COMMUNITY WEST BANCSHARES /, 10-K, 1998-03-31

COMMUNITY WEST BANCSHARES /
10-K, 1998-03-31
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FORM 10-K

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 AND 12CFR16.3

For the fiscal year ended December 31, 1997

Commission File Number: 000-23575

COMMUNITY WEST BANCSHARES

(Exact name of registrant as specified in its charter)

California 77-0446957
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

5638 Hollister Avenue, Goleta, California 93117
(Address of Principal Executive Offices) (Zip Code)

(Registrant's telephone number, including area code) (805) 692-1862

Securities registered under Section 12(b) of the Exchange Act:

Title of each class Name of each exchange on which registered:
Common Stock, no par value National Market tier of The NASDAQ Stock Market

Securities registered under Section 12(g) of the Exchange Act:
None

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act and 12CFR16.3 during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. YES [X] NO[ ]

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

There were 3,171,364 shares of common stock for the registrant issued and
outstanding as of March 2, 1998. The aggregate market value of the voting stock,
based on the closing price of the stock on the NASDAQ National Market on March
2, 1998, held by nonaffiliates of the registrant was approximately $31,000,000.

This Form 10-K contains 65 pages.

COMMUNITY WEST BANCSHARES
FORM 10-K

INDEX

PART I PAGES
<S> <C>
ITEM 1. Description of Business 3

ITEM 2. Description of Property 5

ITEM 3. Legal Proceedings 6

ITEM 4. Submission of Matters to a Vote of Security Holders 6

PART II

ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters 7

ITEM 6. Selected Financial Data 8

ITEM 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9

ITEM 8. Consolidated Financial Statements 40

PART III

ITEM 9. Changes in and Disagreements with Accountants on 60
Accounting and Financial Disclosure

ITEM 10. Directors and Executive Officers of the Registrant 60

ITEM 11. Executive Compensation 61

ITEM 12. Security Ownership of Certain Beneficial Owners and Management 62

ITEM 13. Certain Relationships and Related Transactions 63

PART IV

ITEM 14. Exhibits and Reports of Form 8-K 63

SIGNATURES 65

</TABLE>

2
<PAGE>

PART I

ITEM 1. DESCRIPTION OF BUSINESS
- -----------------------------------

General

Community West Bancshares was incorporated in the State of California on
November 26, 1996, for the purpose of forming a single bank holding company. On
December 31, 1997, Community West Bancshares ("the Holding Company") acquired a
100% interest in Goleta National Bank ("the Bank"). Effective that date,
shareholders of the Bank (NASDAQ:GLTB) became shareholders of the Holding
Company (NASDAQ:CWBC) in a one-for-one exchange.

The Company opened for business as a national banking association on August 21,
1989. The deposits of the Company are insured up to the applicable limits by the
FDIC, and the Company is a member of the Federal Reserve System. The Company's
main office is located at 5827 Hollister Avenue, Goleta, California.

The Company offers a full range of commercial banking services, including the
acceptance of demand, savings and time deposits, and the origination of
commercial, U.S. Small Business Administration ("SBA"), accounts receivable,
real estate, construction, home improvement, and other installment and term
loans. It also offers cash management, remittance processing, electronic
banking, merchant credit card processing, and other customary bank services to
its customers.

The banking industry as a whole offers a broad range of products and services.
Few companies today can effectively offer every product and service available.
Accordingly, the Company continually investigates products and services with
which it can attain a competitive advantage over others in the banking industry.
In this way, management positions the Company to offer those products and
services requested by its customers ahead of its competition.

The Company has been an approved lender/servicer of loans guaranteed by the SBA
since late 1990. The Company originates SBA loans, sells the guaranteed portion
into the secondary market, and services the loans. During 1995, the Company was
designated as a Preferred Lender by the SBA. As a Preferred Lender, the Company
has the ability to move loans through the approval process at the SBA much more
quickly than financial institutions which do not have such a designation. As of
December 31, 1997, the Company was the only SBA Preferred Lender head quartered
in Santa Barbara County. In early 1998, the Company, through the Bank, was
granted SBA Preferred Lender status in Georgia and Florida.

During 1994, the Company established a Mortgage Loan Processing Center. Through
the Mortgage Loan Processing Center, the Company takes applications for
residential real estate loans and processes those loans for a fee for lenders
located throughout the nation. At any point in time, the Company processes loans
for 50-70 such lenders. Because it has so many lenders for which it processes,
the Company can offer many more loan programs than normally offered by any
single institution. By virtue of the large number of loan programs being
offered, the Company has developed the ability to remain ahead of its
competition.

