interest income is the primary source of
operating income of the Company. Net interest income represents the difference
between the interest income from earning assets and the interest paid on
interest-bearing liabilities. Net interest income for 2001 decreased $411,000,
or 3.6%, to $11.1 million when compared with 2000. The decrease in 2001 was
primarily attributable to a decrease in the yield on interest earning assets of
0.80%, coupled with an increase in the volume of average interest earning
assets (principally loan volume) resulting in a decrease in net interest income
of $613,000. The Companys average interest bearing liabilities (principally
time deposits) increased by $15.9 million, coupled with a general decrease in
the interest rates and the Companys cost of funds of 0.43% resulting in a net
increase in interest expense of $202,000. The net interest spread, which
represents the average yield earned on interest earning assets less the average
yield paid on interest bearing liabilities, decreased to 3.03% in 2001 from
3.40% in 2000.

Net interest income for 2000 increased $851,000 to $11.5 million, or 8.0%,
when compared with net interest income of $10.6 million for 1999. The increase
in 2000 was primarily attributable to an increase in the volume of average
interest earning assets (principally loan volume) of $16.7 million, coupled
with an increase in the yield on interest earning assets of 0.67% resulting in
a net increase to interest income of $3.1 million. The Companys average
interest bearing liabilities (principally time deposits increased by $18.2
million, coupled with a general increase in the interest rates and the
Companys cost of funds of 0.66% resulting in a net increase in interest
expense of $2.2 million. The net interest spread increased to 3.40% in 2000
from 3.39% in 1997.

24



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##### Table of Contents



Average balances and rates earned and paid. The following table presents,
for the periods indicated, consolidated average balance sheet information for
the Company, together with interest rates earned and paid on the various
sources and uses of its funds. The table is arranged to group the elements of
earning assets and interest-bearing liabilities, as these items represent the
major sources of income and expense.

|                                     |                                            |                      |         |                         |         |         |        |          |        |         |      |         |      |         |         |          |         |         |        |         |        |  |      |          |      |       |         |         |         |   |        |   |        |  |      |   |      |  
|------------------------------------ | ------------------------------------------ | -------------------- | ------- | ----------------------- | ------- | ------- | ------ | -------- | ------ | ------- | ---- | ------- | ---- | ------- | ------- | -------- | ------- | ------- | ------ | ------- | ------ |  | ---- | -------- | ---- | ----- | ------- | ------- | ------- | - | ------ | - | ------ |  | ---- | - | ---- | -
|                                     |                                            |                      |         | Year ended December 31,
|                                     |                                            |                      |         |                        
|                                     |                                            |                      |         | 2001                    |         | 2000    |        | 1999    
|                                     |                                            |                      |         |                         |         |         |        |         
|                                     |                                            |                      |         |                         |         |         |        | Interest |        | Rates   |      |         |      |         |         | Interest |         | Rates   |        |         |        |  |      | Interest |      | Rates
|                                     |                                            |                      |         | Average                 |         | income/ |        | earned/  |        | Average |      | income/ |      | earned/ |         | Average  |         | income/ |        | earned/
|                                     |                                            |                      |         | balance                 |         | expense |        | paid     |        | balance |      | expense |      | paid    |         | balance  |         | expense |        | paid   
|                                     |                                            |                      |         |                         |         |         |        |          |        |         |      |         |      |         |         |          |         |         |        |        
|                                     |                                            |                      |         | (dollars in thousands) 
|Assets                               |                                            |                      |         |                         |         |         |        |          |        |         |      |         |      |         |         |          |         |         |        |         |        |  |      |          |      |       |         |         |         |   |        |   |        |  |      |  
|Federal funds sold                   |                                            | $                    | 17,008  |                         |         | $       | 690    |          |        |         | 4.06 | %       |      | $       | 14,476  |          |         | $       | 907    |         |        |  | 6.26 | %        |      | $     | 12,940  |         |         | $ | 642    |   |        |  | 4.96 | %
|Investment securities(1)             |                                            |                      | 17,929  |                         |         |         | 885    |          |        |         | 4.94 |         |      |         | 21,669  |          |         |         | 1,346  |         |        |  | 6.21 |          |      |       | 26,525  |         |         |   | 1,340  |   |        |  | 5.05 |  
|Total loans(2)(3)                    |                                            |                      | 252,160 |                         |         |         | 20,272 |          |        |         | 8.04 |         |      |         | 230,944 |          |         |         | 20,206 |         |        |  | 8.75 |          |      |       | 210,878 |         |         |   | 17,399 |   |        |  | 8.25 |  
|                                     |                                            |                      |         |                         |         |         |        |          |        |         |      |         |      |         |         |          |         |         |        |         |        |  |      |          |      |       |         |         |         |   |        |   |        |  |      |  
|                                     |                                            | Total earning assets |         | $                       | 287,097 |         |        | $        | 21,847 |         |      |         | 7.61 | %       |         | $        | 267,089 |         |        | $       | 22,459 |  |      |          | 8.41 | %     |         | $       | 250,343 |   |        | $ | 19,381 |  |      |   | 7.74 | %
|Allowance for loan losses            |                                            |                      | (2,626  | )                       |         |         |        |          |        |         |      |         |      |         | (2,439  | )        |         |         |        |         |        |  |      |          |      |       | (2,295  | )       |         |   |        |   |        |  |      |  
|Cash and due from banks              |                                            |                      | 6,841   |                         |         |         |        |          |        |         |      |         |      |         | 6,142   |          |         |         |        |         |        |  |      |          |      |       | 5,586   |         |         |   |        |   |        |  |      |  
|Premises and equipment               |                                            |                      | 1,372   |                         |         |         |        |          |        |         |      |         |      |         | 1,685   |          |         |         |        |         |        |  |      |          |      |       | 1,707   |         |         |   |        |   |        |  |      |  
|Interest receivable and
other assets |                                            |                      | 3,379   |                         |         |         |        |          |        |         |      |         |      |         | 3,957   |          |         |         |        |         |        |  |      |          |      |       | 3,873   |         |         |   |        |   |        |  |      |  
|                                     |                                            |                      |         |                         |         |         |        |          |        |         |      |         |      |         |         |          |         |         |        |         |        |  |      |          |      |       |         |         |         |   |        |   |        |  |      |  
|                                     |                                            | Total Assets         |         | $                       | 296,063 |         |        |          |        |         |      |         |      |         |         | $        | 276,434 |         |        |         |        |  |      |          |      |       |         | $       | 259,214 |   |        |   |        |  |      |   |      |  
|                                     |                                            |                      |         |                         |         |         |        |          |        |         |      |         |      |         |         |          |         |         |        |         |        |  |      |          |      |       |         |         |         |   |        |   |        |  |      |  
|Liabilities and
shareholders equity |                                            |                      |         |                         |         |         |        |          |        |         |      |         |      |         |         |          |         |         |        |         |        |  |      |          |      |       |         |         |         |   |        |   |        |  |      |  
|Interest bearing demand
deposits     |                                            | $                    | 15,400  |                         |         | $       | 74     |          |        |         | 0.48 | %       |      | $       | 15,671  |          |         | $       | 152    |         |        |  | 0.96 | %        |      | $     | 15,312  |         |         | $ | 147    |   |        |  | 0.96 | %
|Money market deposits                |                                            |                      | 4,328   |                         |         |         | 92     |          |        |         | 2.13 |         |      |         | 3,982   |          |         |         | 103    |         |        |  | 2.61 |          |      |       | 3,523   |         |         |   | 92     |   |        |  | 2.61 |  
|Savings deposits                     |                                            |                      | 52,007  |                         |         |         | 1,590  |          |        |         | 3.06 |         |      |         | 50,865  |          |         |         | 1,967  |         |        |  | 3.73 |          |      |       | 53,224  |         |         |   | 1,986  |   |        |  | 3.73 |  
|Time deposits of
$100,000 or more    |                                            |                      | 22,520  |                         |         |         | 1,229  |          |        |         | 5.46 |         |      |         | 17,460  |          |         |         | 1,031  |         |        |  | 5.11 |          |      |       | 11,115  |         |         |   | 567    |   |        |  | 5.11 |  
|Time deposits under
$100,000         |                                            |                      | 139,947 |                         |         |         | 7,740  |          |        |         | 5.53 |         |      |         | 130,069 |          |         |         | 7,657  |         |        |  | 5.06 |          |      |       | 117,533 |         |         |   | 5,946  |   |        |  | 5.06 |  
|Other borrowings                     |                                            |                      | 682     |                         |         |         | 35     |          |        |         | 5.14 |         |      |         | 873     |          |         |         | 57     |         |        |  | 5.29 |          |      |       | 32      |         |         |   | 2      |   |        |  | 5.29 |  
|                                     |                                            |                      |         |                         |         |         |        |          |        |         |      |         |      |         |         |          |         |         |        |         |        |  |      |          |      |       |         |         |         |   |        |   |        |  |      |  
|Total interest bearing
liabilities   |                                            | $                    | 234,884 |                         |         | $       | 10,760 |          |        |         | 4.58 | %       |      | $       | 218,920 |          |         | $       | 10,967 |         |        |  | 4.35 | %        |      | $     | 200,739 |         |         | $ | 8,740  |   |        |  | 4.35 | %
|Noninterest bearing
demand deposits  |                                            |                      | 36,828  |                         |         |         |        |          |        |         |      |         |      |         | 33,800  |          |         |         |        |         |        |  |      |          |      |       | 35,505  |         |         |   |        |   |        |  |      |  
|Other liabilities                    |                                            |                      | 1,620   |                         |         |         |        |          |        |         |      |         |      |         | 1,563   |          |         |         |        |         |        |  |      |          |      |       | 1,600   |         |         |   |        |   |        |  |      |  
|Shareholders equity                 |                                            |                      | 22,731  |                         |         |         |        |          |        |         |      |         |      |         | 22,151  |          |         |         |        |         |        |  |      |          |      |       | 21,370  |         |         |   |        |   |        |  |      |  
|                                     |                                            |                      |         |                         |         |         |        |          |        |         |      |         |      |         |         |          |         |         |        |         |        |  |      |          |      |       |         |         |         |   |        |   |        |  |      |  
|                                     | Total liabilities and
shareholders equity |                      | $       | 296,063                 |         |         |        |          |        |         |      |         |      |         | $       | 276,434  |         |         |        |         |        |  |      |          |      |       | $       | 259,214 |         |   |        |   |        |  |      |   |     
|                                     |                                            |                      |         |                         |         |         |        |          |        |         |      |         |      |         |         |          |         |         |        |         |        |  |      |          |      |       |         |         |         |   |        |   |        |  |      |  
|Net interest income                  |                                            |                      |         |                         |         | $       | 11,087 |          |        |         |      |         |      |         |         |          |         | $       | 11,492 |         |        |  |      |          |      |       |         |         |         | $ | 10,641 |   |        |  |      |  
|                                     |                                            |                      |         |                         |         |         |        |          |        |         |      |         |      |         |         |          |         |         |        |         |        |  |      |          |      |       |         |         |         |   |        |   |        |  |      |  
|Net interest spread(4)               |                                            |                      |         |                         |         |         |        |          |        |         | 3.03 | %       |      |         |         |          |         |         |        |         |        |  | 3.40 | %        |      |       |         |         |         |   |        |   |        |  | 3.39 | %
|Net interest margin(5)               |                                            |                      |         |                         |         |         |        |          |        |         | 3.86 | %       |      |         |         |          |         |         |        |         |        |  | 4.30 | %        |      |       |         |         |         |   |        |   |        |  | 4.25 | %



---

|(1) |  | There are no tax exempt investment securities in the investment
securities portfolio for any of the reported years.                                                                                                                                
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Average balances are presented net of deferred loan origination fees.
Average nonaccruing loans of $21,000 for 2001, $516,000 million for 2000
and $1.6 million for 1999 are included in the table for computational
purposes.                     
|   
|   
|   
|   
|(3) |  | Loan origination fees are included in interest income as adjustments of
the loan yields over the life of the loan using the interest method. Loan
interest income includes loan fees of $484,000 for 2001, $310,000 for 2000
and $584,000 for 1999.
|   
|   
|   
|   
|(4) |  | Net interest spread represents the average yield earned on
interest-earning assets less the average rate paid on interest-bearing
liabilities.                                                                                                     
|   
|   
|   
|   
|(5) |  | Net interest margin is computed by dividing net interest income by total
average earning assets.                                                                                                                                                   

25



---



##### Table of Contents



Net interest income changes due to volume and rate.The following table
sets forth, for the periods indicated, a summary of the changes in average
asset and liability balances and interest earned and paid resulting from
changes in average asset and liability balances (volume) and changes in
average interest rates. The changes in interest due to both rate and volume are
designated as Mix.

|                                        |       |                                     |       |                                       |     |                                       |        |        |        |       |      |        |     |      |      |         |      |         |       |       |     |   |       |       |     |   |     |     |     |   |       |       |     | 
|--------------------------------------- | ----- | ----------------------------------- | ----- | ------------------------------------- | --- | ------------------------------------- | ------ | ------ | ------ | ----- | ---- | ------ | --- | ---- | ---- | ------- | ---- | ------- | ----- | ----- | --- | - | ----- | ----- | --- | - | --- | --- | --- | - | ----- | ----- | --- | 
|                                        |       |                                     |       | 2001 compared with 2000               |     | 2000 compared with 1999              
|                                        |       |                                     |       |                                       |     |                                      
|                                        |       |                                     |       | Increase (decrease) due to change in: |     | Increase (decrease) due to change in:
|                                        |       |                                     |       |                                       |     |                                      
|                                        |       |                                     |       | Average                               |     | Average                               |        |        |        |       |      |        |     |      |      | Average |      | Average |       |       |     |   |       |       |     |  
|                                        |       |                                     |       | volume                                |     | rate                                  |        | Mix    |        | Total |      | volume |     | rate |      | Mix     |      | Total  
|                                        |       |                                     |       |                                       |     |                                       |        |        |        |       |      |        |     |      |      |         |      |        
|                                        |       |                                     |       | (dollars in thousands)               
|Increase
(decrease) in interest income  |       |                                     |       |                                       |     |                                       |        |        |        |       |      |        |     |      |      |         |      |         |       |       |     |   |       |       |     |   |     |     |     |   |       |      
|Federal funds sold                      |       | $                                   | 159   |                                       |     | $                                     | (319   | )      |        | $     | (57  | )      |     | $    | (217 | )       |      | $       | 76    |       |     | $ | 169   |       |     | $ | 20  |     |     | $ | 265   |      
|Investment securities(1)                |       |                                     | (232  | )                                     |     |                                       | (276   | )      |        |       | 47   |        |     |      | (461 | )       |      |         | (245  | )     |     |   | 307   |       |     |   | (56 | )   |     |   | 6     |      
|Loans(2)(3)                             |       |                                     | 1,856 |                                       |     |                                       | (1,639 | )      |        |       | (151 | )      |     |      | 66   |         |      |         | 1,656 |       |     |   | 1,051 |       |     |   | 100 |     |     |   | 2,807 |      
|                                        |       |                                     |       |                                       |     |                                       |        |        |        |       |      |        |     |      |      |         |      |         |       |       |     |   |       |       |     |   |     |     |     |   |       |      
|                                        | Total |                                     |       | 1,783                                 |     |                                       |        | (2,234 | )      |       |      | (161   | )   |      |      | (612    | )    |         |       | 1,487 |     |   |       | 1,527 |     |   |     | 64  |     |   |       | 3,078 |    
|                                        |       |                                     |       |                                       |     |                                       |        |        |        |       |      |        |     |      |      |         |      |         |       |       |     |   |       |       |     |   |     |     |     |   |       |      
|Increase
(decrease) in interest expense |       |                                     |       |                                       |     |                                       |        |        |        |       |      |        |     |      |      |         |      |         |       |       |     |   |       |       |     |   |     |     |     |   |       |      
|Interest bearing demand deposits        |       |                                     | (3    | )                                     |     |                                       | (77    | )      |        |       | 2    |        |     |      | (78  | )       |      |         | 3     |       |     |   | 1     |       |     |   | 1   |     |     |   | 5     |      
|Money market deposits                   |       |                                     | 9     |                                       |     |                                       | (18    | )      |        |       | (2   | )      |     |      | (11  | )       |      |         | 12    |       |     |   | (1    | )     |     |   | 0   |     |     |   | 11    |      
|Savings deposits                        |       |                                     | 44    |                                       |     |                                       | (411   | )      |        |       | (10  | )      |     |      | (377 | )       |      |         | (88   | )     |     |   | 72    |       |     |   | (3  | )   |     |   | (19   | )    
|Time deposits of $100,000 or more       |       |                                     | 299   |                                       |     |                                       | (78    | )      |        |       | (23  | )      |     |      | 198  |         |      |         | 324   |       |     |   | 89    |       |     |   | 51  |     |     |   | 464   |      
|Time deposits under $100,000            |       |                                     | 581   |                                       |     |                                       | (463   | )      |        |       | (35  | )      |     |      | 83   |         |      |         | 634   |       |     |   | 973   |       |     |   | 104 |     |     |   | 1,711 |      
|Other borrowings                        |       |                                     | (12   | )                                     |     |                                       | (12    | )      |        |       | 2    |        |     |      | (22  | )       |      |         | 45    |       |     |   | 0     |       |     |   | 10  |     |     |   | 55    |      
|                                        |       |                                     |       |                                       |     |                                       |        |        |        |       |      |        |     |      |      |         |      |         |       |       |     |   |       |       |     |   |     |     |     |   |       |      
|                                        | Total |                                     |       | 918                                   |     |                                       |        | (1,059 | )      |       |      | (66    | )   |      |      | (207    | )    |         |       | 930   |     |   |       | 1,134 |     |   |     | 163 |     |   |       | 2,227 |    
|                                        |       |                                     |       |                                       |     |                                       |        |        |        |       |      |        |     |      |      |         |      |         |       |       |     |   |       |       |     |   |     |     |     |   |       |      
|                                        |       | Total
change in net interest income |       | $                                     | 865 |                                       |        | $      | (1,175 | )     |      | $      | (95 | )    |      | $       | (405 | )       |       | $     | 557 |   |       | $     | 393 |   |     | $   | (99 | ) |       | $     | 851 | 
|                                        |       |                                     |       |                                       |     |                                       |        |        |        |       |      |        |     |      |      |         |      |         |       |       |     |   |       |       |     |   |     |     |     |   |       |      



---

|(1) |  | There are no tax exempt investment securities in the investment
securities portfolio for any of the reported years.                                                                                                                       
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Average balances are presented net of deferred loan origination fees.
Average nonaccruing loans of $21,000 for 2001, $516,000 for 2000 and $1.6
million for 1999 are included in the table for computational purposes.                    
|   
|   
|   
|   
|(3) |  | Loan origination fees are included in interest income as adjustments of
the loan yields over the life of the loan using the interest method. Loan
income includes loan fees of $484,000 for 2001, $310,000 for 2000 and
$584,000 for 1999.

Provision for loan losses.The provision for loan losses charged to
operations reflects managements judgment of the adequacy of the allowance for
loan losses. The provision is determined through periodic analysis, which
includes a detailed review of the classification and categorization of problem
loans to be charged off; an assessment of the overall quality and
collectability of the portfolio; and consideration of the loan loss experience,
trends in problem loans and concentrations of credit risk, evaluation of
collateral, as well as current and expected economic conditions, particularly
in segments of the Companys market area. Such reviews also assist management
in establishing the recommended level of the allowance for loan losses. The
Companys board of directors approves the adequacy of the allowance for loan
losses on a quarterly basis.

For 2001, 2000 and 1999, the Company recorded no provision for loan
losses. The lack of a provision in 2001, 2000 and 1999 was the result of
managements determination, in accordance with the policy discussed above, that
the allowance was adequate at December 31, 2001, December 31, 2000 and December
31, 1999, respectively. In fact, the allowance had grown in 2001, 2000 and
1999 by reason of net recoveries on loans previously charged off in the amount
$484,000 of $50,000 and $184,000, respectively. These trends reflected, among
other factors, the strengthening of the Southern California economy.

Noninterest income. Noninterest income for 2001 decreased $209,000, or
12.2%, to $1.5 million, compared with $1.7 million for 2000. The decrease in
2001 was principally attributable to decreased data processing fees generated
by BankLink totaling $333,000 due to the assignment of item processing
contracts to FDSI commencing in June 2001. In April 2001, BankLink entered
into a contract with Financial Data Solutions, Inc (FDSI) to assign the

26



---



##### Table of Contents



item processing contracts of four client banks to FDSI. The contract
provides for BankLink to receive a small percentage of item processing fees
billed for the assigned contracts over the various lives of the four client
contracts.

Noninterest income for 2000 decreased $116,000, or 6.4%, to $1.7 million,
compared with $1.8 million for 1999. The decrease in 2000 was principally
attributable to decreased data processing fees generated by BankLink totaling
$70,000, and a reduction in fees for service charges on deposits totaling
$39,000

Noninterest expense.Noninterest expense for 2001 was $7.6 million,
compared with $7.9 million for 2000 and $7.8 million for 1999. The principal
components of the decrease in 2001 were:



| |  |  | Salaries and employee benefits.Salaries and employee
benefits decreased in 2001 by $313,000, or 6.8%. During 2001, the
Company experienced a decrease of $303,000 in the base salaries paid
to employees. BankLinks staffing levels declined during 2001
relating to the assignment of BankLinks item processing business to
FDSI in June 2001 coupled with other staffing decreases
during 2000, BankLinks decrease in salaries during 2001 was
$154,000. During 2001, the Bank also experienced a decline in
salaries of $149,000, primarily due to the retirement during 2000 of
the Banks former Chief Credit Officer.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | OREO expenses.OREO expenses for 2001 were $0 compared to a
net credit in 2000 of $19,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  |  | Premises and equipment expenses.Premise and equipment
expense decreased in 2001 by $52,000 or 4.7% primarily due to
decreased depreciation expense of $58,000 related to the assignment
of BankLinks item processing business to FDSI resulting in lower
equipment cost. Rent expense for 2001 was reduced by $11,000
primarily due to BankLink vacating its former premises after
consolidating its data processing operation with the Companys
administrative facility.                                                                                                                                                   
|
| |  |  | Other expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

The following is a breakdown of other expenses for the years ended December 31, 2001 and 2000:

|                                           |       |   |                        |       |      |   |             |       |  |   |      |    | 
|------------------------------------------ | ----- | - | ---------------------- | ----- | ---- | - | ----------- | ----- |  | - | ---- | -- | 
|                                           |       |   | (Dollars in thousands)
|                                           |       |   |                       
|                                           |       |   | 2001                   |       | 2000 |   | Incr/(Decr)
|                                           |       |   |                        |       |      |   |            
|Data processing and other outside services |       | $ | 490                    |       |      | $ | 366         |       |  | $ | 124  |   
|Deposit insurance assessments              |       |   | 80                     |       |      |   | 77          |       |  |   | 3    |   
|Professional fees                          |       |   | 410                    |       |      |   | 369         |       |  |   | 41   |   
|Office supplies, postage and telephone     |       |   | 541                    |       |      |   | 519         |       |  |   | 22   |   
|Other                                      |       |   | 715                    |       |      |   | 889         |       |  |   | (174 | ) 
|                                           |       |   |                        |       |      |   |             |       |  |   |      |   
|                                           | Total |   | $                      | 2,236 |      |   | $           | 2,220 |  |   | $    | 16
|                                           |       |   |                        |       |      |   |             |       |  |   |      |   

Other expenses increased in 2001 over 2000 by $16,000, or 0.7%. This
category of expense includes costs for outside processing services,
FDIC and other insurance expense, professional fees and other
miscellaneous expense. Data processing and other outside services
increased by $124,000 primarily due to expenses related to the
Banks item
processing being performed outside the Bank instead of at the Banks
subsidiary, BankLink. Professional fees increased by $41,000
primarily due to increased legal services, and other expenses
decreased by $174,000 primarily from lower operating costs in 2001
than in 2000.

In 2000, noninterest expense increased by 1.2% over the 1999 level due to
the following:



| |  |  | Salaries and employee benefits.Salaries and employee
benefits increased in 2000 by $119,000, or 2.7%. Salary expense in
1999 included $341,000 in special bonus compensation to retain key
employees and compensate employees who ensured that the Bank
continued to operate successfully
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

27



---



##### Table of Contents





| |   |  | during the PCBG merger process which lasted nearly 15 months and was
terminated in September 1999. During 2000, the Bank experienced an
increase of $260,000 in the base salaries paid to employees,
primarily as a result of increases in staffing levels in the
operations area of the Bank and the BankLink operation, in addition
to normal salary increases. Excluding the PCBG special bonus
compensation discussed above, the Banks expense related to
incentive payments in 1999 was $241,000, compared to $406,000 in
2000, an increase of $165,000. The increase in 2000 is
predominately due to incentive payments being made to all levels of
the Banks personnel during 2000, versus incentive payments being
made to only management level personnel during 1999.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | OREO expenses.OREO expenses for 2000 resulted in a net
credit of $19,000 compared to a net credit in 1999 of $146,000. The
components of the 2000 credit were net gains on the sale of OREO
properties of $26,000, offset by OREO holding costs of $7,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  |  | Premises and equipment expenses.Premise and equipment
expense increased in 2000 by $46,000 or 4.3% primarily due to
increased expenses incurred by BankLink of $55,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  |  | Other expenses.Other expenses decreased in 2000 over 1999
by $201,000, or 8.3%. This category of expense includes costs for
outside processing services, FDIC and other insurance expense,
professional fees and other miscellaneous expense. Other expenses in
1999 included $216,000 in professional fees and other expenses
related to the PCBG merger that was terminated in September 1999.                                                                                                                                                                                                                                                                                                                                                                                 

The Companys efficiency ratio which is the ratio of noninterest expenses
to the sum of net interest income before provision for loan losses and total
noninterest income was 60.2% in 2001, compared with 59.9% in 2000 and 62.7% in
1999.

Provision for income taxes.The Companys provision for income taxes was
$2.1 million in 2001, $2.2 million in 2000 and $1.9 million in 1999. These
changes corresponded directly to changes in pre-tax income. The effective
income tax rate was 41.6% in 2001 compared with 41.5% in 2000 and 41.8% in
1999.

Net Income. Net income in 2001 was $2.9 million compared to $3.1 million
in 2000. In 2001, the Company experienced a decrease in net interest income of
$419,000, primarily resulting from the declining rate environment. Noninterest
income decreased by $209,000 primarily from the Companys data processing
subsidiary. Noninterest expense decreased by $330,000, primarily due to a
reduction in salaries and employee benefits of $313,000.

Net income in 2000 was $3.1 million compared to $2.7 million in 1999. In
2000, the Bank experienced increases in net interest income of $851,000,
primarily resulting from increased loan volume. Noninterest income decreased
by $116,000, primarily from the Banks data processing subsidiary. Noninterest
expense increased by $91,000, primarily due to an increase in salary and
benefit expense and income tax expense increased by $251,000.

Summary Selected Quarterly Financial Data (Unaudited)

The following table presents a summary of selected quarterly financial
data, which should be read in conjunction with the Companys consolidated
financial statements and notes thereto included elsewhere herein. In the
opinion of management, this information has been prepared on the same basis as
the consolidated financial statements appearing elsewhere herein, and includes
all adjustments, consisting only of normal recurring adjustments necessary to
present fairly the unaudited results set forth herein. The operating results
for any quarter are not necessarily indicative of results for any subsequent
period or for the entire year.

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|                              |  |                                               |       |      |  |      |       |      |  |      |       |      |  |      |       |      |  |   |       |  |  |   |       |  |  |   |      |  |  |   |       | 
|----------------------------- |  | --------------------------------------------- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | - | ----- |  |  | - | ----- |  |  | - | ---- |  |  | - | ----- | 
|                              |  | For the quarter ended                        
|                              |  |                                              
|                              |  | Dec                                           |       | Sep  |  | Jun  |       | Mar  |  | Dec  |       | Sep  |  | Jun  |       | Mar 
|                              |  | 2001                                          |       | 2001 |  | 2001 |       | 2001 |  | 2000 |       | 2000 |  | 2000 |       | 2000
|                              |  |                                               |       |      |  |      |       |      |  |      |       |      |  |      |       |     
|                              |  | (dollars in thousands, except per share data)
|                              |  | (unaudited)                                  
|Net interest income           |  | $                                             | 2,869 |      |  | $    | 2,751 |      |  | $    | 2,686 |      |  | $    | 2,781 |      |  | $ | 2,868 |  |  | $ | 2,926 |  |  | $ | 957  |  |  | $ | 2,741 | 
|Net income                    |  |                                               | 698   |      |  |      | 761   |      |  |      | 683   |      |  |      | 780   |      |  |   | 737   |  |  |   | 919   |  |  |   | 743  |  |  |   | 702   | 
|Basic earnings per share(1)   |  | $                                             | 0.85  |      |  | $    | 0.87  |      |  | $    | 0.79  |      |  | $    | 0.90  |      |  | $ | 0.85  |  |  | $ | 1.06  |  |  | $ | 0.86 |  |  | $ | 0.81  | 
|Diluted earnings per share(2) |  |                                               | 0.84  |      |  |      | 0.86  |      |  |      | 0.78  |      |  |      | 0.89  |      |  |   | 0.85  |  |  |   | 1.05  |  |  |   | 0.86 |  |  |   | 0.80  | 



---

|(1) |  | Basic earnings per share is computed by dividing net income by the
weighted average number of shares outstanding during the period.                                                                                                                           
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Diluted earnings per share reflects the potential dilution that would
occur if securities or other contracts to issue common stock were
exercised or converted into the common stock or resulted in the issuance
of common stock that then shared in earnings.

Asset and Liability Management

Asset and liability management is an integral part of managing a banking
institutions primary source of income, net interest income. The Company
manages the balance between rate-sensitive assets and rate-sensitive
liabilities being repriced in any given period with the objective of
stabilizing net interest income during periods of fluctuating interest rates.
The Company considers its rate-sensitive assets to be those which either
contain a provision to adjust the interest rate or mature within one year.
These assets include certain loans and investment securities and federal funds
sold. Rate-sensitive liabilities are those which allow for periodic interest
rate changes within one year: they include maturing time certificates, savings
deposits, money market and interest-bearing demand deposits. The difference
between the aggregate amount of assets and liabilities that reprice or mature
within various time frames is called the gap. Generally, if repricing assets
exceed repricing liabilities in a time period, the Company would be deemed to
be asset-sensitive  a positive gap. If repricing liabilities exceed
repricing assets in a time period, the Company would be deemed to be
liability-sensitive  a negative gap. A positive gap will generally produce a
higher net interest margin in a rising rate environment and a lower net
interest margin in a declining rate environment. Conversely, a negative gap
will generally produce a lower net interest margin in a rising rate environment
and a higher net interest margin in a declining rate environment. However,
because interest rates for different asset and liability products offered by
depository institutions respond in a different manner, both in terms of the
responsiveness, as well as the extent of responsiveness to changes in interest
rate environment, the gap is only a general indicator of interest sensitivity.

Generally, the Company seeks to maintain a balanced position in which
there is a narrow range of asset or liability sensitivity within a one-year
period. This kind of balanced position, in principle, should ensure net
interest margin stability in times of volatile interest rates. This balanced
position is accomplished through maintaining a significant level of loans,
investment securities and deposits available for repricing or maturity within
one year.

29



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The following table sets forth the interest rate sensitivity of the
Companys interest-earning assets and interest-bearing liabilities at December
31, 2001, using the interest rate sensitivity gap ratio. For purposes of the
following table, an asset or liability is considered rate-sensitive within a
specified period when it can be repriced or matures within its contractual
terms.

|                                                           |                                            |   |                        |         |           |   |             |        |             |   |           |        |       |   |        |       |  |   |         |        |  |   |         |         | 
|---------------------------------------------------------- | ------------------------------------------ | - | ---------------------- | ------- | --------- | - | ----------- | ------ | ----------- | - | --------- | ------ | ----- | - | ------ | ----- |  | - | ------- | ------ |  | - | ------- | ------- | 
|                                                           |                                            |   | Maturing or Repricing  |         |           |   |             |        |             |   |          
|                                                           |                                            |   |                        |         |           |   |             |        |             |   |          
|                                                           |                                            |   |                        |         |           |   | After 3 but |        | After 1 but |   |           |        |       |   | Non-   |       |  |   |        
|                                                           |                                            |   | Within 3               |         | within 12 |   | within 5    |        | After 5     |   | interest- |        |       |   |       
|                                                           |                                            |   | months                 |         | months    |   | years       |        | years       |   | bearing   |        | Total
|                                                           |                                            |   |                        |         |           |   |             |        |             |   |           |        |      
|                                                           |                                            |   | (dollars in thousands)
|Assets                                                     |                                            |   |                        |         |           |   |             |        |             |   |           |        |       |   |        |       |  |   |         |        |  |   |         |        
|Federal funds sold                                         |                                            | $ | 15,001                 |         |           | $ | 0           |        |             | $ | 0         |        |       | $ | 0      |       |  | $ | 0       |        |  | $ | 15,001  |        
|Investment securities                                      |                                            |   | 7,205                  |         |           |   | 9,165       |        |             |   | 0         |        |       |   | 0      |       |  |   | 0       |        |  |   | 16,370  |        
|Loans(1)                                                   |                                            |   | 102,267                |         |           |   | 56,528      |        |             |   | 95,094    |        |       |   | 8,370  |       |  |   | 0       |        |  |   | 262,259 |        
|Other-interest bearing assets                              |                                            |   | 10                     |         |           |   | 0           |        |             |   | 0         |        |       |   | 0      |       |  |   | 0       |        |  |   | 10      |        
|                                                           |                                            |   |                        |         |           |   |             |        |             |   |           |        |       |   |        |       |  |   |         |        |  |   |         |        
|                                                           | Total earning assets                       |   |                        | 124,483 |           |   |             | 65,693 |             |   |           | 95,094 |       |   |        | 8,370 |  |   |         | 0      |  |   |         | 293,640 | 
|Noninterest-bearing assets
and allowances for loan losses  |                                            |   | 0                      |         |           |   | 0           |        |             |   | 0         |        |       |   | 0      |       |  |   | 9,944   |        |  |   | 9,944   |        
|                                                           |                                            |   |                        |         |           |   |             |        |             |   |           |        |       |   |        |       |  |   |         |        |  |   |         |        
|                                                           | Total assets                               |   | $                      | 124,483 |           |   | $           | 65,693 |             |   | $         | 95,094 |       |   | $      | 8,370 |  |   | $       | 9,944  |  |   | $       | 303,584 | 
|                                                           |                                            |   |                        |         |           |   |             |        |             |   |           |        |       |   |        |       |  |   |         |        |  |   |         |        
|Liabilities and shareholders equity                       |                                            |   |                        |         |           |   |             |        |             |   |           |        |       |   |        |       |  |   |         |        |  |   |         |        
|Interest bearing demand,
money market and
savings deposits |                                            | $ | 78,407                 |         |           | $ | 0           |        |             | $ | 0         |        |       | $ | 0      |       |  | $ | 0       |        |  | $ | 78,407  |        
|Time deposits of $100,000 or more                          |                                            |   | 8,857                  |         |           |   | 14,391      |        |             |   | 765       |        |       |   | 0      |       |  |   | 0       |        |  |   | 24,013  |        
|Time deposits under $100,000                               |                                            |   | 54,651                 |         |           |   | 73,537      |        |             |   | 3,503     |        |       |   | 0      |       |  |   | 0       |        |  |   | 131,691 |        
|Other interest-bearing liabilities                         |                                            |   | 9,305                  |         |           |   | 0           |        |             |   | 0         |        |       |   | 0      |       |  |   | 0       |        |  |   | 9,305   |        
|                                                           |                                            |   |                        |         |           |   |             |        |             |   |           |        |       |   |        |       |  |   |         |        |  |   |         |        
|Total interest bearing liabilities                         |                                            |   | 151,220                |         |           |   | 87,928      |        |             |   | 4,268     |        |       |   | 0      |       |  |   | 0       |        |  |   | 243,416 |        
|Other liabilities and
shareholders equity                 |                                            |   | 0                      |         |           |   | 0           |        |             |   | 0         |        |       |   | 0      |       |  |   | 60,168  |        |  |   | 60,168  |        
|                                                           |                                            |   |                        |         |           |   |             |        |             |   |           |        |       |   |        |       |  |   |         |        |  |   |         |        
|                                                           | Total liabilities and
shareholders equity |   | $                      | 151,220 |           |   | $           | 87,928 |             |   | $         | 4,268  |       |   | $      | 0     |  |   | $       | 60,168 |  |   | $       | 303,584 | 
|                                                           |                                            |   |                        |         |           |   |             |        |             |   |           |        |       |   |        |       |  |   |         |        |  |   |         |        
|Incremental gap                                            |                                            | $ | (26,737                | )       |           | $ | (22,235     | )      |             | $ | 90,826    |        |       | $ | 8,370  |       |  | $ | (50,224 | )      |  |   |         |        
|Cumulative gap                                             |                                            | $ | (26,737                | )       |           | $ | (48,972     | )      |             | $ | 41,854    |        |       | $ | 50,224 |       |  |   |         |        |  |   |         |        
|Cumulative gap/earning assets                              |                                            |   | -9.1                   | %       |           |   | (16.7       | )%     |             |   | 14.3      | %      |       |   | 17.1   | %     |  |   |         |        |  |   |         |        
|Cumulative gap/total assets                                |                                            |   | -8.8                   | %       |           |   | (16.1       | )%     |             |   | 13.8      | %      |       |   | 16.5   | %     |  |   |         |        |  |   |         |        



---

|(1) |  | At December 31, 2001, there were no nonaccrual loans. For purposes of
this table, $58.2 million in floating rate loans accruing at a floor rate
are treated as fixed rate loans using the contractual maturity date.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The majority of the Companys loan portfolio, excluding nonaccrual loans,
continues to consist of floating or adjustable rate loans. The percentage of
such loans decreased to 74.5% at December 31, 2001 from 95.6% at December 31,
2000. The reduction in floating rate loans during 2001 is due to an increase
in floating rate loans accruing at a floor rate, which are treated as loans at
a fixed rate totaling $58.2 million at December 31, 2001, compared to $1.9
million at December 31, 2000. Noninterest bearing demand deposits as a
percentage of total deposits increased to 13.9% at December 31, 2001 from 12.1%
at December 31, 2000. The Companys policy is to maintain a ratio of rate
sensitive assets less rate sensitive liabilities in a range between -10% and
+10% of total assets for assets and liabilities repricing within three months,
and after three months but within 12 months. At December 31, 2001, the amount
of rate sensitive liabilities that reprice within one year exceeded rate
sensitive assets by $49.0 million, or negative 16.7% of total assets. In other
words, the Company was liability-sensitive with a negative cumulative one-year
gap of $49.0 million at

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December 31, 2001. The increase in the Companys liability-sensitive
position at December 31, 2001 as compared to December 31, 2000 is due to $58.2
million in floating rate loans being treated as fixed rate loans, thus
extending the repricing opportunity of certain of the loans beyond the 12 month
time horizon. In general, based upon the Companys mix of deposits, loans and
investments, increases in interest rates would be expected to result in a
decrease in the Companys net interest margin.

The interest rate gaps reported in the table above arises when assets are
funded with liabilities having different repricing intervals. Since these gaps
are actively managed and change daily as adjustments are made for changes in
interest rates and market outlook, positions at the end of any period may not
be reflective of the Companys interest rate sensitivity in subsequent periods.
Active management dictates that longer-term economic views are balanced against
prospects for short-term interest rate changes in all repricing intervals. For
purposes of the analysis above, repricing of fixed-rate instruments is based
upon the contractual maturity of the applicable instruments. Actual payment
patterns may differ from contractual payment patterns. The change in net
interest margin may not always follow the general expectations of an
asset-sensitive or liability-sensitive balance sheet during periods of changing
interest rates, because interest rates earned or paid may change by differing
increments and at different time intervals for each type of interest-sensitive
asset and liability. As a result of these factors, at any given time, the
Company may be more sensitive or less sensitive to changes in interest rates
than indicated in the above table.

Market Risk

Market risk is the risk of loss to future earnings, to fair values or to
future cash flows that may result from changes in the price of a financial
instrument. The value of a financial instrument may change as a result of
changes in interest rate and other market changes. Market risk is attributed
to all market risk sensitive financial instruments, including investment
securities, loans, deposits and borrowings.