Also in 1994, the Company began offering home improvement loans under Title I of
FHA regulations. This is the oldest government insured loan program in
existence, having begun in 1934. The Company originates Title I loans and sells
them into the secondary market and retains the servicing. In early 1995, the
Company was approved as one of a small number of financial institutions to be
able to sell Title I loans directly to the Federal National Mortgage Association
("FNMA"). This approval has given the Company a competitive advantage over
nonapproved lenders because it can price loans at lower rates to customers and
reduce or eliminate fees normally charged to customers, while at the same time
increasing the profitability to the Company.

During 1996, the Company began offering 125 Loan-to-Value ( LTV') loans. These
loans allow the borrower to receive up to 125% of their home value for debt
consolidation, home improvement, school tuition, or any worthwhile cash outlay.
There is an upper limit on these loans of $100,000. The Company relies
principally on the creditworthiness of the borrower, and to a lesser extent on
the underlying collateral, for repayment of these LTV loans; even though, the
loans are secured primarily by a second lien on the property. The loan terms
under the

3
<PAGE>

program range from one to 25 years. In 1997, the Company sold these loans at a
premium to third-parties. Goleta National Company is one of the few national
banks offering the LTV loans; the competition is mainly mortgage and financing
companies.

In 1996, the Company began accounts receivable financing, providing working
capital to small and mid-sized manufacturers, distributors and merchants
throughout Southern California. This division complements the Company's SBA and
commercial lending products, in addition to generating a high annual yield.

Because of the development costs involved, most small community banks have
difficulty providing electronic banking services to their customers. From its
inception, the Company has invested heavily in the hardware and software
necessary to offer today's electronic banking services. In addition to the
normal banking services, the Company offers such services as on-line cash
management, automated clearinghouse origination, electronic data interchange,
remittance processing, draft preparation and processing, and merchant credit
card processing. Not only do these services generate significant fee income,
they attract companies with large deposit balances. These services have helped
the Company remain at a competitive advantage over most institutions its size
and many which are significantly larger than the Company.

On October 16, 1997, the Company paid $570,000 for a 70% interest in Electronic
Paycheck, LLC, a California company that has developed systems to allow
companies to pay their employees by issuing them a card or "electronic
paycheck". The systems were originally developed to pay factory workers in
Kazakhstan. The card is currently being used by companies in the agricultural
sector to pay their workers, many of whom do not have bank accounts. The Company
provides access to ATM and Point-of-Sale (POS) networks so that the cardholders
have access to their cash at thousands of locations virtually worldwide.

Competition and Service Area

The banking business in California is highly competitive with respect to both
loans and deposits; and is dominated overall by a relatively small number of
major banks with many offices operating over wide geographic areas. Some of the
major commercial banks operating in the communities nearby the Company's service
area offer certain services such as trust and investment services and
international banking which are not offered directly by the Company, and by
virtue of their greater total capitalization, such banks have substantially
higher lending limits than the Bank. To help offset the numerous branch offices
of banks, thrifts, and credit unions, as well as competition from mortgage
brokers, insurance companies, credit card companies, and brokerage houses within
the Bank's service area, the Company has established loan production offices in
Fresno, Bakersfield, Costa Mesa, Modesto, Santa Maria, Santa Barbara,
Ventura/Oxnard, and West Covina in California, and in Las Vegas, Nevada,
Atlanta, Georgia and Jacksonville, Pensacola, and Panama City Beach, Florida.
The Company's on-line capabilities allow it to support these offices from its
main computer center in Goleta, California. Part of the Company's strategy is to
establish loan production offices in areas where there is high demand for the
loan products which it originates.

In order to compete for loans and deposits within its primary service area, the
Company uses to the fullest extent possible the flexibility which its
independent status permits. This includes an emphasis on meeting the specialized
banking needs of its customers, including personal contact by the Company's
directors, officers, and employees, newspaper publications, direct mailings and
other local advertising, and by providing experienced management and staff
trained to deal with the specific banking needs of the Company's customers.
Management has established a highly personal banking relationship with the
Company's customers and is attuned and responsive to their financial and service
requirements. In the event there are customers whose loan demands exceed the
Company's lending limits, the Company seeks to arrange for such loans on a
participation basis with other financial institutions and intermediaries. The
Company also assists those few customers requiring highly specialized services
not offered by the Company to obtain such services from correspondent
institutions.