The Company does not engage in trading activities for its own account and
does not participate in foreign currency transactions for its own account.
Accordingly, the Companys exposure to market risk is primarily a function of
its asset and liability management activities. The principal market risk to
the Company is the interest rate risk inherent in its lending, investing and
deposit-taking activities. This is because interest earning assets and
interest-bearing liabilities of the Company do not change at the same speed, to
the same extent or on the same basis.

The Companys interest rate sensitivity analysis is discussed in the
preceding section. The table in the previous section measures the Companys
interest rate sensitivity gap, in other words, the difference between earning
assets and liabilities maturing or repricing within specified periods.
However, gap analysis has significant limitations as a method for measuring
interest rate risk since changes in interest rates do not affect all categories
of assets and liabilities in the same way or at the same time. Further, it has
limitations in helping the Company to manage the difference in behavior of
lending and funding rates  so-called basis risk.

To address the limitations inherent in gap analysis, the Company monitors
its expected change in earnings based on changes in interest rates through a
detailed model. This models estimate of interest rate sensitivity takes into
account the differing time intervals and differing rate change increments of
each type of interest-sensitive asset and liability. It then measures the
projected impact of changes in market interest rates on the Companys return on
equity. Based upon the December 31, 2001 mix of interest-sensitive assets and
liabilities, given an immediate and sustained increase in the
federal funds rate (and other key rates indexes) of 200 basis points, this
model estimates the Companys cumulative return on equity over the next year
would increase by about 35 basis points. Given an immediate and
sustained increase in the federal funds rate (and other key rates
indexes) of 300 basis points, this model estimates the Companys cumulative
return on equity over the next year would increase by about 63 basis points.

Liquidity and Capital Resources

Liquidity.In order to maintain adequate liquidity, the Company must have
sufficient resources available at all times to meet its cash flow requirements.
The need for liquidity in a banking institution arises principally to provide
for deposit withdrawals, the credit needs of its customers and to take
advantage of investment opportunities as they arise. A financial institution
may achieve desired liquidity from both assets and liabilities. The Company
considers cash and deposits held in other banks, federal funds sold, other
short term investments, maturing loans and investments,

31



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##### Table of Contents



payments of principal and interest on loans and investments as sources of
asset liquidity. Deposit growth and access to borrowing lines of credit and
market sources of funds are considered by the Company as sources of liquidity.

The Company reviews its liquidity position on a regular basis based upon
its current position and expected trends as mentioned above. Liquid assets
include cash and deposits in other banks and federal funds sold. The Companys
liquid assets totaled $23.8 million, or 7.8% of total assets at December 31,
2001, compared with $28.2 million, or 9.6% of total assets at December 31,
2000.

Management believes that the Company maintains adequate amounts of liquid
assets and has adequate borrowing lines of credit with the Federal Home Loan
Bank and others to meet its liquidity needs. The Companys liquidity might be
insufficient if deposit withdrawals were to exceed anticipated levels. Deposit
withdrawals can increase if an insured depository financial institution
experiences financial difficulties or receives adverse publicity for other
reasons, or if its pricing, products or services are not competitive with those
offered by other institutions.

The Companys primary sources of liquidity include liquid assets, short
term investments and a stable deposit base. To supplement these, the Bank
maintains a borrowing line of credit with the Federal Home Loan Bank of San
Francisco in the amount of $21.0 million as of December 31, 2001. This line is
secured by previously approved residential and commercial real estate mortgage
loans totaling $35.4 million as of December 31, 2001. There was no utilization
of this borrowing line during 2001.

The Bank has approval to borrow under the Discount Window Program of the
Federal Reserve Bank of San Francisco collateralized by investment securities.
There was no utilization of this borrowing line during 2001.

At December 31, 2001, the Bank has available repurchase agreement lines of
credit with two broker-dealers. These lines are subject to normal terms for
such arrangements. There was no utilization of these lines during 2001. At
December 31, 2001, investment securities with a market value of approximately
$4.0 million were available for the repurchase lines of credit.

Capital.Capital serves as a source of funds and helps protect creditors
and uninsured depositors against potential losses. The primary source of
capital for the Company has been internally generated capital through retained
earnings. The Companys shareholders equity decreased $2.1 million, or 9.2%,
to $20.6 million at December 31, 2001 from $22.7 million at December 31, 2000.
The decrease resulted from net income of $2.9 million, proceeds and tax benefit
from the exercise of stock options of $195,000, offset by dividends
of $2.1 million and the repurchase of 70,000 shares of common stock in October
2001 totaling $3.2 million.

Federal regulations establish guidelines for calculating risk-adjusted
capital ratios. These guidelines establish a systematic approach of assigning
risk weights to Company and Bank assets and off-balance sheet items making the
regulatory capital requirements more sensitive to differences in risk profiles
among banking organizations. Under these regulations, banks are required to
maintain a total risk-based capital ratio of 8.0%; that is, Tier 1 plus Tier
2 capital must equal at least 8.0% of risk-weighted assets plus off-balance
sheet items, and Tier 1 capital (primarily stockholders equity) must
constitute at least 50% of qualifying capital. Tier 1 capital consists
primarily of stockholders equity excluding goodwill, and Tier 2 capital
includes subordinated debt and, subject to a limit of 1.25% of risk-weighted
assets, the allowance for loan losses.

At December 31, 2001, the Company had a Tier 1 risk-based capital ratio of
10.02% and a total risk-based capital ratio of 12.24%. In addition, regulators
have adopted a minimum leverage capital ratio standard. This standard is
designed to ensure that all financial institutions, irrespective of their risk
profile, maintain minimum levels of core capital, which by definition excludes
the allowance for loan losses. These minimum standards for top-rated
institutions may be as low as 3.0%; however, regulatory agencies have stated
that most institutions should maintain ratios at least 1 to 2 percentage points
above the 3.0% minimum. At December 31, 2001, the Companys leverage capital
ratio equaled 8.94%.

Banks with Tier 1 risk-based capital of 6.0%, total-risk-based capital of
at least 10.0% and a leverage capital ratio of at least 5.0% are considered
well capitalized by federal banking agencies.

The Companys policy is not to declare any dividends that would cause its
leverage capital ratio to be below 7.0% or its total risk-based capital ratio
to be below 10.0%.

32



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##### Table of Contents



The following table summarizes the minimum capital ratios required by
current FDIC regulations, the ratios at which a bank is considered
well-capitalized by the FDIC, and the capital ratios of the Company at December
31, 2001, 2000 and 1999.

|                          |  |                                 |     |                        |  |      |      |      |  |      |       |   |  |  |     |  |  |  |     | 
|------------------------- |  | ------------------------------- | --- | ---------------------- |  | ---- | ---- | ---- |  | ---- | ----- | - |  |  | --- |  |  |  | --- | 
|                          |  | Regulatory capital requirements |     | Actual at December 31,
|                          |  |                                 |     |                       
|                          |  | Minimum                         |     | Well-capitalized       |  | 2001 |      | 2000 |  | 1999
|                          |  |                                 |     |                        |  |      |      |      |  |     
|Tier-1 risk-based capital |  |                                 | 4.0 | %                      |  |      | 6.0  | %    |  |      | 10.02 | % |  |  | N/A |  |  |  | N/A | 
|Total risk-based capital  |  |                                 | 8.0 | %                      |  |      | 10.0 | %    |  |      | 12.24 | % |  |  | N/A |  |  |  | N/A | 
|Leverage capital ratio(1) |  |                                 | 4.0 | %                      |  |      | 5.0  | %    |  |      | 8.94  | % |  |  | N/A |  |  |  | N/A | 



---

|(1) |  | Tier 1 capital to total quarterly average assets.
|--- |  | -------------------------------------------------

The following table summarizes the minimum capital ratios required by
current FDIC regulations, the ratios at which a bank is considered
well-capitalized by the FDIC, and the capital ratios of the Bank at December
31, 2001, 2000 and 1999.

|                          |  |                                 |     |                        |  |      |      |      |  |      |       |   |  |  |       |   |  |  |       |  
|------------------------- |  | ------------------------------- | --- | ---------------------- |  | ---- | ---- | ---- |  | ---- | ----- | - |  |  | ----- | - |  |  | ----- | -
|                          |  | Regulatory capital requirements |     | Actual at December 31,
|                          |  |                                 |     |                       
|                          |  | Minimum                         |     | Well-capitalized       |  | 2001 |      | 2000 |  | 1999
|                          |  |                                 |     |                        |  |      |      |      |  |     
|Tier-1 risk-based capital |  |                                 | 4.0 | %                      |  |      | 6.0  | %    |  |      | 8.77  | % |  |  | 9.13  | % |  |  | 9.57  | %
|Total risk-based capital  |  |                                 | 8.0 | %                      |  |      | 10.0 | %    |  |      | 10.99 | % |  |  | 10.12 | % |  |  | 10.64 | %
|Leverage capital ratio(1) |  |                                 | 4.0 | %                      |  |      | 5.0  | %    |  |      | 7.80  | % |  |  | 7.97  | % |  |  | 8.21  | %



---

|(2) |  | Tier 1 capital to total quarterly average assets.
|--- |  | -------------------------------------------------

Failure to meet minimum capital requirements can trigger mandatory actions
by the regulators that, if under-taken, could have a material effect on the
Companys financial statements and operations.

Impact of Inflation

The financial statements and related financial data presented have been
prepared in accordance with auditing standards generally accepted in the United
States, which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation. Unlike most
industrial companies, virtually all of the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates are
likely to have a more significant impact on a financial institutions
performance than the effects of general levels of inflation. During periods of
inflation, interest rates do not necessarily move in the same direction or with
the same magnitude as the price of goods and services. The Company seeks to
manage its interest sensitivity gap to minimize the potential adverse effect of
inflation and other market forces on its net interest income and capital.

Financial institutions are also affected by inflations impact on
noninterest expenses, such as salaries and occupancy expenses. During 1999,
2000 and 2001, inflation remained relatively stable, and the Companys level of
noninterest expense was relatively unaffected by inflation.

Impact of Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) approved
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS
141 requires that all business combinations initiated after June 30, 2001 be
accounted for using the purchase method. SFAS 142 changes the accounting for
goodwill from an amortization method to an impairment-only approach. Instead
of amortization, goodwill will be subject to at least an annual assessment for
impairment by applying a fair-value-based test. Intangible assets acquired
must be separated from goodwill and amortized over their useful life. Hemet
Bancorp does not presently have any goodwill recorded; thus Management does not
believe that the effects of the new standards will have a material impact on
the financial statements.

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In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets
and the associated asset retirement costs. It applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and/or the normal operation of a
long-lived asset, except for certain obligations of lessees. SFAS 143 requires
that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs are capitalized
as part of the carrying amount of the long-lived asset. SFAS 143 is effective
for financial statements issued for fiscal years beginning after June 15, 2002
(with earlier application being encouraged). Management does not expect the
adoption of SFAS 143 to have a material impact on the Companys financial
condition and results of operations

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This statement is effective as
of January 1, 2002 and addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This Statement supersedes and
amends various pronouncements including FASB Statement No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. This Statement describes a probability-weighted cash flow estimation
approach to deal with situations in which alternative courses of action to
recover the carrying amount of a long-lived asset are under consideration or a
range is estimated for the amount of possible future cash flows. This
Statement also establishes a primary-asset approach to determine the cash
flow estimation period for a group of assets and liabilities that represents
the unit of accounting for a long-lived asset to be held and used. Management
does not believe that the effects of the new standards will have a material
impact on the financial statements.

In December 2001, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) No. 01-6, Accounting by Certain Entities
(including Entities with Trade Receivables) that Lend to or Finance the
Activities of Others. It addresses financial accounting and reporting for any
entity that lends to or finances the activities of others. SOP No. 01-6 is
effective for fiscal years beginning after December 15, 2001. Management
believes that the adoption of SOP No. 01-6 will not have a material impact on
the financial statements.

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##### Table of Contents






ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Following are the audited consolidated balance sheets of the Company and
subsidiaries as of December 31, 2001 and 2000, and the related consolidated
statements of operations, stockholders equity and cash flows for each of the
three years ending December 31, 2001, 2000 and 1999.

CONTENTS

|                                           |                                                      |  |       |    | 
|------------------------------------------ | ---------------------------------------------------- |  | ----- | -- | 
|                                           |                                                      |  | Page 
|                                           |                                                      |  |      
|Report of Independent Public Accountants   |                                                      |  | 36    |   
|Financial Statements                       |                                                      |  |       |   
|                                           | Consolidated Balance Sheets                          | 
|                                           | December 31, 2001 and 2000                           |  |       | 37 | 
|                                           | Consolidated Statements of Operations                |  |       |    | 
|                                           | For the years ended December 31, 2001, 2000 and 1999 |  |       | 38 | 
|                                           | Consolidated Statements of Stockholders Equity      | 
|                                           | For the years ended December 31, 2001, 2000 and 1999 |  |       | 39 | 
|                                           | Consolidated Statements of Cash Flows                | 
|                                           | For the years ended December 31, 2001, 2000 and 1999 |  |       | 40 | 
|Notes To Consolidated Financial Statements |                                                      |  | 41-54 |   

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(ARTHUR ANDERSEN)



REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and
Board of Directors of Hemet Bancorp:

We have audited the accompanying consolidated balance sheets of HEMET BANCORP
(a California corporation) and subsidiaries as of December 31, 2001 and 2000,
and the related consolidated statements of operations, changes in stockholders
equity and cash flows for each of the three years in the period ended December
31, 2001. These consolidated financial statements are the responsibility of the
Hemet Bancorps management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.

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

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

/s/ Andersen, LLP

Orange County, California
January 31, 2002

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HEMET BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
ASSETS

|                                                                |                                                             |                                              |                                                                                        |                                                                                                      |             |            |             |            |             |            |             | 
|--------------------------------------------------------------- | ----------------------------------------------------------- | -------------------------------------------- | -------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------- | ----------- | ---------- | ----------- | ---------- | ----------- | ---------- | ----------- | 
|                                                                |                                                             |                                              |                                                                                        |                                                                                                      |             | 2001       |             | 2000      
|                                                                |                                                             |                                              |                                                                                        |                                                                                                      |             |            |             |           
|CASH AND DUE FROM BANKS                                         |                                                             | $                                            | 8,792,000                                                                              |                                                                                                      |             | $          | 6,683,000   |           
|FEDERAL FUNDS SOLD                                              |                                                             |                                              | 15,001,000                                                                             |                                                                                                      |             |            | 21,503,000  |           
|                                                                |                                                             |                                              |                                                                                        |                                                                                                      |             |            |             |           
|                                                                |                                                             |                                              |                                                                                        | Total Cash and Cash Equivalents                                                                      |             |            | 23,793,000  |            |             |            | 28,186,000  | 
|INVESTMENT SECURITIES HELD TO MATURITY                          |                                                             |                                              |                                                                                        |                                                                                                      |             |            |             |           
|                                                                |                                                             |                                              |                                                                                        | Market values of $16,417,000 at December 31, 2001 and
$18,388,000 at December 31, 2000, respectively |             |            | 16,370,000  |            |             |            | 18,342,000  | 
|LOANS                                                           |                                                             |                                              | 261,519,000                                                                            |                                                                                                      |             |            | 242,769,000 |           
|ALLOWANCE FOR LOAN LOSSES                                       |                                                             |                                              | (2,950,000                                                                             | )                                                                                                    |             |            | (2,466,000  | )         
|                                                                |                                                             |                                              |                                                                                        |                                                                                                      |             |            |             |           
|                                                                |                                                             |                                              |                                                                                        | Loans, net                                                                                           |             |            | 258,569,000 |            |             |            | 240,303,000 | 
|PREMISES AND EQUIPMENT, net                                     |                                                             |                                              | 1,215,000                                                                              |                                                                                                      |             |            | 1,537,000   |           
|ACCRUED INTEREST RECEIVABLE                                     |                                                             |                                              | 1,110,000                                                                              |                                                                                                      |             |            | 1,504,000   |           
|OTHER REAL ESTATE OWNED                                         |                                                             |                                              | 2,000                                                                                  |                                                                                                      |             |            | 2,000       |           
|OTHER ASSETS                                                    |                                                             |                                              | 2,525,000                                                                              |                                                                                                      |             |            | 2,360,000   |           
|                                                                |                                                             |                                              |                                                                                        |                                                                                                      |             |            |             |           
|                                                                |                                                             | $                                            | 303,584,000                                                                            |                                                                                                      |             | $          | 292,234,000 |           
|                                                                |                                                             |                                              |                                                                                        |                                                                                                      |             |            |             |           
|                                                                |                                                             |                                              |                                                                                        | LIABILITIES AND STOCKHOLDERS EQUITY                                                                 |             |            |             |            |             |            |             | 
|DEPOSITS                                                        |                                                             |                                              |                                                                                        |                                                                                                      |             |            |             |           
|                                                                |                                                             | Noninterest bearing demand deposits          |                                                                                        | $                                                                                                    | 37,811,000  |            |             | $          | 32,277,000  |           
|                                                                |                                                             | Savings and interest-bearing demand deposits |                                                                                        |                                                                                                      | 71,078,000  |            |             |            | 67,653,000  |           
|                                                                |                                                             | Money market deposits                        |                                                                                        |                                                                                                      | 7,329,000   |            |             |            | 3,892,000   |           
|                                                                |                                                             | Time deposits of $100,000 or more            |                                                                                        |                                                                                                      | 24,013,000  |            |             |            | 22,211,000  |           
|                                                                |                                                             | Time deposits less than $100,000             |                                                                                        |                                                                                                      | 131,691,000 |            |             |            | 141,811,000 |           
|                                                                |                                                             |                                              |                                                                                        |                                                                                                      |             |            |             |           
|                                                                |                                                             |                                              |                                                                                        | Total Deposits                                                                                       |             |            | 271,922,000 |            |             |            | 267,844,000 | 
|BORROWED FUNDS                                                  |                                                             |                                              | 3,000,000                                                                              |                                                                                                      |             |            |            |           
|ACCRUED INTEREST PAYABLE AND OTHER LIABILITIES                  |                                                             |                                              | 1,731,000                                                                              |                                                                                                      |             |            | 1,666,000   |           
|                                                                |                                                             |                                              |                                                                                        |                                                                                                      |             |            |             |           
|                                                                |                                                             |                                              |                                                                                        | Total Liabilities                                                                                    |             |            | 276,653,000 |            |             |            | 269,510,000 | 
|                                                                |                                                             |                                              |                                                                                        |                                                                                                      |             |            |             |           
|COMMITMENTS AND CONTINGENCIES (Note 7)                          |                                                             |                                              |                                                                                        |                                                                                                      |             |            |             |           
|GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN COMPANY DEBENTURES |                                                             |                                              | 6,305,000                                                                              |                                                                                                      |             |            |            |           
|STOCKHOLDERS EQUITY                                            |                                                             |                                              |                                                                                        |                                                                                                      |             |            |             |           
|                                                                | Common stock, no par value 
Authorized  20,000,000 shares |                                              |                                                                                        |                                                                                                      |             |            |             |            |            
|                                                                |                                                             |                                              | Issued and outstanding  805,120 at December 31, 2001
and 866,820 at December 31, 2000 |                                                                                                      |             | 1,045,000  |             |            |             | 4,014,000  |            
|                                                                | Retained earnings                                           |                                              |                                                                                        | 19,581,000                                                                                           |             |            |             | 18,710,000 |            
|                                                                |                                                             |                                              |                                                                                        |                                                                                                      |             |            |             |           
|                                                                |                                                             |                                              | Total Stockholders Equity                                                             |                                                                                                      |             | 20,626,000 |             |            |             | 22,724,000 |            
|                                                                |                                                             |                                              |                                                                                        |                                                                                                      |             |            |             |           
|                                                                |                                                             | $                                            | 303,584,000                                                                            |                                                                                                      |             | $          | 292,234,000 |           
|                                                                |                                                             |                                              |                                                                                        |                                                                                                      |             |            |             |           

The accompanying notes are an integral part of these consolidated balance sheets.