4
<PAGE>

Employees

As of December 31, 1997, the Company employed 157 persons, including 2
principal officers. The Company's employees are not represented by a union or
covered by a collective bargaining agreement. Management of the Company believes
that, in general, its employee relations are excellent.

ITEM 2. DESCRIPTION OF PROPERTY
- -----------------------------------

The Company owns the following property:

The Goleta National Bank Branch office, located at 5827 Hollister Avenue,
Goleta, California. This 4,000 square foot facility houses the Company's main
office. An adjacent 200 square foot buiding provides additional office space.

The Company leases the following properties:

The Company leases, under three separate leases, four suites in an office
building at 5638 Hollister Avenue, Goleta, California, from an independent third
party. The leases are for a term expiring May 31, 1998, with a current monthly
rent of $8,188 per month for all four suites. The leases also provide the
Company with two additional consecutive options of three years each to extend
the leases. The suites consist of approximately 5,435 square feet of office
space. These suites house the company's Corporate Office, Finance, Data
Processing, Compliance, and Electronic Business Services departments of the
Company, as well as the offices of the Company's subsidiary, Electronic
Paycheck, LLC.

The Company leases approximately 1,500 square feet of office space located
at 310 South Pine Avenue, Goleta, California, from an independent third party.
The lease is for a term expiring October 1, 1998, with a current monthly rent of
$800 per month. The lease also provides the company with two additional
consecutive options of three years each to extend the lease. This facility
houses the Special Assets and Loan Collection departments of the Company .

The Company leases under two separate leases approximately 2,718 square
feet of office space located at 3891 State Street, Santa Barbara, California,
from an independent third party. The lease is for a term expiring March 31,
2001, with a current monthly rent of $6,691 per month for both leases. The lease
also provides the Company with two additional consecutive options of three years
each to extend the lease. This facility houses the Retail and Wholesale Mortgage
Lending departments of the Company.

The Company leases approximately 1,500 square feet of office space located
at 1300 Eastman Avenue, Ventura, California, from an independent third party.
The lease is for a term expiring August 31, 1998, with a current monthly rent of
$2,506 per month. The lease also provides the Company with one option of three
years to extend the lease. This facility houses the Ventura County Loan
Production office and the Accounts Receivable Financing department of the
Company.

The Company leases approximately 630 square feet of storefront space
located at 2222 South Broadway, Suite E, Santa Maria, California, from an
independent third party. The lease is for a term expiring October 31, 1998, with
a current monthly rent of $900 per month. The lease also provides the Company
with one option of 12 months to extend the lease. This facility houses the Santa
Maria Loan Production office of the Company.

The Company leases approximately 1,032 square feet of storefront space
located at 4170 South Decatur, Unit D-4, Las Vegas, Nevada, from an independent
third party. The lease is for a term expiring February 28, 2000, with a current
monthly rent of $1,806 per month. This facilitiy houses the Las Vegas, Nevada
Loan Production office of the Company.

The Company leases approximately 6,380 square feet of space located at 5383
Hollister Avenue, 2nd Floor, Goleta, California, from an independent third
party. The lease is for a term expiring November 30, 2002, with a current
monthly rent of $8,613 per month. The lease also provides the Company with two
options of

5
<PAGE>

36 months to extend the lease. This facility houses the Alternative Mortgage
lending, SBA lending, and Human Resources departments of the Company.

The Company also leases small executive suites on a month-to-month basis in
Bakersfield, Fresno, Modesto, West Covina and Costa Mesa, California. The
Company also has executive suites in Woodstock, Georgia, and Jacksonville,
Pensacola, and Panama City Beach, Florida. These offices allow the Company to
have a local presence for the production of loans while controlling the
underwriting and funding of the loans at the main office in Goleta. The Company
also leases on a month-to-month basis a storage unit and a portion of a parking
lot, both, are located in Goleta.

The Company's total occupancy expense, exclusive of furniture and equipment
expense, for the year ended December 31, 1997, was $774,000. Management believes
that its existing facilities are adequate for its present purposes.

ITEM 3. LEGAL PROCEEDINGS
- ----------------------------

From time to time the Company is party to claims and legal proceedings arising
in the ordinary course of business. After taking into consideration information
furnished by counsel to the Company, management believes that the ultimate
aggregate liability represented thereby, if any, will not have a material
adverse effect on the Company's financial position or results of operations.