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

|                                          |                                      |                           |                                                         |            |            |            |            |            |            |            |            |            |            |            |            | 
|----------------------------------------- | ------------------------------------ | ------------------------- | ------------------------------------------------------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | 
|                                          |                                      |                           |                                                         |            |            | 2001       |            | 2000       |            | 1999      
|                                          |                                      |                           |                                                         |            |            |            |            |            |            |           
|INTEREST INCOME                           |                                      |                           |                                                         |            |            |            |            |            |            |            |            |           
|                                          | Loans, including fees                |                           | $                                                       | 20,272,000 |            |            | $          | 20,206,000 |            |            | $          | 17,399,000 |           
|                                          | Investment securities                |                           |                                                         | 885,000    |            |            |            | 1,346,000  |            |            |            | 1,340,000  |           
|                                          | Federal funds sold                   |                           |                                                         | 690,000    |            |            |            | 907,000    |            |            |            | 642,000    |           
|                                          |                                      |                           |                                                         |            |            |            |            |            |            |            |            |           
|                                          |                                      |                           | Total Interest Income                                   |            |            | 21,847,000 |            |            |            | 22,459,000 |            |            |            | 19,381,000 |           
|                                          |                                      |                           |                                                         |            |            |            |            |            |            |            |            |           
|INTEREST EXPENSE                          |                                      |                           |                                                         |            |            |            |            |            |            |            |            |           
|                                          | Transaction and savings deposits     |                           |                                                         | 1,756,000  |            |            |            | 2,222,000  |            |            |            | 2,225,000  |           
|                                          | Time deposits of $100,000 or more    |                           |                                                         | 1,229,000  |            |            |            | 1,031,000  |            |            |            | 567,000    |           
|                                          | Time deposits less than $100,000     |                           |                                                         | 7,740,000  |            |            |            | 7,657,000  |            |            |            | 5,946,000  |           
|                                          | Other borrowings                     |                           |                                                         | 35,000     |            |            |            | 57,000     |            |            |            | 2,000      |           
|                                          |                                      |                           |                                                         |            |            |            |            |            |            |            |            |           
|                                          |                                      |                           | Total Interest Expense                                  |            |            | 10,760,000 |            |            |            | 10,967,000 |            |            |            | 8,740,000  |           
|                                          |                                      |                           |                                                         |            |            |            |            |            |            |            |            |           
|                                          |                                      | Net Interest Income       |                                                         |            | 11,087,000 |            |            |            | 11,492,000 |            |            |            | 10,641,000 |           
|PROVISION FOR LOAN LOSSES                 |                                      |                           |                                                        |            |            |            |           |            |            |            |           |           
|                                          |                                      |                           |                                                         |            |            |            |            |            |            |            |            |           
|                                          |                                      |                           | Net Interest Income after Provision for Loan            |            |            |            |            |            |            |            |            |            |            |            |           
|                                          |                                      |                           |                                                         | Losses     |            |            | 11,087,000 |            |            |            | 11,492,000 |            |            |            | 10,641,000 | 
|                                          |                                      |                           |                                                         |            |            |            |            |            |            |            |            |           
|NONINTEREST INCOME                        |                                      |                           |                                                         |            |            |            |            |            |            |            |            |           
|                                          | Fees and service charges on deposits |                           |                                                         | 470,000    |            |            |            | 436,000    |            |            |            | 476,000    |           
|                                          | Other charges and fees               |                           |                                                         | 95,000     |            |            |            | 94,000     |            |            |            | 122,000    |           
|                                          | Other income                         |                           |                                                         | 935,000    |            |            |            | 1,179,000  |            |            |            | 1,227,000  |           
|                                          |                                      |                           |                                                         |            |            |            |            |            |            |            |            |           
|                                          |                                      | Total Noninterest Income  |                                                         |            | 1,500,000  |            |            |            | 1,709,000  |            |            |            | 1,825,000  |           
|                                          |                                      |                           |                                                         |            |            |            |            |            |            |            |            |           
|NONINTEREST EXPENSE                       |                                      |                           |                                                         |            |            |            |            |            |            |            |            |           
|                                          | Salaries and employee benefits       |                           |                                                         | 4,277,000  |            |            |            | 4,590,000  |            |            |            | 4,471,000  |           
|                                          | Premises and equipment               |                           |                                                         | 1,058,000  |            |            |            | 1,110,000  |            |            |            | 1,064,000  |           
|                                          | Other real estate owned, net         |                           |                                                         |           |            |            |            | (19,000    | )          |            |            | (146,000   | )         
|                                          | Other expenses                       |                           |                                                         | 2,236,000  |            |            |            | 2,220,000  |            |            |            | 2,421,000  |           
|                                          |                                      |                           |                                                         |            |            |            |            |            |            |            |            |           
|                                          |                                      | Total Noninterest Expense |                                                         |            | 7,571,000  |            |            |            | 7,901,000  |            |            |            | 7,810,000  |           
|                                          |                                      |                           |                                                         |            |            |            |            |            |            |            |            |           
|                                          |                                      |                           | Income before Minority Interest in Income of Subsidiary |            |            |            |            |            |            |            |            |            |            |            |           
|                                          |                                      |                           | and Provision for Income Taxes                          |            |            | 5,016,000  |            |            |            | 5,300,000  |            |            |            | 4,656,000  |           
|MINORITY INTEREST IN INCOME OF SUBSIDIARY |                                      |                           | (14,000                                                 | )          |            |            |           |            |            |            |           |           
|                                          |                                      |                           |                                                         |            |            |            |            |            |            |            |            |           
|                                          |                                      |                           | Income before Provision for Income Taxes                |            |            | 5,002,000  |            |            |            | 5,300,000  |            |            |            | 4,656,000  |           
|PROVISION FOR INCOME TAXES                |                                      |                           | 2,080,000                                               |            |            |            | 2,199,000  |            |            |            | 1,948,000  |           
|                                          |                                      |                           |                                                         |            |            |            |            |            |            |            |            |           
|                                          |                                      |                           | Net Income                                              |            | $          | 2,922,000  |            |            | $          | 3,101,000  |            |            | $          | 2,708,000  |           
|                                          |                                      |                           |                                                         |            |            |            |            |            |            |            |            |           
|EARNINGS PER SHARE                        |                                      |                           |                                                         |            |            |            |            |            |            |            |            |           
|                                          |                                      |                           | Basic Earnings Per Share                                |            | $          | 3.41       |            |            | $          | 3.58       |            |            | $          | 3.19       |           
|                                          |                                      |                           | Diluted Earnings Per Share                              |            | $          | 3.37       |            |            | $          | 3.56       |            |            | $          | 3.15       |           

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

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HEMET BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

|                                              |  |              |         |        |  |   |            |          |  |          |  |  |  |   |            |  
|--------------------------------------------- |  | ------------ | ------- | ------ |  | - | ---------- | -------- |  | -------- |  |  |  | - | ---------- | -
|                                              |  | COMMON STOCK |         |        |  |   |            |         
|                                              |  |              |         |        |  |   |            | RETAINED
|                                              |  | SHARES       |         | AMOUNT |  |   |            |          |  | EARNINGS
|                                              |  |              |         |        |  |   |            |          |  |         
|BALANCE, December 31, 1998                    |  |              | 844,252 |        |  | $ | 3,666,000  |          |  |          |  |  |  | $ | 17,358,000 |  
|Stock options exercised                       |  |              | 21,000  |        |  |   | 252,000    |          |  |          |  |  |  |   |           |  
|Common stock cash dividend
at $2.80 per share |  |              |        |        |  |   |           |          |  |          |  |  |  |   | (2,378,000 | )
|Net income                                    |  |              |        |        |  |   |           |          |  |          |  |  |  |   | 2,708,000  |  
|                                              |  |              |         |        |  |   |            |          |  |          |  |  |  |   |            |  
|BALANCE, December 31, 1999                    |  |              | 865,252 |        |  |   | 3,918,000  |          |  |          |  |  |  |   | 17,688,000 |  
|Stock options exercised                       |  |              | 1,568   |        |  |   | 22,000     |          |  |          |  |  |  |   |           |  
|Tax benefit on stock options                  |  |              |        |        |  |   | 74,000     |          |  |          |  |  |  |   |           |  
|Common stock cash dividend
at $2.40 per share |  |              |        |        |  |   |           |          |  |          |  |  |  |   | (2,079,000 | )
|Net income                                    |  |              |        |        |  |   |           |          |  |          |  |  |  |   | 3,101,000  |  
|                                              |  |              |         |        |  |   |            |          |  |          |  |  |  |   |            |  
|BALANCE, December 31, 2000                    |  |              | 866,820 |        |  |   | 4,014,000  |          |  |          |  |  |  |   | 18,710,000 |  
|Repurchase shares                             |  |              | (70,000 | )      |  |   | (3,164,000 | )        |  |          |  |  |  |   |           |  
|Stock options exercised                       |  |              | 8,300   |        |  |   | 179,000    |          |  |          |  |  |  |   |           |  
|Tax benefit on stock options                  |  |              |        |        |  |   | 16,000     |          |  |          |  |  |  |   |           |  
|Common stock cash dividend
at $2.40 per share |  |              |        |        |  |   |           |          |  |          |  |  |  |   | (2,051,000 | )
|Net income                                    |  |              |        |        |  |   |           |          |  |          |  |  |  |   | 2,922,000  |  
|                                              |  |              |         |        |  |   |            |          |  |          |  |  |  |   |            |  
|BALANCE, December 31, 2001                    |  |              | 805,120 |        |  | $ | 1,045,000  |          |  |          |  |  |  | $ | 19,581,000 |  
|                                              |  |              |         |        |  |   |            |          |  |          |  |  |  |   |            |  

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

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

|                                                     |                                             |   |                                                                       |                                                                       |         |             |             |           |   |             |             |           |   |             |             |  
|---------------------------------------------------- | ------------------------------------------- | - | --------------------------------------------------------------------- | --------------------------------------------------------------------- | ------- | ----------- | ----------- | --------- | - | ----------- | ----------- | --------- | - | ----------- | ----------- | -
|                                                     |                                             |   |                                                                       |                                                                       |         | 2001        |             | 2000      |   | 1999       
|                                                     |                                             |   |                                                                       |                                                                       |         |             |             |           |   |            
|CASH FLOWS FROM OPERATING ACTIVITIES:                |                                             |   |                                                                       |                                                                       |         |             |             |           |   |             |             |          
|                                                     | Net income                                  |   | $                                                                     | 2,922,000                                                             |         |             | $           | 3,101,000 |   |             | $           | 2,708,000 |  
|                                                     | Adjustments to Reconcile Net Income to      |   |                                                                       |                                                                       |         |             |             |           |   |             |             |           |  
|                                                     |                                             |   |                                                                       | Net Cash Provided by Operating Activities:                            |         |             |             |           |   |             |             |           |   |             |             |  
|                                                     |                                             |   |                                                                       | Depreciation and amortization                                         |         |             | 287,000     |           |   |             | 348,000     |           |   |             | 331,000     |  
|                                                     |                                             |   |                                                                       | Loss (gain) on disposal of premises and equipment                     |         |             | (6,000      | )         |   |             | 8,000       |           |   |             | 8,000       |  
|                                                     |                                             |   |                                                                       | Deferred income tax                                                   |         |             | (29,000     | )         |   |             | (20,000     | )         |   |             | (13,000     | )
|                                                     |                                             |   |                                                                       | Gain on sale of other real estate owned                               |         |             |            |           |   |             | (26,000     | )         |   |             | (158,000    | )
|                                                     |                                             |   |                                                                       | Tax benefit on stock options exercised                                |         | 16,000      |             |           |   | 74,000      |             |           |   |            |            
|                                                     |                                             |   |                                                                       | Net
(Accretion) of discount/Amortization of Premium
on investments    |         | 17,000      |             |           |   | (67,000     | )           |           |   | (2,000      | )          
|                                                     |                                             |   |                                                                       | Unearned interest on investment securities                            |         | (483,000    | )           |           |   | (48,000     | )           |           |   | (52,000     | )          
|                                                     |                                             |   |                                                                       | Gain on called held to maturity investment securities                 | (42,000 | )           |             |           |  |             |             |           |  |            
|                                                     | Change in Operating Assets and Liabilities: |   |                                                                       |                                                                       |         |             |             |           |   |            
|                                                     |                                             |   |                                                                       | Decrease (increase) in accrued interest receivable                    |         |             | 394,000     |           |   |             | 26,000      |           |   |             | (389,000    | )
|                                                     |                                             |   |                                                                       | Decrease (increase) in other assets                                   |         |             | (136,000    | )         |   |             | 93,000      |           |   |             | 251,000     |  
|                                                     |                                             |   |                                                                       | Increase (decrease) in accrued interest payable
and other liabilities |         |             | 65,000      |           |   |             | (326,000    | )         |   |             | 525,000     |  
|                                                     |                                             |   |                                                                       |                                                                       |         |             |             |           |   |             |             |          
|                                                     |                                             |   |                                                                       | Net Cash Provided by Operating Activities                             |         |             | 3,005,000   |           |   |             | 3,163,000   |           |   |             | 3,209,000   |  
|                                                     |                                             |   |                                                                       |                                                                       |         |             |             |           |   |             |             |          
|CASH FLOWS FROM INVESTING ACTIVITIES:                |                                             |   |                                                                       |                                                                       |         |             |             |           |   |             |             |          
|                                                     |                                             |   | Proceeds from maturities of investment securities                     |                                                                       |         | 29,217,000  |             |           |   | 28,697,000  |             |           |   | 35,183,000  |            
|                                                     |                                             |   | Purchases of investment securities                                    |                                                                       |         | (26,737,000 | )           |           |   | (21,952,000 | )           |           |   | (35,220,000 | )          
|                                                     |                                             |   | Net increase in loans                                                 |                                                                       |         | (18,266,000 | )           |           |   | (21,811,000 | )           |           |   | (13,858,000 | )          
|                                                     |                                             |   | Purchases of premises and equipment                                   |                                                                       |         | (127,000    | )           |           |   | (108,000    | )           |           |   | (598,000    | )          
|                                                     |                                             |   | Proceeds from sales of other real estate owned                        |                                                                       |         |            |             |           |   | 162,000     |             |           |   | 1,033,000   |            
|                                                     |                                             |   | Proceeds from sale of premises and equipment                          |                                                                       |         | 168,000     |             |           |   | 14,000      |             |           |   |            |            
|                                                     |                                             |   |                                                                       |                                                                       |         |             |             |           |   |             |             |          
|                                                     |                                             |   |                                                                       | Net Cash Used in Investing Activities                                 |         |             | (15,745,000 | )         |   |             | (14,998,000 | )         |   |             | (13,460,000 | )
|                                                     |                                             |   |                                                                       |                                                                       |         |             |             |           |   |             |             |          
|CASH FLOWS FROM FINANCING ACTIVITIES:                |                                             |   |                                                                       |                                                                       |         |             |             |           |   |             |             |          
|                                                     |                                             |   | Net increase (decrease) in demand, savings, and
money market deposits |                                                                       |         | 12,396,000  |             |           |   | (1,350,000  | )           |           |   | (192,000    | )          
|                                                     |                                             |   | Net increase (decrease) in time deposits                              |                                                                       |         | (8,318,000  | )           |           |   | 22,523,000  |             |           |   | 16,478,000  |            
|                                                     |                                             |   | Proceeds from the exercise of stock options                           |                                                                       |         | 179,000     |             |           |   | 22,000      |             |           |   | 252,000     |            
|                                                     |                                             |   | Increase in long term debt                                            |                                                                       |         | 3,000,000   |             |           |   |            |             |           |   |            |            
|                                                     |                                             |   | Issuance of Trust Preferred Stock                                     |                                                                       |         | 6,500,000   |             |           |   |            |             |           |   |            |            
|                                                     |                                             |   | Issuance
Cost of Trust Preferred Stock                                |                                                                       |         | (195,000)   | )           |           |   |            |             |           |   |            |            
|                                                     |                                             |   | Cash paid for Tender Offer, including expenses                        |                                                                       |         | (3,164,000  | )           |           |   |            |             |           |   |            |            
|                                                     |                                             |   | Cash dividends paid                                                   |                                                                       |         | (2,051,000  | )           |           |   | (2,079,000  | )           |           |   | (2,378,000  | )          
|                                                     |                                             |   |                                                                       |                                                                       |         |             |             |           |   |             |             |          
|                                                     |                                             |   |                                                                       | Net Cash Provided by Financing Activities                             |         |             | 8,347,000   |           |   |             | 19,116,000  |           |   |             | 14,160,000  |  
|                                                     |                                             |   |                                                                       |                                                                       |         |             |             |           |   |             |             |          
|NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |                                             |   | (4,393,000                                                            | )                                                                     |         |             | 7,281,000   |           |   |             | 3,909,000   |          
|                                                     |                                             |   |                                                                       |                                                                       |         |             |             |           |   |             |             |          
|CASH AND CASH EQUIVALENTS, Beginning of Year         |                                             |   | 28,186,000                                                            |                                                                       |         |             | 20,905,000  |           |   |             | 16,996,000  |          
|                                                     |                                             |   |                                                                       |                                                                       |         |             |             |           |   |             |             |          
|CASH AND CASH EQUIVALENTS, End of Year               |                                             | $ | 23,793,000                                                            |                                                                       |         | $           | 28,186,000  |           |   | $           | 20,905,000  |          
|                                                     |                                             |   |                                                                       |                                                                       |         |             |             |           |   |             |             |          
|Supplemental information                             |                                             |   |                                                                       |                                                                       |         |             |             |           |   |             |             |          
|                                                     |                                             |   |                                                                       | Interest paid                                                         |         | $           | 10,914,000  |           |   | $           | 10,838,000  |           |   | $           | 8,696,000   |  
|                                                     |                                             |   |                                                                       | Income taxes paid                                                     |         | $           | 2,040,000   |           |   | $           | 2,410,000   |           |   | $           | 1,753,000   |  
|                                                     |                                             |   |                                                                       | Transfer from Loans to Other Real Estate Owned                        |         | $           |            |           |   | $           | 84,000      |           |   | $           | 852,000     |  

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

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HEMET BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




A. Principles of Consolidation and Nature of Operations

The accounting and reporting policies of Hemet Bancorp and subsidiaries
(the Company) conform to generally accepted accounting principles and to
general practice within the banking industry. The consolidated financial
statements include the Bancorp and its wholly owned subsidiaries, The Bank
of Hemet, including its wholly owned subsidiary BankLink Corporation (the
Bank), and Hemet Statutory Trust I (the Trust). All significant
intercompany accounts and transactions have been eliminated in the
consolidated financial statements.

Hemet Bancorp, a Bank holding company, was incorporated on January 31, 2001
in the State of California for the purpose of acquiring and holding all of
the outstanding stock of the Bank. Hemet Bancorp acquired all of the
outstanding stock of the Bank on November 21, 2001. Hemet Statutory Trust
I, was established on November 8, 2001 in the State of Connecticut for the
purpose of issuing Guaranteed Preferred Beneficial Interests in Company
Debentures (the Trust Preferred Securities). The Bank was incorporated
in California in 1974 and operates five branches in communities located in
the Inland Empire area of Southern California. The Banks primary source
of revenue is providing commercial and industrial income-producing real
estate loans to small and middle-market businesses and individuals. The
Bank offers a full range of commercial banking services. BankLink is a
provider of data processing services for banks.

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

In April 2001, BankLink entered into a contract with Financial Data
Solutions, Inc. (FDSI) to assign the item processing contracts of four
client banks to FDSI. The contract provides for BankLink to receive a
small percentage of the item processing fees billed for the assigned
contracts over the various lives of the four client contracts. The
contract also provides for BankLink to lease certain item processing
equipment to FDSI. The conversion of item processing services from
BankLink to FDSI was completed in June 2001. BankLink continues to perform
data processing services for client banks.

On September 8, 1999, the Bank announced that its Board of Directors
approved the termination of the Acquisition Agreement with Pacific
Community Banking Group (PCBG). The Acquisition Agreement provided for
the acquisition of the Bank by PCBG and the payment of the merger
consideration to the Banks shareholders upon consummation of the
acquisition. The merger consideration that was to be paid would have been
funded in part with proceeds from an initial public offering of PCBG
expected to have been underwritten by an underwriting group. A major
condition of the Acquisition Agreement was that PCBG shall have entered
into a firm commitment underwriting agreement for an initial public
offering by PCBG. PCBG was not able to satisfy that condition by the time
provided in the Acquisition Agreement after which either party could
unilaterally terminate the Acquisition Agreement. The Banks write-off of
$216,000 in PCBG merger-related professional fees and other expenses was
recorded in noninterest expense for the year ended December 31, 1999.