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

A special meeting of security holders of the Company was held October 30, 1997.
The security holders voted on and passed a plan for a Company reorganization and
consolidation. Under this plan, the Company became a wholly owned subsidiary of
the newly formed holding company, Community West Bancshares in a one-for-one
exchange of stock; for each share of Goleta National Bank held, they received a
share of Community West Bancshares. This applied to both common stock and the
outstanding common stock warrants. There was a total of 1,118,602, or 73.52%,
proxies voted out of 1,521,423 possible votes. The following shows how the votes
were cast:

FOR AGAINST ABSTAIN NON-VOTES
<S> <C> <C> <C> <C>
Number of Votes Received 1,073,838 19,932 24,832 402,821
Percentage of Total Shares 70.58% 1.31% 1.63% 26.48%
</TABLE>

As prospective shareholders of Community West Bancshares, the security holders
also voted and passed the proposed Stock Option Plan for Community West
Bancshares. This proposal received 1,118,602, or 73.52%, votes out of 1,521,423
possible votes. The following shows how the votes were cast:

FOR AGAINST ABSTAIN NON-VOTES
<S> <C> <C> <C> <C>
Number of Votes Received 1,102,128 2,431 14,043 402,821
Percentage of Total Shares 72.44% 0.16% 0.92% 26.48%
</TABLE>

6
<PAGE>

PART II.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- --------------------------------------------------------------------------------
MATTERS
- -------

As of the close of business December 31, 1997, the common stock and warrants for
Goleta National Bank, symbol "GLTB" and "GLTBW", respectively, were converted to
Community West Bancshares common stock and warrants, symbol "CWBC" and "CWBCW"
respectively. On January 5, 1998, NASDAQ National Market ("NASDAQ") listed the
new common stock symbol "CWBC" for trading and the old symbol "GLTB" was
removed. The outstanding warrants, "CWBCW" continue to trade Over-the-Counter
("OTC").

Prior to listing on NASDAQ, the stock was traded OTC under the symbol "GLTB".
OTC quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions. The common stock was
listed on NASDAQ on November 19, 1996, under the symbol "GLTB". During the
secondary stock offering which took place in the third quarter of 1996, warrants
were issued. Each warrant entitles the holder to purchase two shares of common
stock at an exercise price of $4.375 per share. The warrants expire on June 30,
1998, and are traded OTC under the new symbol "CWBCW". The following table sets
forth the high and low sales prices on a per share basis for the common stock
and a per warrant basis for the warrants, as reported by the respective
exchanges for the period indicated:

Common Stock(1) Warrants
<C> <S> <C> <C> <C> <C>
Low High Low High
--------------- -------- ---------- ----------
1996 First Quarter 3 3 7/32 Not Issued Not Issued
Second Quarter 3 1/2 3 1/2 Not Issued Not Issued
Third Quarter 3 5/8 4 1/2 1/2 1 1/8
Fourth Quarter 4 3/8 5 3/8 2 4
1997 First Quarter 5 1/4 8 1/4 3 1/2 7 1/2
Second Quarter 6 5/8 7 5/8 7 1/2 7 1/2
Third Quarter 6 3/8 9 3/4 5 3/4 7
Fourth Quarter 8 3/8 9 1/2 6 1/2 10 1/2
1998 First Quarter 8 7/8 14 9 5/8 16 1/2

</TABLE>

(1) As adjusted for the 1996 and 1998 2-for-1 stock splits.

On March 20, 1998, the last reported sale price per share for the Company's
stock and warrants was $13 5/16 and $17 1/2 respectively.

The Company has declared and paid cash dividends per share of $.03, $.03, and
$.04 in 1994, 1995 and 1996, respectively. The Company declared and issued a 10%
stock dividend in 1995, and effected a 2-for-1 stock split in 1996. On January
23, 1998, the holding company, Community West Bancshares, announced a 2-for-1
stock split. This was effective for holders of record on February 3, 1998, and
paid February 27, 1998.

The Company had approximately 423 shareholders of record of its common stock as
of March 2, 1998.

7
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA
- -----------------------------------

SUMMARY OF EARNINGS

The following Summary of Earnings of the Company for the five years ended
December 31, 1997, has been derived from the audited financial statements
included elsewhere in this document. This summary should be read in conjunction
with Financial Statements and Notes relating thereto which appear herein.