B. Investment Securities Held to Maturity

Securities are classified as held to maturity and are carried at cost,
decreased by the amortization of premiums and increased by the accretion of
discounts, as applicable. The Bank has the positive intent and ability to
hold its investment securities to maturity, and does not anticipate selling
any portion of the investment securities portfolio for liquidity or other
purposes.

C. Loans

Loans are stated at the amount of unpaid principal, reduced by an allowance
for loan losses and deferred net loan origination fees. Interest on loans
is recognized over the terms of the loans and is calculated on principal
amounts outstanding. Loan origination fees, offset by certain direct loan
origination costs, are deferred and amortized as an adjustment of the loan
yield using the effective interest method. As unearned revenue, the net
unrecognized fees and costs are reported as reductions of the loan balance.

Accrual of interest on loans is discontinued when management believes,
after considering economic and business conditions, and collection efforts,
that the borrowers financial condition is such that collection of interest
is doubtful. Income is subsequently recognized only to the extent cash
payments are received until, in managements judgment, the borrowers
ability to make periodic interest and principal payments is no longer
doubtful, in which case the credit is returned to accrual status.

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The Bank considers a loan to be impaired when, based upon current
information and events, it believes that it is probable the Bank will be
unable to collect all amounts due according to the contractual terms of the
loan agreement. The Bank measures impairment on a loan by loan basis using
either the present value of expected future cash flows discounted at the
loans effective interest rate, or the fair value of the collateral if the
loan is collateral dependent. The Bank excludes smaller balance homogeneous loans such as consumer installment
loans and lines of credit from its impairment
calculations. In determining
whether a loan is impaired or not, the Bank applies its normal loan review
procedures. Loans for which an insignificant delay, i.e., less than 90
days past due, or an insignificant shortfall in the amount of payments is
anticipated, but the Bank expects to collect all amounts due, are not
considered for impairment.

D. Allowance for Loan Losses

The allowance for loan losses is maintained at a level considered adequate
to provide for losses that are inherent in the portfolio. Management makes
periodic credit reviews of the loan portfolio and considers current
economic conditions, historical loan loss experience, assessments of
problem credits and other factors in determining the adequacy of the
allowance. The allowance is based on estimates and ultimate losses may vary
from the current estimates. These estimates are reviewed periodically and,
as adjustments become necessary, they are reported in earnings in the
periods in which they become known. The allowance is increased by
provisions charged to operating expense and reduced by net charge-offs.

E. Premises and Equipment

The Companys buildings, furniture, equipment and leasehold improvements
are stated at cost less accumulated depreciation and amortization, which is
charged to expense on a straight-line basis over the estimated useful lives
of the assets or, in the case of leasehold improvements, over the life of
the leases, whichever is shorter. Maintenance and repairs are charged
directly to expense as incurred. Improvements to premises and equipment
which extend the useful lives of the assets are capitalized. Gains and
losses resulting from the disposal of premises and equipment are included
in current operations. Rates of depreciation are based on the following
depreciable lives: buildings, 30 years; furniture, five to seven years;
equipment, three to five years; and leasehold improvements, the shorter of
fifteen years or the lease term.

F. Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, and Federal funds sold. Generally,
Federal funds are sold for one-day periods.

G. Other Real Estate Owned

Other real estate owned represents real estate acquired by foreclosure or
deed in lieu of foreclosure in satisfaction of commercial and residential
real estate loans and is carried at the lower of the recorded investment in
the property or its fair value, less estimated carrying costs and costs of
disposition. At the time of foreclosure, the value of the underlying loan
is initially recorded at fair value at the date of foreclosure,
establishing a new cost basis by a charge to the allowance for loan losses,
if necessary. Any subsequent write-downs are charged to noninterest
expense. Operating expenses of such properties, net of related income and
gains or losses on their disposition, are recorded in noninterest expense.

H. Income Taxes

The Company applies an asset and liability approach in accounting for
income taxes payable or refundable at the date of the financial statements
as a result of all events that have been recognized in the financial
statements and as measured by the provisions of enacted tax laws.
Additionally, deferred tax assets are evaluated and a valuation allowance
is established if it is more likely than not that all or a portion of the
deferred tax asset will not be realized.

I. Earnings per Share

In October 2001, the Bank concluded a Tender Offer which resulted in the
repurchase of 70,000 shares of common stock at the offering price of $44.00
per share. The repurchase of common shares resulted in a decrease to
common stock of $3,164,000, inclusive of offering costs totaling $84,000.

Basic earnings per share (EPS) is computed by dividing income available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the earnings of the Bank. The following
is a reconciliation of the numerators and denominators used in the
calculation of basic EPS and diluted EPS for the years ended December 31,
2001, 2000 and 1999.

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|                                 |  |          |           |        |  |     |         |  |  |   |       |  
|-------------------------------- |  | -------- | --------- | ------ |  | --- | ------- |  |  | - | ----- | -
|                                 |  | Earnings |           | Shares |  | EPS
|                                 |  |          |           |        |  |    
|For the Year Ended 2001          |  |          |           |        |  |     |         |  |  |   |       |  
|Basic Earnings Per Share         |  | $        | 2,922,000 |        |  |     | 856,649 |  |  | $ | 3.41  |  
|Effect of Dilutive Stock Options |  |          |          |        |  |     | 11,521  |  |  |   | (0.04 | )
|                                 |  |          |           |        |  |     |         |  |  |   |       |  
|Diluted Earnings Per Share       |  | $        | 2,922,000 |        |  |     | 868,170 |  |  | $ | 3.37  |  
|                                 |  |          |           |        |  |     |         |  |  |   |       |  
|For the Year Ended 2000          |  |          |           |        |  |     |         |  |  |   |       |  
|Basic Earnings Per Share         |  | $        | 3,101,000 |        |  |     | 866,176 |  |  | $ | 3.58  |  
|Effect of Dilutive Stock Options |  |          |          |        |  |     | 5,717   |  |  |   | (0.02 | )
|                                 |  |          |           |        |  |     |         |  |  |   |       |  
|Diluted Earnings Per Share       |  | $        | 3,101,000 |        |  |     | 871,893 |  |  | $ | 3.56  |  
|                                 |  |          |           |        |  |     |         |  |  |   |       |  
|For the Year Ended 1999          |  |          |           |        |  |     |         |  |  |   |       |  
|Basic Earnings Per Share         |  | $        | 2,708,000 |        |  |     | 848,627 |  |  | $ | 3.19  |  
|Effect of Dilutive Stock Options |  |          |          |        |  |     | 11,777  |  |  |   | (0.04 | )
|                                 |  |          |           |        |  |     |         |  |  |   |       |  
|Diluted Earnings Per Share       |  | $        | 2,708,000 |        |  |     | 860,404 |  |  | $ | 3.15  |  
|                                 |  |          |           |        |  |     |         |  |  |   |       |  

J. Postretirement Benefits and Stock Options

The Bank has a salary continuation plan for certain key management
personnel. The plan provides for payments for fifteen years commencing
upon reaching age 65, or death. The Bank measures the obligations to
provide these future postretirement benefits over the estimated remaining
years of benefit. Salary continuation expense was $45,000, $42,000 and
$39,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
The Bank is committed to pay $1,875,000 over the pay out periods of the
plan. As of December 31, 2001, no salary continuation plan payments have
been made to key management personnel.

The Bank does not record any compensation cost in connection with the stock
options issued to various officers of the Bank. The Bank elected to
disclose the pro forma impact of compensation costs on net income and
diluted EPS. The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option pricing model. (See Note 9).

The Bank established a 401(k) plan effective August 1, 1997. Employees who
have completed one year of service and meet certain other requirements are
eligible for enrollment. Employees may contribute a percentage of their
salary pursuant to IRS regulatory maximums, and under the plan, the Bank
matches 60% of the first 6% of salary contributed using forfeitures and
cash. Participants vest immediately in their own contributions. Vesting
in the Banks contributions occurs immediately for employees with five
years of credited service. Vesting is prorated for employees with less
than five years of credited service at the rate of 20% per year. The
Banks expense for contributions to this plan was $73,000, $62,000 and
$46,000 during 2001, 2000 and 1999, respectively.

K. New Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) approved
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS 141 requires that all business combinations initiated after June 30,
2001 be accounted for using the purchase method. SFAS 142 changes the
accounting for goodwill from an amortization method to an impairment-only
approach. Instead of amortization, goodwill will be subject to at least an
annual assessment for impairment by applying a fair-value-based test.
Intangible assets acquired must be separated from goodwill and amortized
over their useful life. Hemet Bancorp does not presently have any goodwill
recorded; thus Management does not believe that the effects of the new
standards will have a material impact on the financial statements.

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. It applies to
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and/or the normal
operation of a long-lived asset, except for certain obligations of lessees.
SFAS 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS 143 is effective for financial statements issued for
fiscal years beginning after June 15, 2002 (with earlier application being
encouraged). Management does not expect the adoption of SFAS 143 to have a
material impact on the Companys financial condition and results of
operations.

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In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This statement is effective
as of January 1, 2002 and addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. This Statement supersedes
and amends various pronouncements including FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. This Statement describes a probability-weighted
cash flow estimation approach to deal with situations in which alternative
courses of action to recover the carrying amount of a long-lived asset are
under consideration or a range is estimated for the amount of possible
future cash flows. This Statement also establishes a primary-asset
approach to determine the cash flow estimation period for a group of assets
and liabilities that represents the unit of accounting for a long-lived
asset to be held and used. Management does not believe that the effects of
the new standards will have a material impact on the financial statements.

In December 2001, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) No. 01-6, Accounting by Certain
Entities (including Entities with Trade Receivables) that Lend to or
Finance the Activities of Others. It addresses financial accounting and
reporting for any entity that lends to or finances the activities of
others. SOP No. 01-6 is effective for fiscal years beginning after
December 15, 2001. Management believes that the adoption of SOP No. 01-6
will not have a material impact on the financial statements.

2. INVESTMENT SECURITIES HELD TO MATURITY

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

|                           |  |           |            |            |  |            |        |            |  |   |        |   |  |   |            | 
|-------------------------- |  | --------- | ---------- | ---------- |  | ---------- | ------ | ---------- |  | - | ------ | - |  | - | ---------- | 
|                           |  |           |            |            |  | Gross      |        | Gross      |  |   |        |  
|                           |  | Amortized |            | Unrealized |  | Unrealized |        |            |  |  
|December 31, 2001          |  | Cost      |            | Gains      |  | Losses     |        | Fair Value
|                           |  |           |            |            |  |            |        |           
|U.S. government treasuries |  | $         | 10,154,000 |            |  | $          | 9,000  |            |  | $ | (1,000 | ) |  | $ | 10,162,000 | 
|U.S. government agencies   |  |           | 6,216,000  |            |  |            | 39,000 |            |  |   | 0      |   |  |   | 6,255,000  | 
|                           |  |           |            |            |  |            |        |            |  |   |        |   |  |   |            | 
|                           |  | $         | 16,370,000 |            |  | $          | 48,000 |            |  | $ | (1,000 | ) |  | $ | 16,417,000 | 
|                           |  |           |            |            |  |            |        |            |  |   |        |   |  |   |            | 
|December
31, 2000          |  |           |            |            |  |            |        |            |  |   |        |   |  |   |            | 
|                          
|U.S. government agencies   |  | $         | 18,342,000 |            |  | $          | 48,000 |            |  | $ | (2,000 | ) |  | $ | 18,388,000 | 
|                           |  |           |            |            |  |            |        |            |  |   |        |   |  |   |            | 

Investment securities with a book value of $12,183,000 and $14,034,000 at
December 31, 2001 and 2000, respectively, were pledged to secure public
deposits and for other purposes as required or permitted by law. The
estimated fair values of pledged securities were $12,226,000 and
$14,078,000 at December 31, 2001 and 2000, respectively.

U.S. government agency securities of $223,000 at December 31, 2001
represent preferred stock of the Federal Home Loan Bank (FHLB), which has
no maturity date. The remaining balance of investment securities held to
maturity at December 31, 2002 was all due in one year or less.

3. LOANS, NET

The Banks loans, commitments, and standby letters of credit have been
granted to customers primarily in the Inland Empire and Orange County
areas of Southern California. Prevailing economic conditions, including
real estate values and other factors may affect certain borrowers ability
to repay loans. Although management believes the level of allowance for
loan losses is adequate to absorb losses inherent in the loan portfolio,
declines in the local economy and/or increases in the interest rate charged
on adjustable rate loans may result in increasing loan and other real
estate owned losses that cannot be reasonably estimated at December 31,
2001. The most significant category of collateral is real estate,
principally commercial and industrial income-producing properties. At
December 31, 2001, the Banks loan portfolio included approximately
$7,576,000 of fixed rate loans. The loan portfolio consisted of the
following at December 31, 2001 and 2000:

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|                                    |                  |   |             |             |      |   |             |             | 
|----------------------------------- | ---------------- | - | ----------- | ----------- | ---- | - | ----------- | ----------- | 
|                                    |                  |   | 2001        |             | 2000
|                                    |                  |   |             |             |     
|Commercial                          |                  | $ | 6,781,000   |             |      | $ | 7,481,000   |            
|Real Estate                         |                  |   | 253,146,000 |             |      |   | 235,049,000 |            
|Installment                         |                  |   | 2,055,000   |             |      |   | 580,000     |            
|Other                               |                  |   | 277,000     |             |      |   | 233,000     |            
|                                    |                  |   |             |             |      |   |             |            
|                                    |                  |   | 262,259,000 |             |      |   | 243,343,000 |            
|Deferred loan origination fees, net |                  |   | (740,000    | )           |      |   | (574,000    | )          
|                                    |                  |   |             |             |      |   |             |            
|                                    |                  |   | 261,519,000 |             |      |   | 242,769,000 |            
|Allowance for loan losses           |                  |   | (2,950,000  | )           |      |   | (2,466,000  | )          
|                                    |                  |   |             |             |      |   |             |            
|                                    | Total Loans, net |   | $           | 258,569,000 |      |   | $           | 240,303,000 | 
|                                    |                  |   |             |             |      |   |             |            

Non-accrual loans totaled approximately $0 and $48,000 at December 31, 2001
and 2000, respectively. Interest income that would have been recognized on
non-accrual loans if they had performed in accordance with the terms of the
loans was approximately $0 for the years ended December 31, 2001 and 2000,
respectively and $29,000 for the year ended December 31, 1999. At December
31, 2001 and 2000, respectively, the Bank had an insignificant amount of
loans past due 90 days or more in interest or principal and still accruing
interest.

At December 31, 2001 and 2000, loans that were considered impaired totaled
$1,883,000 and $1,953,000, respectively, all of which had a related
allowance for loan loss aggregating $22,000 and $67,000, respectively.
Impaired loans of $48,000 were on a non-accrual basis at December 31, 2000.
Substantially all of the impaired loans were collateral dependent and were
measured using the fair value of the collateral. For the years ended
December 31, 2001, 2000 and 1999, the Bank recognized interest income on
these impaired loans of $133,000, $134,000 and $170,000, respectively. The
average outstanding principal balance of impaired loans was $1,918,000,
$2,290,000 and $2,969,000 during 2001, 2000 and 1999, respectively.

Prior to the implementation of SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, the Bank
originated first and second mortgages for resale on the secondary market to
Federal Home Loan Mortgage Corporation (FHLMC), and Federal National
Mortgage Association (FNMA). Gains or losses on the sales of these loans
were recognized at the time of sale. The Bank retained servicing rights to
these loans. Servicing arrangements provide for the Bank to maintain all
records related to the servicing agreement, to assume responsibility for
billing mortgagors, to collect periodic mortgage payments, and to perform
various other activities necessary to the mortgage servicing function. The
Bank receives as compensation a servicing fee based on the principal
balance of the outstanding loans. Servicing fee income amounted to
approximately $33,000, $41,000 and $49,000 during 2001, 2000 and 1999,
respectively. The total unpaid principal balance of the mortgage servicing
portfolio amounted to approximately $9,218,000 and $12,774,000 at December
31, 2001 and 2000, respectively.

The activity in the allowance for loan losses is summarized as follows:

|                                           |  |      |           |      |  |      |           |   |  |   |           |  
|------------------------------------------ |  | ---- | --------- | ---- |  | ---- | --------- | - |  | - | --------- | -
|                                           |  | 2001 |           | 2000 |  | 1999
|                                           |  |      |           |      |  |     
|Balance at Beginning of Year               |  | $    | 2,466,000 |      |  | $    | 2,416,000 |   |  | $ | 2,232,000 |  
|Recoveries on loans previously charged off |  |      | 488,000   |      |  |      | 66,000    |   |  |   | 222,000   |  
|Loans charged off                          |  |      | (4,000    | )    |  |      | (16,000   | ) |  |   | (38,000   | )
|                                           |  |      |           |      |  |      |           |   |  |   |           |  
|Balance at End of Year                     |  | $    | 2,950,000 |      |  | $    | 2,466,000 |   |  | $ | 2,416,000 |  
|                                           |  |      |           |      |  |      |           |   |  |   |           |  

As part of its normal banking activities, the Bank has extended credit to
certain directors and officers and the companies with which they are
associated (related parties). All related party loans were current as to
principal and interest as of December 31, 2001 and 2000. In managements
opinion, these loans were made in the ordinary course of business at
prevailing market rates and terms. Total commitments for such loans
amounted to $1,124,000 and $3,160,000 at December 31, 2001 and 2000, of
which $749,000 and $357,000 were undisbursed, respectively. During 2001,
there were no new loan commitments or advances on existing commitments to
related parties, and repayments on existing commitments to related parties
were $135,000. During 2001, loan commitments totaling $1,673,000 to two
former directors who are considered principal shareholders, however, are no
longer considered related parties for these purposes were treated as
expired commitments, and loan commitments totaling $228,000 to an existing
director in the form of a personal guarantee was released.

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4. PREMISES AND EQUIPMENT

Major classifications of premises and equipment are summarized as follows
as of December 31:

|                                                |       |   |            |           |      |   |            |           | 
|----------------------------------------------- | ----- | - | ---------- | --------- | ---- | - | ---------- | --------- | 
|                                                |       |   | 2001       |           | 2000
|                                                |       |   |            |           |     
|Land                                            |       | $ | 211,000    |           |      | $ | 211,000    |          
|Buildings                                       |       |   | 1,073,000  |           |      |   | 1,005,000  |          
|Furniture and equipment                         |       |   | 1,439,000  |           |      |   | 1,767,000  |          
|Leasehold improvements                          |       |   | 325,000    |           |      |   | 371,000    |          
|                                                |       |   |            |           |      |   |            |          
|                                                |       |   | 3,048,000  |           |      |   | 3,354,000  |          
|Less: accumulated depreciation and amortization |       |   | (1,833,000 | )         |      |   | (1,817,000 | )        
|                                                |       |   |            |           |      |   |            |          
|                                                | Total |   | $          | 1,215,000 |      |   | $          | 1,537,000 | 
|                                                |       |   |            |           |      |   |            |          

The amount of depreciation and amortization included in operating expense
was $287,000, $348,000, and $331,000 for the years ended December 31, 2001,
2000, and 1999, respectively.