YEAR ENDED DECEMBER 31,(1)
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands, except per share data) 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
Interest income $ 8,009 $ 6,812 $ 6,504 $ 5,180 $ 3,682
Interest expense 2,910 2,425 2,451 1,680 1,104
---------- ---------- ---------- ---------- ----------
Net interest income 5,099 4,387 4,053 3,500 2,578
Provision for possible loan losses 260 435 360 700 305
---------- ---------- ---------- ---------- ----------
Net interest income after provision for
possible loan losses 4,839 3,952 3,693 2,800 2,273
Other operating income 9,432 6,620 4,481 2,514 828
Other operating expense 11,524 8,667 6,436 4,204 2,590
---------- ---------- ---------- ---------- ----------
Earnings before income taxes 2,747 1,905 1,738 1,110 511
Provision for income taxes 1,158 800 730 463 0
---------- ---------- ---------- ---------- ----------
Net income $ 1,589 $ 1,105 $ 1,008 $ 647 $ 511
========== ========== ========== ========== ==========
Earnings per common share - Basic $ 0.53 $ 0.47 $ .50 $ .35 $ 0.28
Earnings per common share - Diluted $ 0.44 $ 0.44 $ .47 $ .31 $ 0.25
Number of shares used in earnings per share
calculation (2) 3,016,208 2,356,162 2,013,830 1,829,284 1,825,284
Net Loans $ 59,315 $ 54,206 $ 46,472 $ 40,752 $ 43,263
Total Assets 87,468 72,718 64,245 57,136 57,392
Deposits 75,962 65,032 58,256 51,712 52,346
Total Liabilities 76,623 65,169 58,610 52,223 52,908
Total Equity 10,845 7,549 5,635 4,913 4,484

</TABLE>

(1) See Notes to Financial Statements for a summary of significant accounting
policies and other related data.

(2) Earnings per common share information is based on the weighted average
number of common shares
outstanding during each period. Earnings per share amounts have been restated to
reflect the
10% stock dividend issued in 1995 and the 2-for-1 stock splits in 1996 and 1998.

8
<PAGE>
<TABLE>
<CAPTION>

The following table sets forth selected ratios for the periods indicated:

YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995 1994 1993
-------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net earnings to average stockholder equity 14.64% 13.67% 17.89% 13.17% 12.86%
Net earnings to average total assets 1.82% 1.52% 1.57% 1.13% 1.10%
Total interest expense to total interest income 36.33% 35.59% 37.69% 32.43% 29.98%
Other operating income to other operating expense 81.85% 76.39% 69.63% 59.78% 31.97%
</TABLE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
-------------------------------------------------

The following is management's discussion and analysis of the significant changes
in income and expense accounts presented in the Summary of Earnings for the
three years ended December 31, 1997, 1996, and 1995.

INTRODUCTION
- ------------

This discussion is designed to provide a better understanding of significant
trends related to the Company's financial condition, results of operations,
liquidity, capital resources, and interest rate sensitivity. It should be read
in conjunction with the audited financial statements and notes thereto and the
other financial information appearing elsewhere in this filing.

NET INTEREST INCOME AND NET INTEREST MARGIN
- -------------------------------------------------

Total interest income increased from $6,812,072 in 1996 to $8,009,432 in 1997,
representing a 17.6% increase in 1997 over 1996. This increase in 1997 over 1996
was reflected by a 21.0% increase because of an increase in interest-earning
assets offset by a 3.4% decrease because of lower rates. Total interest expense
increased from $2,424,730 in 1996 to $2,910,450 in 1997, representing a 20.0%
increase in 1997 compared to 1996. This increase was reflected by a 15.9%
increase in interest-bearing liabilities and a 4.1% increase in rates paid on
deposits. The result of these changes was net interest income increased from
$4,387,342 in 1996 to $5,098,982 in 1997.

Total interest income increased from $6,504,315 in 1995 to $6,812,072 in 1996,
representing a 4.7% increase in 1996 over 1995. This increase in 1996 over 1995
was reflected by a 7.1% increase because of an increase in interest-earning
assets offset by a 2.4% decrease because of lower interest rates. Total interest
expense decreased from $2,451,472 in 1995 to $2,424,730 in 1996, representing a
1.1% decrease in 1996 over 1995. This decrease was reflected by a 6.0% increase
because of an increase in interest-bearing liabilities offset by a 7.1% decrease
because of lower rates paid on deposits. The result of these changes was net
interest income increased from $4,052,843 in 1995 to $4,387,342 in 1996.

1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Interest Income $8,009,432 $6,812,072 $6,504,315
Interest Expense 2,910,450 2,424,730 2,451,472
Net Interest Income 5,098,982 4,387,342 4,052,843
Net Interest Margin 6.6% 6.8% 7.0%
</TABLE>

The net interest margin (net interest income divided by average
interest-earning assets) was 7.0% in 1995, 6.8% in 1996, and 6.6% in 1997. The
difference in net interest margins in 1996 vs. 1995, and in 1997 vs. 1996, was
primarily because of increases in volumes of earning assets. It should be noted,
as a benchmark rate, the prime rate quoted in the Wall Street Journal was 9.0%
at midyear 1995, by 1995 year-end, prime had fallen to 8.5%. In 1996, prime
decreased slightly to 8.25%. Early in 1997, prime increased to 8.5% and has held
steady at that rate.

9
<PAGE>

The following table sets forth the changes in interest income and expense
attributable to changes in rates and volumes:

Analysis of Changes in Net Interest Income
------------------------------------------------

Year Ended December 31,
-----------------------
(Dollars in thousands) 1997 Versus 1996 1996 Versus 1995 1995 Versus 1994
---------------------------- ---------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Change Change Change Change Change Change
Total Due to Due to Total Due to Due to Total Due to Due to
Change Rate Volume Change Rate Volume Change Rate Volume
-------- -------- -------- -------- -------- -------- ------- -------- --------
Time deposits in other
financial institutions $ 33 $ - $ 33 $ (86) $ (15) $ (71) $ 24 $ 53 $ (29)
Federal Funds sold 141 11 130 (22) (28) 6 105 81 24
Investment securities 15 (32) 47 52 (6) 58 33 3 30
Loans, net 1,008 3 1,005 364 (150) 514 1,163 388 775
-------- -------- -------- -------- -------- -------- ------- -------- --------
Total interest-earnings
assets 1,197 (18) 1,215 308 (199) 507 1,324 525 800
-------- -------- -------- -------- -------- -------- ------- -------- --------
Interest bearing demand
(NOW, MMDA) 8 (14) 22 (21) (24) 3 107 89 18
Savings (23) (12) (11) (27) (62) 35 184 62 122
Time certificates of deposit 500 66 434 22 (93) 115 481 435 46
-------- -------- -------- -------- -------- -------- ------- -------- --------
Total interest-bearing
liabilities 485 40 445 (26) (179) 153 772 586 186
-------- -------- -------- -------- -------- -------- ------- -------- --------
Net interest income $ 712 ($58) $ 770 $ 334 $ (20) $ 354 $ 553 $ (61) $ 614
======== ======== ======== ======== ======== ======== ======= ======== ========
</TABLE>

The change in interest income or interest expense that is attributable to both
changes in rate and changes in volume has been allocated to the change due to
rate and the change due to volume in proportion to the relationship of the
absolute amounts of changes in each.

The following is a summary of changes in earnings of the Company for the years
ended December 31, 1997, 1996, and 1995. This summary of changes in earnings
should be read in conjunction with the Financial Statements and Notes relating
thereto appearing elsewhere herein.

Year Ended December 31,
(Dollars in thousands) 1997 over 1996 1996 over 1995 1995 over 1994
--------------------- --------------------- --------------------
Amount Amount Amount
of % of of % of of % of
Change(1) Change(1) Change(1) Change(1) Change(1) Change(1)
---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 1,008 15.9% $ 364 6.1% $ 1,163 24.2%
Interest on federal funds sold 141 49.6 (22) (7.2) 105 51.7
Interest on time deposits in other
financial institutions 33 37.4 (86) (49.4) 24 16.0
Interest on investment securities 15 14.9 52 108.3 33 200.0
</TABLE>