The Company occupies its office premises under separate long-term,
noncancelable leases which expire in various years through 2004. All
leases are accounted for as operating leases. At December 31, 2001, future
minimum lease commitments under all noncancellable leases are as follows:

|     |       |   |             |         | 
|---- | ----- | - | ----------- | ------- | 
|     |       |   | Lease      
|     |       |   | Commitments
|     |       |   |            
|2002 |       | $ | 287,000     |        
|2003 |       |   | 171,000     |        
|2004 |       |   | 79,000      |        
|2005 |       |   | 75,000      |        
|2006 |       |   | 68,000      |        
|     |       |   |             |        
|     | Total |   | $           | 680,000 | 
|     |       |   |             |        

5. INCOME TAXES

The current and deferred amounts of the provisions for income taxes for the
years ended December 31, 2001,
2000 and 1999 consisted of the following:

|          |         |       |           |                          |           |      |           |           |           |   |           |           |           |  
|--------- | ------- | ----- | --------- | ------------------------ | --------- | ---- | --------- | --------- | --------- | - | --------- | --------- | --------- | -
|          |         |       |           | Years Ended December 31,
|          |         |       |           |                         
|          |         |       |           | 2001                     |           | 2000 |           | 1999     
|          |         |       |           |                          |           |      |           |          
|Current:  |         |       |           |                          |           |      |           |           |           |   |           |          
|          | Federal |       | $         | 1,553,000                |           |      | $         | 1,649,000 |           |   | $         | 1,461,000 |          
|          | State   |       |           | 556,000                  |           |      |           | 570,000   |           |   |           | 500,000   |          
|          |         |       |           |                          |           |      |           |           |           |   |           |          
|          |         | Total |           |                          | 2,109,000 |      |           |           | 2,219,000 |   |           |           | 1,961,000 |  
|          |         |       |           |                          |           |      |           |           |           |   |           |          
|Deferred: |         |       |           |                          |           |      |           |           |           |   |           |          
|          | Federal |       |           | (23,000                  | )         |      |           | (17,000   | )         |   |           | (28,000   | )        
|          | State   |       |           | (6,000                   | )         |      |           | (3,000    | )         |   |           | 15,000    |          
|          |         |       |           |                          |           |      |           |           |           |   |           |          
|          |         | Total |           |                          | (29,000   | )    |           |           | (20,000   | ) |           |           | (13,000   | )
|          |         |       |           |                          |           |      |           |           |           |   |           |          
|          |         | $     | 2,080,000 |                          |           | $    | 2,199,000 |           |           | $ | 1,948,000 |          
|          |         |       |           |                          |           |      |           |           |           |   |           |          

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Deferred taxes arise from temporary differences between income reported for
financial reporting purposes and that reported for federal and state income
tax purposes. The tax effects of the principal temporary differences
resulting in deferred taxes were:

|                                                                               |  |                          |          |      |  |      |          |   |  |   |          |  
|------------------------------------------------------------------------------ |  | ------------------------ | -------- | ---- |  | ---- | -------- | - |  | - | -------- | -
|                                                                               |  | Years Ended December 31,
|                                                                               |  |                         
|                                                                               |  | 2001                     |          | 2000 |  | 1999
|                                                                               |  |                          |          |      |  |     
|Expenses reported on a different basis for tax purposes                        |  | $                        | 3,000    |      |  | $    | 15,000   |   |  | $ | 20,000   |  
|Depreciation computed differently on tax returns than for
financial statements |  |                          | (13,000  | )    |  |      | (18,000  | ) |  |   | (17,000  | )
|Deferred compensation                                                          |  |                          | (19,000  | )    |  |      | (17,000  | ) |  |   | (16,000  | )
|                                                                               |  |                          |          |      |  |      |          |   |  |   |          |  
|                                                                               |  |                          | ($29,000 | )    |  |      | ($20,000 | ) |  |   | ($13,000 | )
|                                                                               |  |                          |          |      |  |      |          |   |  |   |          |  

Total tax expense differed from the amount computed using the federal
statutory rate as follows:

|                                             |       |   |           |           |        |  |           |      |        |   |           |           |           |  |      |      |   |   |           |           |  |  |      |      |  
|-------------------------------------------- | ----- | - | --------- | --------- | ------ |  | --------- | ---- | ------ | - | --------- | --------- | --------- |  | ---- | ---- | - | - | --------- | --------- |  |  | ---- | ---- | -
|                                             |       |   | 2001      |           | 2000   |  | 1999     
|                                             |       |   |           |           |        |  |          
|                                             |       |   |           |           |        |  | Percent   |      |        |   |           |           | Percent   |  |      |      |   |   | Percent  
|                                             |       |   |           |           |        |  | of Pretax |      |        |   |           |           | of Pretax |  |      |      |   |   | of Pretax
|                                             |       |   | Amount    |           | Income |  | Amount    |      | Income |   | Amount    |           | Income   
|                                             |       |   |           |           |        |  |           |      |        |   |           |           |          
|Tax expense at
federal statutory
rate        |       | $ | 1,701,000 |           |        |  | 34.0      | %    |        | $ | 1,802,000 |           |           |  | 34.0 | %    |   | $ | 1,583,000 |           |  |  | 34.0 | %   
|State income tax,
net of federal tax
benefit |       |   | 355,000   |           |        |  | 7.1       |      |        |   | 374,000   |           |           |  | 7.1  |      |   |   | 340,000   |           |  |  | 7.3  |     
|Other                                        |       |   | 24,000    |           |        |  | 0.5       |      |        |   | 23,000    |           |           |  | 0.4  |      |   |   | 25,000    |           |  |  | 0.5  |     
|                                             |       |   |           |           |        |  |           |      |        |   |           |           |           |  |      |      |   |   |           |           |  |  |      |     
|                                             | Total |   | $         | 2,080,000 |        |  |           | 41.6 | %      |   | $         | 2,199,000 |           |  |      | 41.5 | % |   | $         | 1,948,000 |  |  |      | 41.8 | %
|                                             |       |   |           |           |        |  |           |      |        |   |           |           |           |  |      |      |   |   |           |           |  |  |      |     

At December 31, 2001 and 2000, the components
of the net deferred tax asset,
which is included in other assets, on the accompanying consolidated balance
sheets were as follows:

|                          |       |   |          |         |      |   |          |         | 
|------------------------- | ----- | - | -------- | ------- | ---- | - | -------- | ------- | 
|                          |       |   | 2001     |         | 2000
|                          |       |   |          |         |     
|Allowance for loan losses |       | $ | 590,000  |         |      | $ | 590,000  |        
|Deferred compensation     |       |   | 297,000  |         |      |   | 278,000  |        
|State income tax          |       |   | 190,000  |         |      |   | 194,000  |        
|Depreciation              |       |   | 101,000  |         |      |   | 88,000   |        
|Other                     |       |   | (210,000 | )       |      |   | (211,000 | )      
|                          |       |   |          |         |      |   |          |        
|                          | Total |   | $        | 968,000 |      |   | $        | 939,000 | 
|                          |       |   |          |         |      |   |          |        

6. BORROWED FUNDS

At December 31, 2001, the Bank had a long term borrowing in the amount of
$3,000,000 scheduled to mature on September 1, 2008. The borrowing is tied
to the Wall Street Journal Prime rate and bears a floating rate of interest
of 4.75%. During 2001, the interest rate on the borrowing ranged from 6.00%
to 4.75%.

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7. COMMITMENTS AND CONTINGENCIES

In order to meet the financing needs of its customers in the normal course
of business, the Bank is a party to financial instruments with off-balance
sheet risk. These financial instruments include commitments to extend
credit and standby letters of credit. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a
fee. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. Standby letters of credit are conditional
commitments issued by the Bank to guarantee the performance of a customer
to a third party. The Bank does not enter into any interest rate swaps or
caps, or forward or future contracts.

The nature of the off-balance sheet risk inherent in these instruments is
the possibility of accounting losses resulting from (1) the failure of
another party to perform according to the terms of a contract that would
cause a draw on a standby letter of credit, or (2) changes in market rates
of interest for those few commitments and undisbursed loans which have
fixed rates of interest. To minimize this risk, the Bank uses the same
credit policies in making commitments and conditional obligations as it
does for on-balance sheet instruments. The decision as to whether
collateral should be required is based on the circumstances of each
specific commitment or conditional obligation.

To varying degrees, these instruments involve elements of credit and
interest rate risk in excess of the amount recognized in the consolidated
balance sheets. The Banks exposure to credit loss in the event of
non-performance by the other party to the financial instruments for
commitments to extend credit and standby letters of credit is represented
by the contractual amount of those instruments. At December 31, 2001, the
Bank had commitments to extend credit of approximately $11,159,000 and
obligations under standby letters of credit of approximately $703,000.
Management does not believe there will be any material losses as a result
of these letters of credit and loan commitments.

At December 31, 2001, the Bank has available a borrowing line of credit
with the FHLB in the amount of $21,045,000 using previously approved
residential and commercial real estate mortgage loans totaling $35,449,000
to secure the line of credit. There was no utilization of this borrowing
line during 2001.

The Bank has approval to borrow under the Discount Window Program of the
Federal Reserve Bank of San Francisco collateralized by investment
securities. There was no utilization of this borrowing line during 2001.

The Bank has available repurchase lines of credit with two broker/dealers
at December 31, 2001. These lines are subject to normal terms for such
arrangements. There was no utilization of these lines during 2001. At
December 31, 2001, investment securities with a market value of
approximately $3,967,000 were available for these repurchase lines of
credit.

The Bank is required to maintain reserve balances with the Federal Reserve
Bank. The amounts of these reserve balances at December 31, 2001 and 2000
were $1,311,000 and $696,000, respectively.

On May 2, 2000, the Bank announced that it settled a class action lawsuit
filed by former Inland Savings and Loan shareholders on terms which were
not material to the Banks business, results of operation, or financial
condition. In connection with the 1992 acquisition of Inland, the Bank had
issued Preferred stock to shareholders of Inland. The Preferred stock was
automatically converted to the Banks common stock in 1995. In 1997 the
named plaintiffs sued the Bank and certain of its directors regarding the
manner in which the Bank implemented the conversion, as governed by certain
provisions of the merger agreement. The settlement was approved by the
Superior Court of Riverside County, California on June 16, 2000.
Distribution of settlement proceeds was made by a court appointed fund
administrator to class members on August 25, 2000.

In addition, the Bank is a defendant in various legal proceedings resulting
from normal banking business. In the opinion of management and the Banks
legal counsel, the disposition of such litigation will not have a material
effect on the Banks consolidated financial condition or results of
operations.

8. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY DEBENTURES

Effective December 18, 2001, the Trust completed a private issuance of
$6,500,000 in Trust Preferred Securities which are reflected on the
accompanying Consolidated Balance Sheets as Guaranteed Preferred Beneficial
Interests in Company Debentures. The Trust Preferred Securities bear a
floating rate of interest of 3.60% over the three month LIBOR, payable
quarterly, with the initial rate set at 5.6%. Following the issuance of
the Trust Preferred Securities, the Trust used the proceeds from the Trust
Preferred Securities offering to purchase $6,500,000 of Junior Subordinated
Debt Securities (the Debt Securities) of the Company. The Debt
Securities bear the same terms and interest rates as the related Trust
Preferred Securities. The Debt Securities are the sole assets of the Trust
and are eliminated, along with the related income statement effects, in the
consolidated financial statements. The Company has fully and
unconditionally guaranteed all of the obligations of the Trust including
the Trust Preferred Securities. The Trust Preferred Securities mature on
December 18, 2031 and can be redeemed commencing on December 18, 2006
without a prepayment penalty. Redemption of the Trust Preferred Securities
prior to December 18, 2006 would result in a prepayment penalty of 107.5%
of the principal amount being redeemed plus any

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accrued and unpaid interest. Under applicable
regulatory guidelines, the Trust Preferred Securities will qualify as Tier
1 Capital. Distributions on the Trust Preferred Securities are recorded on
the income statement in Minority Interest in Income of Subsidiary. The
costs associated with the Trust Preferred Securities issuance of
$6,500,000 have been
netted from the proceeds and are being accreted to interest using a method which approximates the
effective interest method over the life of the Trust Preferred Securities.
On December 27, 2001, Hemet Bancorp invested $3,000,000 of the net proceeds
in the Bank to increase the Banks capital levels.

9. STOCK OPTION PLAN

The Bank grants incentive and nonqualified stock options to certain
full-time salaried officers and management level employees. In June 1994,
the Bank established a stock option plan which authorized the issuance of
75,000 shares, of which 31,000 shares were granted in 1994, 21,000 shares
were granted in 1997, 5,000 shares were granted in 1999, 22,000 shares were
granted in 2000, and 5,000 were granted in 2001 to various officers of the
Bank. At December 31, 2001, 13,700 shares of common stock were reserved
for grant under the plan which includes 4,000 shares forfeited during 1996,
17,200 shares forfeited during 2000, and 1,500 shares forfeited during
2001. The stock options are exercisable at a price equal to market value
on the date of grant. Options expire not more than ten years after the
date of grant. Options vest and are exercisable on a straight line basis
over a five year period.

Transactions in plan for the three years ended December 31, 2001 are as
follows:

|                                 |                   |  |             |         |                  |   |          |       | 
|-------------------------------- | ----------------- |  | ----------- | ------- | ---------------- | - | -------- | ----- | 
|                                 |                   |  |             |         |                  |   | Weighted
|                                 |                   |  | Options     |         | Average Exercise
|                                 |                   |  | Outstanding |         | Price Per Share 
|                                 |                   |  |             |         |                 
|Balance, December 31, 1998       |                   |  | 46,968      |         |                  | $ | 16.69    |      
|                                 | Options exercised |  |             | (21,000 | )                |   | $        | 12.00 | 
|                                 | Options granted   |  |             | 5,000   |                  |   | $        | 35.00 | 
|                                 |                   |  |             |         |                  |   |          |      
|Balance, December 31, 1999       |                   |  | 30,968      |         |                  | $ | 20.82    |      
|                                 | Options exercised |  |             | (1,568  | )                |   | $        | 14.01 | 
|                                 | Options granted   |  |             | 22,000  |                  |   | $        | 31.30 | 
|                                 | Options forfeited |  |             | (17,200 | )                |   | $        | 26.13 | 
|                                 |                   |  |             |         |                  |   |          |      
|Balance, December 31, 2000       |                   |  | 34,200      |         |                  | $ | 27.42    |      
|                                 | Options exercised |  |             | (8,300  | )                |   | $        | 21.58 | 
|                                 | Options granted   |  |             | 5,000   |                  |   | $        | 34.75 | 
|                                 | Options forfeited |  |             | (1,500  | )                |   | $        | 31.54 | 
|                                 |                   |  |             |         |                  |   |          |      
|Balance, December 31, 2001       |                   |  | 29,400      |         |                  | $ | 30.10    |      
|                                 |                   |  |             |         |                  |   |          |      
|Exercisable at December 31, 2001 |                   |  | 6,300       |         |                  | $ | 24.97    |      
|                                 |                   |  |             |         |                  |   |          |      

The Bank does not record any compensation cost in connection with the stock
options issued to various officers of the Bank. The Banks pro forma net
income and diluted earnings per share assuming the Bank recorded
compensation cost in 2001, 2000 and 1999 for the applicable options granted
subsequent to January 1, 1996 would not have a material effect on the
Banks consolidated results of operations or diluted EPS. The disclosure of
the pro forma impact of compensation costs is not applicable for options
granted prior to January 1, 1996.

The pro forma impact of compensation costs on net income and diluted
earnings per share as presented above may not be representative of the
impact which could be realized in future years.

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10. OTHER EXPENSES

The following is a breakdown of other expenses for the years ended December
31, 2001, 2000 and 1999:

|                                           |       |   |         |           |      |   |         |           |  |   |         |           | 
|------------------------------------------ | ----- | - | ------- | --------- | ---- | - | ------- | --------- |  | - | ------- | --------- | 
|                                           |       |   | 2001    |           | 2000 |   | 1999   
|                                           |       |   |         |           |      |   |        
|Data processing and other outside services |       | $ | 490,000 |           |      | $ | 366,000 |           |  | $ | 318,000 |          
|Deposit insurance assessments              |       |   | 80,000  |           |      |   | 77,000  |           |  |   | 85,000  |          
|Professional fees                          |       |   | 410,000 |           |      |   | 369,000 |           |  |   | 654,000 |          
|Office supplies, postage and telephone     |       |   | 541,000 |           |      |   | 519,000 |           |  |   | 480,000 |          
|Other                                      |       |   | 715,000 |           |      |   | 889,000 |           |  |   | 884,000 |          
|                                           |       |   |         |           |      |   |         |           |  |   |         |          
|                                           | Total |   | $       | 2,236,000 |      |   | $       | 2,220,000 |  |   | $       | 2,421,000 | 
|                                           |       |   |         |           |      |   |         |           |  |   |         |          

11. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value estimates of financial instruments for both assets and
liabilities are made at a discrete point in time based on relevant market
information and information about the financial instruments. Because no
active market exists for a significant portion of the Banks financial
instruments, fair value estimates are based on judgments regarding current
economic conditions, risk characteristics of various financial instruments,
prepayment assumptions, future expected loss experience and other such
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 estimates.

The Bank intends to hold the majority of its assets and liabilities to
their stated maturities. Thus, management does not believe that the bulk
sale concepts applied to certain problem loans for purposes of measuring
the impact of credit risk on fair values of said assets is reasonable to
the operations of the Bank and does not fairly present the values
realizable over the long term on assets that will be retained by the Bank.
Therefore, the Bank does not intend to realize any significant differences
between carrying value and fair value through sale or other disposition.
No attempt should be made to adjust stockholders equity to reflect the
following fair value disclosures as management believes them to be
inconsistent with the philosophies and operations of the Bank.

In addition, the fair value estimates are based on existing on-and
off-balance sheet financial instruments without attempting to estimate the
value of existing and anticipated future customer relationships and the
value of assets and liabilities that are not considered financial
instruments. Significant assets and liabilities that are not considered
financial assets or liabilities include the branch network, deferred tax
assets, other real estate owned, and premises and equipment.

The following methods and assumptions were used to estimate the fair value
of financial instruments.

Investment Securities

For U.S. government treasury and agency securities, fair values are based
on market prices. For other investment securities, fair value equals quoted
market price, if available. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar securities.

Loans

The fair value for loans with variable interest rates is the carrying
amount. The fair value of fixed rate loans is derived by calculating the
discounted value of future cash flows expected to be received by the
various homogeneous categories of loans. All loans have been adjusted to
reflect changes in credit risk.

Deposits

The fair value of demand deposits, savings deposits, and money market
deposits are defined as the amounts payable on demand at year end. The
fair value of fixed maturity certificates of deposit is estimated based on
the discounted value of the future cash flows expected to be paid on the
deposits.

Commitments to Extend Credit and Standby Letters of Credit

The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms
of the agreements and the present creditworthiness of the parties involved.
For fixed rate loan commitments, fair value also considers the difference
between current levels of interest rates and committed rates. The fair

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value of these unrecorded financial instruments is not material to the
Banks financial position or fair value disclosures at December 31, 2001
and 2000 (see Note 7).

The estimated fair values of the Banks financial instruments are as
follows:

|                      |                           |  |                |             |            |  |   |             | 
|--------------------- | ------------------------- |  | -------------- | ----------- | ---------- |  | - | ----------- | 
|                      |                           |  | Carrying Value |             | Fair Value
|                      |                           |  |                |             |           
|DECEMBER 31, 2001     |                           |  |                |             |            |  |   |            
|Financial Assets      |                           |  |                |             |            |  |   |            
|                      | Cash and cash equivalents |  | $              | 23,793,000  |            |  | $ | 23,793,000  | 
|                      | Investment securities     |  |                | 16,370,000  |            |  |   | 16,417,000  | 
|                      | Loans, net                |  |                | 258,569,000 |            |  |   | 261,406,000 | 
|Financial Liabilities |                           |  |                |             |            |  |   |            
|                      | Deposits                  |  |                | 271,922,000 |            |  |   | 273,101,000 | 
|DECEMBER 31, 2000     |                           |  |                |             |            |  |   |            
|Financial Assets      |                           |  |                |             |            |  |   |            
|                      | Cash and cash equivalents |  | $              | 28,186,000  |            |  | $ | 28,186,000  | 
|                      | Investment securities     |  |                | 18,342,000  |            |  |   | 18,388,000  | 
|                      | Loans, net                |  |                | 240,303,000 |            |  |   | 242,741,000 | 
|Financial Liabilities |                           |  |                |             |            |  |   |            
|                      | Deposits                  |  |                | 267,844,000 |            |  |   | 268,367,000 | 

12. REGULATORY MATTERS

Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bancorp and Bank must meet specific capital
guidelines that involve quantitative measures of the Bancorps and Banks
assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weighting and other factors. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Bancorps financial statements. Management
believes the Bancorp and Bank meets all capital adequacy requirements to
which they are subject as of December 31, 2001. The most recent
notification from the Federal Deposit Insurance Corporation categorized the
Bank as well capitalized under the regulatory framework for prompt
corrective action. There are no conditions or events since that
notification that management believes have changed the capital category of
the Bank.

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A comparison of the Bancorps and Banks actual regulatory capital with
minimum requirements for adequately capitalized and well capitalized banks,
as defined by regulation, is shown below. The amounts shown for December
31, 2000 are for the Bank.

|                                                    |  |        |            |             |  |             |       |       |  |                  |              |            |  |  |      |   |  |  |              |  |  |  |       |  
|--------------------------------------------------- |  | ------ | ---------- | ----------- |  | ----------- | ----- | ----- |  | ---------------- | ------------ | ---------- |  |  | ---- | - |  |  | ------------ |  |  |  | ----- | -
|                                                    |  |        |            |             |  |             |       |       |  | To be Adequately |              | To be Well
|                                                    |  | Actual |            | Capitalized |  | Capitalized
|                                                    |  |        |            |             |  |            
|                                                    |  | Amount |            | Ratio       |  | Amount      |       | Ratio |  | Amount           |              | Ratio     
|                                                    |  |        |            |             |  |             |       |       |  |                  |              |           
|AS OF DECEMBER 31, 2001                             |  |        |            |             |  |             |       |       |  |                  |              |            |  |  |      |   |  |  |              |  |  |  |       |  
|Tier 1 Risk-Based Capital
(To Risk Weighted Assets) |  |        |            |             |  |             |       |       |  |                  |              |            |  |  |      |   |  |  |              |  |  |  |       |  
|Hemet Bancorp                                       |  | $      | 26,930,000 |             |  |             | 10.02 | %     |  |                  | >$10,746,000 |            |  |  | >4.0 | % |  |  | >$16,121,000 |  |  |  | >6.0  | %
|The Bank of Hemet                                   |  | $      | 23,473,000 |             |  |             | 8.77  | %     |  |                  | >$10,705,000 |            |  |  | >4.0 | % |  |  | >$16,060,000 |  |  |  | >6.0  | %
|                                                   
|Total Risk-Based Capital
(To Risk Weighted Assets)  |  |        |            |             |  |             |       |       |  |                  |              |            |  |  |      |   |  |  |              |  |  |  |       |  
|Hemet Bancorp                                       |  | $      | 32,880,000 |             |  |             | 12.24 | %     |  |                  | >$21,495,000 |            |  |  | >8.0 | % |  |  | >$26,870,000 |  |  |  | >10.0 | %
|The Bank of Hemet                                   |  | $      | 29,422,000 |             |  |             | 10.99 | %     |  |                  | >$21,413,000 |            |  |  | >8.0 | % |  |  | >$26,768,000 |  |  |  | >10.0 | %
|                                                   
|Tier 1 Capital
(To Average Assets)                  |  |        |            |             |  |             |       |       |  |                  |              |            |  |  |      |   |  |  |              |  |  |  |       |  
|Hemet Bancorp                                       |  | $      | 26,930,000 |             |  |             | 8.94  | %     |  |                  | >$12,044,000 |            |  |  | >4.0 | % |  |  | >$15,057,000 |  |  |  | >5.0  | %
|The Bank of Hemet                                   |  | $      | 23,473,000 |             |  |             | 7.80  | %     |  |                  | >$12,040,000 |            |  |  | >4.0 | % |  |  | >$15,051,000 |  |  |  | >5.0  | %
|                                                   
|AS OF DECEMBER 31, 2000                             |  |        |            |             |  |             |       |       |  |                  |              |            |  |  |      |   |  |  |              |  |  |  |       |  
|THE
BANK OF HEMET                                   |  |        |            |             |  |             |       |       |  |                  |              |            |  |  |      |   |  |  |              |  |  |  |       |  
|Tier 1 Risk-Based Capital
(To Risk Weighted Assets) |  | $      | 22,724,000 |             |  |             | 9.13  | %     |  |                  | >$9,952,000  |            |  |  | >4.0 | % |  |  | >$14,930,000 |  |  |  | >6.0  | %
|                                                   
|Total Risk-Based Capital
(To Risk Weighted Assets)  |  | $      | 25,191,000 |             |  |             | 10.12 | %     |  |                  | >$19,906,000 |            |  |  | >8.0 | % |  |  | >$24,885,000 |  |  |  | >10.0 | %
|Tier 1 Capital
(To Average Assets)                  |  | $      | 22,724,000 |             |  |             | 7.97  | %     |  |                  | >$11,406,000 |            |  |  | >4.0 | % |  |  | >$14,259,000 |  |  |  | >5.0  | %

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13. CONDENSED PARENT ONLY FINANCIAL INFORMATION

Hemet Bancorps Condensed Balance Sheet as of December 31, 2001 is as follows:

|                                               |                                                     |  |                                                      |            |   |            | 
|---------------------------------------------- | --------------------------------------------------- |  | ---------------------------------------------------- | ---------- | - | ---------- | 
|Assets                                         |                                                     |  | 2001                                                 |           
|                                               |                                                     |  |                                                      |           
|                                               | Cash and
          cash equivalents                 |  | $                                                    | 2,449,000  |  
|                                               | Loans receivable                                    |  |                                                      | 1,000,000  |  
|                                               | Investment
          in subsidiaries, equity method |  |                                                      | 23,871,000 |  
|                                               | Deferred
          tax asset                        |  |                                                      | 968,000    |  
|                                               | Other
          assets                              |  |                                                      | 85,000     |  
|                                               |                                                     |  |                                                      |           
|                                               |                                                     |  | Total
          Assets                               |            | $ | 28,373,000 | 
|                                               |                                                     |  |                                                      |           
|Liabilities
          and Stockholders Equity |                                                    
|                                               | Other liabilities                                   |  |                                                      | 97,000     |  
|                                               | Balances
          due to Bank                      |  |                                                      | 948,000    |  
|                                               | Balances
          due to Trust                     |  |                                                      | 6,702,000  |  
|                                               | Stockholders
          Equity                      |  |                                                      | 20,626,000 |  
|                                               |                                                     |  |                                                      |           
|                                               |                                                     |  | Total
          Liabilities and Stockholders Equity |            | $ | 28,373,000 | 
|                                               |                                                     |  |                                                      |           

Hemet Bancorps Condensed Statement of Income from inception (January
31, 2001) to December 31, 2001 is as follows:

|                                                                                       |  |   |         |  
|-------------------------------------------------------------------------------------- |  | - | ------- | -
|Equity in undistributed income of Bank                                                 |  | $ | 239,000 |  
|Equity in undistributed loss of Trust                                                  |  |   | (1,000  | )
|Interest Income                                                                        |  |   | 7,000   |  
|Other Expenses                                                                         |  |   | 41,000  |  
|                                                                                       |  |   |         |  
|                                                                                      
|Income Before Minority Interest in Income of Subsidiary and Provision for Income Taxes |  |   | 204,000 |  
|                                                                                      
|Minority
Interest in Income of Subsidiary                                              |  |   | (14,000 | )
|                                                                                      
|Income
Before Provision for Income Taxes                                               |  |   | 190,000 |  
|                                                                                      
|Income Tax Benefit                                                                     |  |   | 20,000  |  
|                                                                                       |  |   |         |  
|                                                                                      
|Net Income                                                                             |  | $ | 210,000 |  
|                                                                                       |  |   |         |  

Hemet Bancorps Condensed Statement of Cash Flows from inception
(January 31, 2001) to December 31, 2001 is as follows:

|                                             |                                                                               |                                            |                                           |            |          |            |  
|-------------------------------------------- | ----------------------------------------------------------------------------- | ------------------------------------------ | ----------------------------------------- | ---------- | -------- | ---------- | -
|Cash Flows from Operating Activities         |                                                                               |                                            |                                           |           
|                                             | Net Income                                                                    |                                            | $                                         | 210,000    |         
|                                             | Adjustments to reconcile net income to net cash used by
operating activities: |                                            |                                           |            |         
|                                             |                                                                               | Equity in undistributed net income of Bank |                                           |            | (239,000 | )         
|                                             |                                                                               | Equity in undistributed net loss of Trust  |                                           |            | 1,000    |           
|                                             |                                                                               | Provision for deferred income taxes        |                                           |            | (968,000 | )         
|                                             |                                                                               | Net change in assets and liabilities       |                                           |            | 959,000  |           
|                                             |                                                                               |                                            |                                           |           
|                                             |                                                                               |                                            | Net cash used by operating activities     |            |          | (37,000    | )
|                                             |                                                                               |                                            |                                           |           
|Cash Flows from Investing Activities         |                                                                               |                                            |                                           |           
|                                             | Investment in subsidiaries                                                    |                                            |                                           | (3,202,000 | )       
|                                             | Investment in loans                                                           |                                            |                                           | (1,000,000 | )       
|                                             |                                                                               |                                            |                                           |           
|                                             |                                                                               |                                            | Net cash used by investing activities     |            |          | (4,202,000 | )
|                                             |                                                                               |                                            |                                           |           
|Cash Flows from Financing Activities         |                                                                               |                                            |                                           |           
|                                             | Proceeds from advances from subsidiaries                                      |                                            |                                           | 182,000    |         
|                                             | Proceeds from issuance of Trust Preferred Securities                          |                                            |                                           | 6,506,000  |         
|                                             |                                                                               |                                            |                                           |           
|                                             |                                                                               |                                            | Net cash provided by financing activities |            |          | 6,688,000  |  
|                                             |                                                                               |                                            |                                           |           
|Net increase in Cash and Cash Equivalents    |                                                                               |                                            | 2,449,000                                 |           
|Cash and Cash Equivalents, Beginning of Year |                                                                               |                                            |                                          |           
|                                             |                                                                               |                                            |                                           |           
|Cash and Cash Equivalents, End of Year       |                                                                               | $                                          | 2,449,000                                 |           
|                                             |                                                                               |                                            |                                           |           

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14. SUMMARY SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following table presents selected historical consolidated quarterly
financial data, including per share information for the Company.

|                             |  |                             |           |         |  |         |           |         |  |       |           |  |  |   |           |  |  |   |            | 
|---------------------------- |  | --------------------------- | --------- | ------- |  | ------- | --------- | ------- |  | ----- | --------- |  |  | - | --------- |  |  | - | ---------- | 
|                             |  | At or for the quarter ended
|                             |  |                            
|                             |  | Mar 31,                     |           | Jun 30, |  | Sep 30, |           | Dec 31, |  |       |           | 
|                             |  | 2001                        |           | 2001    |  | 2001    |           | 2001    |  | Total
|                             |  |                             |           |         |  |         |           |         |  |      
|Results of operations        |  |                             |           |         |  |         |           |         |  |       |           |  |  |   |           |  |  |   |            | 
|Interest income              |  | $                           | 5,861,000 |         |  | $       | 5,521,000 |         |  | $     | 5,373,000 |  |  | $ | 5,092,000 |  |  | $ | 21,847,000 | 
|Interest expense             |  |                             | 3,080,000 |         |  |         | 2,835,000 |         |  |       | 2,622,000 |  |  |   | 2,223,000 |  |  |   | 10,760,000 | 
|Net interest income          |  |                             | 2,781,000 |         |  |         | 2,686,000 |         |  |       | 2,751,000 |  |  |   | 2,869,000 |  |  |   | 11,087,000 | 
|Provision for loan losses    |  |                             | 0         |         |  |         | 0         |         |  |       | 0         |  |  |   | 0         |  |  |   | 0          | 
|Net income before income
tax |  |                             | 1,328,000 |         |  |         | 1,170,000 |         |  |       | 1,301,000 |  |  |   | 1,203,000 |  |  |   | 5,002,000  | 
|Net income                   |  |                             | 780,000   |         |  |         | 683,000   |         |  |       | 761,000   |  |  |   | 698,000   |  |  |   | 2,922,000  | 
|Basic earnings per share     |  | $                           | 0.90      |         |  | $       | 0.79      |         |  | $     | 0.87      |  |  | $ | 0.85      |  |  | $ | 3.41       | 
|Diluted earnings per
share   |  | $                           | 0.89      |         |  | $       | 0.78      |         |  | $     | 0.86      |  |  | $ | 0.84      |  |  | $ | 3.37       | 

15. SUBSEQUENT EVENTS (UNAUDITED)

On March 1, 2002, Hemet Bancorp announced its intention to qualify the
Company to become an S corporation for income tax purposes. As an S
corporation, substantially all of Hemet Bancorps tax liability would be
assumed by its shareholders, thus eliminating the double-taxation of
dividends. For Hemet Bancorp to meet the Internal Revenue Service
eligibility requirements to become an S corporation, it will need to reduce
the number of its shareholders to no more than 75, from its current number
of approximately 400. This transaction is subject to regulatory approval
and is contingent upon numerous factors including the ability of the
Company to reduce their shareholders to no more than 75. There can be no
assurance that the Company will be able to achieve S corporation status.

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PART III




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

Not applicable.




ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The following table sets forth as of January 31, 2002, the names of and
certain information concerning the directors of the Company.

|                                                                                |  |     |  |            |  |                                                                                                                                                          
|------------------------------------------------------------------------------- |  | --- |  | ---------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                |  |     |  | Year First |  |                                                                                                                                                          
|                                                                                |  |     |  | Appointed  |  | Principal Occupation                                                                                                                                     
|Name and Title                                                                  |  | Age |  | Director   |  | During the Past Five Years                                                                                                                               
|                                                                                |  |     |  |            |  |                                                                                                                                                          
|John B.
        Brudin, Director                                                |  | 72  |  | 1974       |  | Retired, Consultant to various
      public sector organizations                                                                                         
|                                                                                |  |     |  |            |  |                                                                                                                                                          
|Eric J.
        Gosch, Director                                                 |  | 48  |  | 2000       |  | President of Inland Chevrolet,
      Inc and President of Rancho Ford, Inc.                                                                              
|                                                                                |  |     |  |            |  |                                                                                                                                                          
|E. Kenneth
        Hyatt, Director                                              |  | 57  |  | 1982       |  | Executive Vice President, Talbot
      Insurance and Financial Services, Inc.                                                                            
|                                                                                |  |     |  |            |  |                                                                                                                                                          
|James B.
        Jaqua, President,
        Chief Executive Officer and Director |  | 59  |  | 1983       |  | President and Chief Executive
      Officer for Hemet Bancorp and The Bank of Hemet                                                                      
|                                                                                |  |     |  |            |  |                                                                                                                                                          
|Alan H.
        Lewis, Director                                                 |  | 58  |  | 2001       |  | Assistant Dean of the A.
      Gary Anderson Graduate School of Management,
      University of California, Riverside                                    
|                                                                                |  |     |  |            |  |                                                                                                                                                          
|John J.
        McDonough, Director                                             |  | 70  |  | 1974       |  | Retired as Chairman of the Board of
      The Bank of Hemet effective December 31, 2001, Consultant to The Bank
      of Hemet effective January 1, 2002.
|                                                                                |  |     |  |            |  |                                                                                                                                                          
|Joseph D.
        Pehl, Director                                                |  | 70  |  | 1992       |  | President, Cornell Consulting,
      Inc.                                                                                                                

None of the directors were selected pursuant to any arrangement or
understanding other than with the directors and executive officers of the
Company acting within their capacities as such. There are no family
relationships between any of the directors and executive officers of the
Company.

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Executive Officers

The following table sets forth as of January 31, 2002, the names of and
certain information concerning executive officers of the Company.

|                  |  |     |  |       |  |                                                                                                                                                                                                                                                                                                                                                                                              
|----------------- |  | --- |  | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name              |  | Age |  | Since |  | Position and principal occupation                                                                                                                                                                                                                                                                                                                                                            
|                  |  |     |  |       |  |                                                                                                                                                                                                                                                                                                                                                                                              
|                  |  |     |  |       |  |                                                                                                                                                                                                                                                                                                                                                                                              
|James B. Jaqua    |  | 59  |  | 1983  |  | President and Chief Executive
      Officer for Hemet Bancorp and The Bank of Hemet                                                                                                                                                                                                                                                                                                          
|                  |  |     |  |       |  |                                                                                                                                                                                                                                                                                                                                                                                              
|Kevin Farrenkopf  |  | 41  |  | 2001  |  | Executive Vice President, Chief
      Operating Officer, The Bank of Hemet since April 2001. Senior Vice President-Division
      Manager, Retail Banking for Western Financial Bank since 1995.                                                                                                                                                                                             
|                  |  |     |  |       |  |                                                                                                                                                                                                                                                                                                                                                                                              
|Catherine A. Frei |  | 41  |  | 2001  |  | Executive Vice President, Chief
      Financial Officer, The Bank of Hemet since May 2001, Senior Vice President,
      Chief Financial Officer, The Bank of Hemet since February 2001. Senior Vice
      President, Acting Chief Financial Officer since July 2000, Senior Vice President,
      Controller and Cashier from August 1996. Vice President, Controller from
      August 1994.

Mr. McDonough retired as Chairman of the Board of The Bank of Hemet effective
December 31, 2001.

Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Securities and Exchange Act of 1934 requires the
Companys officers and directors, and persons who own more than ten percent of
a registered class of the Companys equity securities, to file report of
ownership and change in ownership with the SEC. Such persons are required by
SEC regulation to furnish the Company with copies of all Section 16 (a) forms
they file.

Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Form 4s
were required for those persons, the Company believes that, during 2001, its
officers, directors and more than ten-percent beneficial owners complied with
all filing requirements applicable to them.

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ITEM 11. EXECUTIVE COMPENSATION

The following table sets out a summary of the compensation for certain
officers and the chairman of the board of directors.

|                                                 |  |                     |      |           |  |          |         |           |  |             |         |          |  |           |   |              |  |                        |   |      |  |         |       |  |  |           |   |  |  |   |        | 
|------------------------------------------------ |  | ------------------- | ---- | --------- |  | -------- | ------- | --------- |  | ----------- | ------- | -------- |  | --------- | - | ------------ |  | ---------------------- | - | ---- |  | ------- | ----- |  |  | --------- | - |  |  | - | ------ | 
|                                                 |  |                     |      |           |  |          |         |           |  |             |         |          |  |           |   |              |  | Long-term compensation |   |      |  |        
|                                                 |  |                     |      |           |  |          |         |           |  |             |         |          |  |           |   |              |  |                        |   |      |  |        
|                                                 |  | Annual compensation |      | Awards    |  | Payout   |         |           |  |            
|                                                 |  |                     |      |           |  |          |         |           |  |            
|                                                 |  |                     |      |           |  |          |         |           |  |             |         |          |  | Other     |   |              |  |                        |   |      |  |         |       |  |  |           |   |  |  |  
|                                                 |  |                     |      |           |  |          |         |           |  |             |         |          |  | annual    |   | Restricted   |  |                        |   |      |  |         |       |  |  | All other
|                                                 |  |                     |      |           |  |          |         |           |  |             |         |          |  | compen-   |   | stock        |  | Options/               |   | LTIP |  | compen-
|Name and principal position                      |  | Year                |      | Salary($) |  | Bonus($) |         | sation($) |  | award(s)($) |         | SARs (#) |  | payout($) |   | sation($)(1)
|                                                 |  |                     |      |           |  |          |         |           |  |             |         |          |  |           |   |             
|JAMES B. JAQUA                                   |  |                     | 2001 |           |  | $        | 236,868 |           |  | $           | 148,000 |          |  |           |  |              |  |                        |  |      |  |         | -0-   |  |  |           |  |  |  | $ | 6,020  | 
|President and                                    |  |                     | 2000 |           |  |          | 231,570 |           |  |             | 100,000 |          |  |           |  |              |  |                        |  |      |  |         | -0-   |  |  |           |  |  |  |   | 3,515  | 
|Chief Executive Officer                          |  |                     | 1999 |           |  |          | 224,700 |           |  |             | 104,000 |          |  |           |  |              |  |                        |  |      |  |         |       |  |  |           |  |  |  |   | 2,247  | 
|                                                
|JOHN J. MCDONOUGH(2)                             |  |                     | 2001 |           |  |          | 103,948 |           |  |             | 10,000  |          |  |           |  |              |  |                        |  |      |  |         | -0-   |  |  |           |  |  |  |   | 10,080 | 
|Chairman of the Board                            |  |                     | 2000 |           |  |          | 100,571 |           |  |             | 5,000   |          |  |           |  |              |  |                        |  |      |  |         | -0-   |  |  |           |  |  |  |   | 8,333  | 
|                                                 |  |                     | 1999 |           |  |          | 98,936  |           |  |             | 5,000   |          |  |           |  |              |  |                        |  |      |  |         | -0-   |  |  |           |  |  |  |   | 8,083  | 
|                                                
|KEVIN FARRENKOPF(3)                              |  |                     | 2001 |           |  |          | 84,855  |           |  |             | 0       |          |  |           |  |              |  |                        |  |      |  |         | 5,000 |  |  |           |  |  |  |   | 2,601  | 
|Executive Vice President
Chief Operating Officer |  |                     |      |           |  |          |         |           |  |             |         |          |  |           |   |              |  |                        |   |      |  |         |       |  |  |           |   |  |  |   |        | 
|                                                
|CATHERINE A. FREI(4)                             |  |                     | 2001 |           |  |          | 106,275 |           |  |             | 30,000  |          |  |           |  |              |  |                        |  |      |  |         | -0-   |  |  |           |  |  |  |   | 2,601  | 
|Executive Vice President                         |  |                     | 2000 |           |  |          | 86,423  |           |  |             | 20,000  |          |  |           |  |              |  |                        |  |      |  |         | 3,000 |  |  |           |  |  |  |   | 2,360  | 
|Chief Financial Officer                          |  |                     |      |           |  |          |         |           |  |             |         |          |  |           |   |              |  |                        |   |      |  |         |       |  |  |           |   |  |  |   |        | 



---

|(1) |  | The amounts include the Banks matching contribution to The Bank of Hemet
401(k). The matching contribution for Mr. McDonough in 2001, 2000 and
1999 was $3,706, $2,535 and $1,979, respectively, and the remainder
represents the Banks cost of premiums for life insurance for which Mr.
McDonough is the owner and insured, and the beneficiary is selected by Mr.
McDonough.                   
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Effective December 31, 2001, Mr. McDonough retired as Chairman of the
Board.                                                                                                                                                                                                                                                                                                                        
|   
|   
|   
|   
|(3) |  | Effective April 19, 2001, Mr. Farrenkopf became Executive Vice
President/Chief Operating Officer of the Bank.                                                                                                                                                                                                                                                                                       
|   
|   
|   
|   
|(4) |  | Effective July 2000, Ms. Frei became Acting Chief Financial Officer,
effective February 2001, Ms. Frei became Chief Financial Officer and
effective May 2001, Ms. Frei became Executive Vice President, Chief
Financial Officer. Ms. Frei has held various positions with the Bank
since July 1994, and was Senior Vice President, Controller and Cashier
prior to becoming Chief Financial Officer.