10
<PAGE>

Year Ended December 31,
(Dollars in thousands) 1997 over 1996 1996 over 1995 1995 over 1994
Amount Amount Amount
of % of of % of of % of
Change(1) Change(1) Change(1) Change(1) Change(1) Change(1)
---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Total interest income 1,197 17.6 308 4.7 1,325 25.5
INTEREST EXPENSE
Interest on deposits 485 20.0 (26) (1.1) 772 45.9
---------- --------- ---------- --------- ---------- ---------
Net interest income 712 16.2 334 8.2 553 15.8
PROVISION FOR LOAN
LOSSES (175) (40.2) 75 20.8 (340) (48.6)
---------- --------- ---------- --------- ---------- ---------
Net interest income after
provision for loan losses 887 22.4 259 7.0 893 31.9
OTHER INCOME
Gains from loan sales 2,980 265.8 (313) (21.8) 63 4.7
Servicing from loan sales (1,493) (100.0) 405 37.1 1,089 100.0
Loan origination fees - sold or
brokered loans 903 43.9 1,326 181.4 477 187.8
Loan servicing fees (43) (6.4) 96 16.6 95 19.6
Service charges 306 51.9 218 58.6 85 29.6
Document processing fees 309 60.8 426 507.1 35 71.4
Other income (150) (86.2) (19) (9.8) 124 179.7
---------- --------- ---------- --------- ---------- ---------
Total other income 2,812 42.5 2,139 47.7 1,969 78.2
OTHER EXPENSE
Salaries and employee benefits 1,862 34.2 1,528 38.9 1,532 64
Occupancy expenses 323 27.2 199 20.2 269 37.5
Other operating expenses 71 (9.0) 139 21.5 197 43.5
Postage & freight 279 51.4 378 229.1 110 200.0
Advertising expense 166 53.3 29 10.3 117 70.9
Professional services 180 73.3 (72) (22.6) (8) (2.5)
Office supplies (24) (16.3) 31 27.9 15 15.6
---------- --------- ---------- --------- ---------- ---------
Total other expenses 2,857 33.0 2,231 34.7 2,232 53.1
Income before provision for
income taxes 842 44.2 167 9.7 629 56.7
---------- --------- ---------- --------- ---------- ---------
PROVISION FOR INCOME
TAXES 358 44.7 70 9.6 267 57.7
---------- --------- ---------- --------- ---------- ---------
NET INCOME $ 484 43.7% $ 97 9.6% $ 362 55.8%
========== ========= ========== ========= ========== =========
<FN>
(1) Increase or (decrease) over previous year amount.
</TABLE>

11
<PAGE>

OTHER INCOME
- --------------

Other income increased from $4,481,256 in 1995, to $6,620,491 in 1996, and to
$9,432,215 in 1997, representing a 47.7% increase in 1996 over 1995 and a 42.5%
increase in 1997 over 1996. The increase was because of continued emphasis by
the Company on generating noninterest income. These year to year gains are a
reflection of the increases in SBA loan originations, sales, and servicing, as
well as increased growth in mortgage loan processing over the years, and the
significant growth in the origination, sales, and servicing of home equity loans
started in 1995. In addition, fees from electronic banking services have
increased dramatically over the last three years. The Company's percentage
coverage of other expenses with other income rose from 69.6% in 1995 to 76.4% in
1996 and 81.8% in 1997.

OTHER EXPENSES
- ---------------

Other expenses include salaries and employee benefits, occupancy and equipment,
and other operating expenses. The continued growth of the Company required
additional staff and overhead expense to support the continued high level of
customer service and increased the cost of occupying the Company's offices.
Although compensation expenses have grown significantly, approximately 40% of
the Company personnel derive some or all of their compensation based on income
production. This means that a significant portion of compensation is tied to
increases in revenues instead of being a fixed expense. Other expenses increased
from $6,436,271 in 1995 to $8,666,933 in 1996 and to $11,523,906 in 1997,
representing a 34.7% in 1996 over 1995 and a 33.0% increase in 1997 over 1996.
The increases in other expenses for the periods compared were primarily because
of compensation related to loan originations and sales, the increase in the
number of loan production and processing offices, the upgrading of data
processing hardware and software, and increased advertising.

The following table compares the various elements of other expenses as a
percentage of average assets for the three years ended December 31, (in
thousands except percentage amounts.)

<TABLE>
<CAPTION>
Salaries Other
Average and Employee Occupancy Operating
Period Assets(1) Benefits Expenses Expenses
<S> <C> <C> <C> <C>
1997 $ 87,468 8.36% 1.72% 3.09%
1996 72,718 7.50% 1.63% 2.79%
1995 64,245 6.11% 1.54% 2.37%
<FN>
(1) Based on the average of daily balances.
</TABLE>

PROVISION FOR LOAN LOSSES
- ----------------------------
The provision for loan losses corresponds directly to the level of the allowance
that management deems sufficient to offset potential loan losses. The balance in
the loan loss allowance reflects the amount which, in management's judgment, is
adequate to provide for these potential loan losses, after weighing the mix of
the loan portfolio, current economic conditions, past loan experience and such
other factors as deserve recognition in estimating loan losses.