Aggregated option(1) exercises in fiscal year 2001
and fiscal year-end option values

|                  |  |             |   |             |  |             |     |                        |  |                       |       |                      |  |  |       |  |  |                      |        |  |  |   |        | 
|----------------- |  | ----------- | - | ----------- |  | ----------- | --- | ---------------------- |  | --------------------- | ----- | -------------------- |  |  | ----- |  |  | -------------------- | ------ |  |  | - | ------ | 
|                  |  |             |   |             |  |             |     |                        |  |                       |       |                      |  |  |       |  |  | Value of unexercised
|                  |  |             |   |             |  |             |     |                        |  | Number of unexercised |       | in-the-money options
|                  |  | Shares      |   |             |  |             |     | options at 12/31/01(#) |  | at 12/31/01($)(2)    
|                  |  | acquired on |   | Value       |  |             |     |                       
|Name              |  | exercise(#) |   | realized($) |  | Exercisable |     | Unexercisable          |  | Exercisable           |       | Unexercisable       
|                  |  |             |   |             |  |             |     |                        |  |                       |       |                     
|James B. Jaqua    |  |             | 0 |             |  |             | N/A |                        |  |                       | 0     |                      |  |  | 1,200 |  |  | $                    | 0      |  |  | $ | 23,100 | 
|John J. McDonough |  |             | 0 |             |  |             | N/A |                        |  |                       | 0     |                      |  |  | 0     |  |  |                      | 0      |  |  |   | 0      | 
|Kevin Farrenkopf  |  |             | 0 |             |  |             | N/A |                        |  |                       | 0     |                      |  |  | 5,000 |  |  |                      | 0      |  |  |   | 46,250 | 
|Catherine A. Frei |  |             | 0 |             |  |             | N/A |                        |  |                       | 3,100 |                      |  |  | 2,600 |  |  | $                    | 79,400 |  |  | $ | 35,500 | 



---

|(1) |  | The Bank of Hemet has no plans pursuant to which stock appreciation
rights may be granted.                                                                                                                                      
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Value of unexercised in-the-money options is the difference between the
fair market value of the securities underlying the options and the
exercise or base price of the options at exercise or fiscal year-end,
respectively.

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##### Table of Contents



The following table sets forth as to each of the Executive Officers information
with respect to option grants during fiscal 2000: (i) the number of shares of
Common Stock underlying options granted during fiscal 2000, (ii) the percentage
that such options represent of all options granted to employees during that
year, (iii) the exercise price and (iv) the expiration date.

Option Grants During Fiscal 2001

|                  |  |           |       |              |  |            |       |            |  |   |       |  |  |  |          | 
|----------------- |  | --------- | ----- | ------------ |  | ---------- | ----- | ---------- |  | - | ----- |  |  |  | -------- | 
|                  |  |           |       |              |  | % of Total |       |            |  |   |       |  |  | 
|                  |  |           |       |              |  | Options    |       |            |  |   |       |  |  | 
|                  |  | Number of |       | Granted to   |  | Exercise   |       |            |  |  
|                  |  | Options   |       | Employees in |  | Price      |       | Expiration
|Name              |  | Granted   |       | Fiscal Year  |  | ($/Share)  |       | Date      
|                  |  |           |       |              |  |            |       |           
|James B. Jaqua    |  |           | 0     |              |  |            | N/A   |            |  |   | N/A   |  |  |  | N/A      | 
|John J. McDonough |  |           | 0     |              |  |            | N/A   |            |  |   | N/A   |  |  |  | N/A      | 
|Kevin Farrenkopf  |  |           | 5,000 |              |  |            | 100.0 | %          |  | $ | 34.75 |  |  |  | 04/19/11 | 
|Catherine A. Frei |  |           | 0     |              |  |            | N/A   |            |  |   | N/A   |  |  |  | N/A      | 

Employment Contract and Severance Agreements

The Bank entered into an employment agreement, effective January 1, 2001,
with Mr. Jaqua to serve as President and Chief Executive Officer of the Bank
for a term that expires on December 31, 2003. The agreement provides for an
annual base salary of $238,000 for 2001, with an annual increase and bonus at
the discretion of the board of directors. The agreement affords certain
health, accidental and disability insurance benefits to Mr. Jaqua and his
spouse.

The Bank entered into an employment agreement, effective April 19, 2001,
with Mr. Farrenkopf to serve as Executive Vice President and Chief Operating
Officer of the Bank for a term that expires on April 19, 2002. The agreement
provides for an annual base salary of $120,000 for 2001, with an annual
increase and bonus at the discretion of the board of directors. The agreement
also provides for a grant of 5,000 incentive stock options. The agreement
affords certain health, accidental and disability insurance benefits to Mr.
Farrenkopf.

Mr. Jaqua has a salary continuation agreement with the Bank. Under Mr.
Jaquas agreement, he will receive a salary of $110,000 per year for 15 years
beginning when he reaches age 65, so long as he is employed by the Bank at that
age. If Mr. Jaqua dies before that time, his beneficiary will receive the
remaining payments. If Mr. Jaqua is terminated, or if the Bank is sold or
merged with another entity, then he will receive a lump sum payment equal to
the present value (using an annual discount rate equal to the annual interest
rate of a ten year Treasury note) of fifteen annual payments of $110,000. The
Bank may reduce the payment made to Mr. Jaqua if, when aggregated with other
payments, the amount would constitute an excess parachute payment under the
Internal Revenue Code of 1986, as amended.

Mr. McDonough has a salary continuation agreement with the Bank. Under
Mr. McDonoughs agreement, he will receive a salary of $15,000 per year for 15
years beginning when he reaches age 65, so long as he is employed by the Bank
at that age. If Mr. McDonough dies before that time, his beneficiary will
receive the remaining payments. Effective December 31, 2001, Mr. McDonough
retired and the payout provision of his salary continuation agreement commenced
in January 2002.

Other executive officers and employees of the Bank have severance benefits
under a severance policy of the Bank that provides between 4 and 52 weeks
salary if they are terminated within 6 months after a change in control of the
Bank.

58



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##### Table of Contents



Compensation of Directors

Director fees paid for 2001 are in the form of a retainer of $1,200 per
month, plus $400 for each regular board meeting attended, and $200 for each
committee meeting attended. No directors fees were paid to Messrs. Jaqua and
McDonough during 2001. Effective January 2002, Mr. McDonough retired from his
position of Chairman of the Board of the Bank, however, he will remain
a Director of the Bank and will be entitled to the payment of director fees.

Effective January 2002, the fees paid to Directors were increased as
follows: Retainer fee $1,500 per month, each regular board meeting attended
$500 per month, and each committee meeting attended $250 per meeting.

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##### Table of Contents






ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Management of the Company knows of no person who owns, beneficially or of
record, either individually or together with associates, five percent or more
of the outstanding shares of the Company common stock and common stock
equivalents, except as set forth in the table below. The following table sets
forth as of January 31, 2002 the number and percentage of shares of the Company
common stock beneficially owned, directly or indirectly, by each of the
Companys directors, executive officers and principal shareholders and by the
directors and named executive officers of the Company as a group. The shares
beneficially owned are determined under Security and Exchange Commission
Rules, and do not necessarily indicate ownership for any other purpose. In
general, beneficial ownership includes shares over which the director,
principal shareholder or executive officer has sole or shared voting or
investment power and shares which such person has the right to acquire within
60 days of January 31, 2002. Unless otherwise indicated, the persons listed
below have sole voting and investment powers of the shares beneficially owned.
Management is not aware of any arrangements which may, at a subsequent date,
result in a change of control of the Company, except as contemplated
to qualify the Company as an S Corporation.

|                                                                                        |  |                      |         |                     |  |  |      |  
|--------------------------------------------------------------------------------------- |  | -------------------- | ------- | ------------------- |  |  | ---- | -
|                                                                                        |  | Amount and Nature of |         |                     |  | 
|Beneficial Owner(7)                                                                     |  | Beneficial Ownership |         | Percent of Class(6)
|                                                                                        |  |                      |         |                    
|John B. Brudin                                                                          |  |                      | 74,158  |                     |  |  | 9.1  | %
|Eric J. Gosch                                                                           |  |                      | 11,551  | (1)                 |  |  | 1.4  | %
|E. Kenneth Hyatt                                                                        |  |                      | 30,729  |                     |  |  | 3.8  | %
|James B. Jaqua                                                                          |  |                      | 167,954 | (2)                 |  |  | 20.7 | %
|Alan H. Lewis                                                                           |  |                      | 250     |                     |  |  | 0.0  | %
|John J. McDonough                                                                       |  |                      | 20,301  | (3)                 |  |  | 2.5  | %
|Joseph D. Pehl                                                                          |  |                      | 7,084   | (4)                 |  |  | 0.9  | %
|Kevin Farrenkopf                                                                        |  |                      | 500     |                     |  |  | 0.1  | %
|Catherine A. Frei                                                                       |  |                      | 3,301   | (5)                 |  |  | 0.4  | %
|Total for Directors and Named Executive
Officers as a group (numbering 9)               |  |                      | 313,197 |                     |  |  | 38.4 | %
|Jack E. Gosch                                                                           |  |                      | 108,116 | (1)                 |  |  | 13.3 | %
|Estate of Clayton Record                                                                |  |                      | 52,561  |                     |  |  | 6.5  | %
|Total for Principal Shareholders (numbering 2)                                          |  |                      | 160,677 |                     |  |  | 19.8 | %
|Total for Directors, Named Executive
Officers and Principal Shareholders
(numbering 11) |  |                      | 463,909 |                     |  |  | 57.4 | %



---

|(1) |  | The amount includes 9,965 shares owned by Jack Gosch Ford, Inc.
Retirement Plan and Trust in which Mr. Eric Gosch and Mr. Jack Gosch have
shared ownership.                                                                                                                                                                                                                                           
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | The amount includes 146,981 shares owned in the name of The Jaqua Trust
of 1989, 8,993 shares of common stock owned in the name of James B. Jaqua
IRA, 4,813 shares owned in the name of James B. Jaqua, and 5,967 shares
owned in the name of M. Susan Jaqua IRA. This amount includes 1,200
shares acquirable by stock options that are vested or will be vested
within 60 days of January 31, 2002.
|   
|   
|   
|   
|(3) |  | The amount includes 7,560 shares owned in the name of the McDonough
Family Trust, 1,610 shares owned in the name on Ann McDonough IRA, and
11,131 shares owned in the name of John McDonough IRA.                                                                                                                                                                                                     
|   
|   
|   
|   
|(4) |  | The amount includes 4,204 shares owned in the name of the Pehl Trust, 300
shares owned in the name of the Cornell Pension Plan, and 2,580 shares
owned in the name of Joseph D. Pehl Keogh Retirement Account.                                                                                                                                                                                        
|   
|   
|   
|   
|(5) |  | The amount includes 3,300 shares acquirable by stock options that are
vested or will be vested within 60 days of January 31, 2002.                                                                                                                                                                                                                                                                    
|   
|   
|   
|   
|(6) |  | Assumes a total of 813,120 shares, composed of the 805,120 outstanding
shares of Company common stock and 8,000 shares of the Company common
stock acquirable by exercise of stock options that are vested within 60
days of January 31, 2002.                                                                                                                                                        
|   
|   
|   
|   
|(7) |  | The address of each of these persons is care of The Bank of Hemet, 3715
Sunnyside Drive, Riverside, California 92506.                                                                                                                                                                                                                                                                                 

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Some of the Companys directors and executive officers and their immediate
families, as well as the companies with which they are associated, are
customers of, or have had banking transactions with, the Company in the
ordinary course of the Companys business, and the Company expects to have
banking transactions with such persons in the future. In the Company
managements opinion, all loans and commitments to lend included in such
transactions were made in compliance with applicable laws on substantially the
same terms, including interest rates and collateral, as those prevailing for
comparable transactions with other persons of similar credit-worthiness and, in
the opinion of management, did not involve more than a normal risk of
collectability or present other unfavorable features. All loans and extensions
of credit made to the Companys directors and executive officers are current
and performing as agreed upon. No director or executive officer of the Company
had indebtedness in excess of 10% of the Companys equity capital accounts.
The aggregate extensions of credit to director and executive officers of the
Company did not exceed 20% of the equity of the Company at any time since the
beginning of 2001.

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##### Table of Contents






PART IV




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



|A. |  | 1. Financial Statements
|-- |  | -----------------------

| |                                                                                                
| | -----------------------------------------------------------------------------------------------
| | The following are included under Part II, Item 8  Financial Statements and Supplementary Data:
|
| | Report of Independent Public Accountants                                                       
|
| | Consolidated Balance Sheets                                                                    
|
| | Consolidated Statements of Operations                                                          
|
| | Consolidated Statements of Stockholders Equity                                                
|
| | Consolidated Statements of Cash Flows                                                          
|
| | Notes to Consolidated Financial Statements                                                     



|A. |  | 2. Financial Statement Schedules
|-- |  | --------------------------------

| |                                                         
| | --------------------------------------------------------
| | All schedules are omitted since they are not applicable.



|A. |  | 3. Exhibits
|-- |  | -----------

The following exhibits are listed by numbers corresponding to Exhibit
Table of Item 601 of Regulation S-K.

|     |  |                                                                                                                                                                                                    
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |  |                                                                                                                                                                                                    
|2.1  |  | Agreement and Plan of Reorganization between the Bank and
Pacific Community Banking Group dated July 30, 1998 (incorporated by
reference to Form 8-K filed August 4, 1998)                         
|    
|2.2  |  | First Restatement of Agreement and Plan of Reorganization
between the Bank and Pacific Community Banking Group dated January 5,
1999 (incorporated by reference to Form 8-K filed January 22, 1999)
|    
|3.1  |  | Articles of Incorporation (incorporated by reference to Form
F-3 filed October 1992)                                                                                                               
|    
|3.2  |  | By-Laws, as amended March 6, 1997 (incorporated by reference to
Form 10-K filed March 14, 1997)                                                                                                    
|    
|10.1 |  | Stock Option Plan effective June 15, 1994 (incorporated by
reference to Form F-2 filed March 30, 1995)                                                                                             
|    
|10.2 |  | Form of Indemnification Agreement (incorporated by reference to
Form F-2 filed March 30, 1995)                                                                                                     
|    
|10.3 |  | Employment Agreement of James B. Jaqua dated January 1, 2001                                                                                                                                       
|    
|10.4 |  | Executive Salary Continuation Agreement of James B. Jaqua dated
March 22, 1995                                                                                                                     
|    
|10.5 |  | Amendment No. 1 to Executive Salary Continuation Agreement of
James B. Jaqua dated July 16, 1998                                                                                                   
|    
|10.6 |  | Amendment No. 2 to Executive Salary Continuation Agreement of
James B. Jaqua dated July 29, 1998                                                                                                   
|    
|10.7 |  | Amendment No. 3 to Executive Salary Continuation Agreement dated
May 26, 1999                                                                                                                      
|    
|10.8 |  | Employment
Agreement of Kevin Farrenkopf dated April 19, 2001                                                                                                                                      

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|    |  |                                                     
|--- |  | ----------------------------------------------------
|21. |  | List of Subsidiaries and the State of Incorporation.
|   
|99. |  | Letter regarding
audit by Andersen                  

2.     Reports on Form 8-K

During the calendar quarter ended December 31, 2001, the following reports
on Form 8-K were filed:



| | 1) |  | The Company filed a report on Form 8-K on
November 21, 2001 announcing the completion of the bank holding
company reorganization between The Bank of Hemet and Hemet
Bancorp.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2) |  | Hemet Bancorp filed a report on
Form 8-K on December 21,
2001 announcing the completion of a Trust Preferred transaction.                                                    

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SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Bank has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



| | HEMET BANCORP
| | -------------



|Dated: March 29, 2002 | By: /s/ James B. Jaqua
James B. Jaqua
President
Chief Executive Officer
|--------------------- | -----------------------------------------------------------------------



|Dated: March 29, 2002 | By: /s/ Catherine A. Frei
Catherine A. Frei
Executive Vice President/Chief Financial Officer
|--------------------- | --------------------------------------------------------------------------------------------

Pursuant to the requirements of the Securities Exchange Act of 1934 this report
has been signed in Hemet, California, by the following persons on behalf of the
registrant in the capacities and on the dates indicated.

|                      |  |                   |  |                       
|--------------------- |  | ----------------- |  | ----------------------
|Signature             |  | Title             |  | Date                  
|                      |  |                   |  |                       
|                      |  |                   |  |                       
|/s/ John J. McDonough |  | Director          |  | March 29,
        2002
|                      |  | Chairman Emeritus |  |                       
|John J. McDonough     |  |                   |  |                       
|                      |  |                   |  |                       
|/s/ James B. Jaqua    |  | President, Chief  |  | March 29,
        2002
|                      |  | Executive Officer |  |                       
|James B. Jaqua        |  | and Director      |  |                       
|                      |  |                   |  |                       
|/s/ John B. Brudin    |  | Director          |  | March 29,
        2002
|                      |  |                   |  |                       
|John B. Brudin        |  |                   |  |                       
|                      |  |                   |  |                       
|/s/ Eric J. Gosch     |  | Director          |  | March 29,
        2002
|                      |  |                   |  |                       
|Jack E. Gosch         |  |                   |  |                       
|                      |  |                   |  |                       
|/s/ E. Kenneth Hyatt  |  | Director          |  | March 29,
        2002
|                      |  |                   |  |                       
|E. Kenneth Hyatt      |  |                   |  |                       
|                      |  |                   |  |                       
|/s/ Alan H. Lewis     |  | Director          |  | March 29,
        2002
|                      |  |                   |  |                       
|Alan H. Lewis         |  |                   |  |                       
|                      |  |                   |  |                       
|/s/ Joseph D. Pehl    |  | Director          |  | March 29,
        2002
|                      |  |                   |  |                       
|Joseph D. Pehl        |  |                   |  |                       

64