Management allocated $260,000 as a provision for loan losses in 1997, $435,000
in 1996 and $360,000 in 1995. Loans charged off, net of recoveries, in 1997 were
$383,469, in 1996 were $488,618 and in 1995 were $288,377. The ratio of the
allowance for loan losses to total gross loans was 1.8% at December 3l, 1997,
2.4% at December 31, 1996, and 2.7% at December 31, 1995.

In management's opinion, the balance of the allowance for loan losses at
December 31, 1997, was sufficient to sustain any foreseeable losses in the loan
portfolio at that time.

INCOME TAXES
- -------------

Income taxes were $1,158,351 in 1997, $800,478 in 1996, and $730,000 in 1995.

12
<PAGE>

NET INCOME
-----------

The net income of the Company was $1,588,940 in 1997, $1,105,422 in 1996, and
$1,007,828 in 1995. Earnings per share were $0.53 basic and $.44 diluted in
1997; $.47 basic and $.44 diluted in 1996; and $.50 basic and $.47 diluted in
1995; as adjusted to reflect the 1996 and 1998 2-for-1 stock splits and the 1995
10% stock dividend. The increases in net income for the past three years were
the result of several factors. First, the earning assets of the Company have
increased, resulting in an increase in net interest income. Second, the
origination and sale of SBA loans has continued to grow, resulting in increased
gains on sales and increased servicing income. Third, the increased volume of
business in the Mortgage Loan Processing Center and Home Improvement Lending
Department increased fee income, income from loan sales, and servicing income.
Offsetting the income increase was an overall increase in expenses related to
the production of income.

LIQUIDITY
- ---------

The Company has an asset and liability management program allowing the Company
to maintain its interest margins during times of both rising and falling
interest rates and to maintain sufficient liquidity. Liquidity of the Company at
December 31, 1997, was 37.4%, at December 31, 1996, was 29.7%, and at December
31, 1995, was 23.8% based on liquid assets (consisting of cash and due from
banks, deposits in other financial institutions, security investments, federal
funds sold and loans available for sale) divided by total assets. Management
believes it maintains adequate liquidity levels.

CAPITAL RESOURCES
- ------------------

The shareholders' equity accounts of the Company increased from $6,113,041 at
December 31, 1995, to $10,059,141 at December 31, 1996, and to $12,128,864 at
December 31, 1997. In 1996, the Company raised approximately $2,800,000 through
a secondary stock offering. This increased capital may be used for merger or
acquisition activity, as well as to allow continued internal growth. As part of
the secondary offering, 472,653 warrants were issued which entitle each holder
to acquire two shares of common stock at an exercise price of $4.375 per share.
The warrants expire on June 30, 1998. As of December 31, 1997, 33,770 warrants
had been exercised, leaving 438,883 warrants outstanding, or $3,840,226 in
potential additional capital.

The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The Company's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors. Quantitative measures established
by regulation to ensure capital adequacy require the Company to maintain minimum
amounts and ratios of total and Tier 1 capital (primarily common stock and
retained earnings less goodwill) to risk-weighted assets, and of Tier 1 capital
to average assets. Management believes, as of December 31, 1997, that the
Company exceeds all capital adequacy requirements to which it is subject.

As of December 31, 1997 and 1996, the most recent notification from the FDIC
categorized the Company as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Company
must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage
ratios as set forth in the table below. There are no conditions or events since
that notification which management believes have changed the Company's category.

13
<PAGE>

The Company's actual capital ratios are presented below.

<TABLE>
<CAPTION>
TO BE CATEGORIZED
AS WELL CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE ACTION
ACTUAL ADEQUACY PURPOSES PROVISIONS
------ ----------------- -------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1997:
Total Capital (to Risk
Weighted Assets) $12,357,179 17.20% $5,746,643 >= 8% $7,183,304 >=10%
Tier I Capital (to Risk
Weighted Assets) $11,454,477 15.95% $2,873,321 >=4% $4,309,982 >=6%
Tier I Capital (to Average
Assets) $11,454,477 12.02% $3,812,315 >=4% $4,765,393 >=5%
AS OF DECEMBER 31, 1996:
Total Capital (to Risk
Weighted Assets) $ 9,406,022 14.88% $5,057,001 >= 8% $ 6,321,21 >=10%
Tier I Capital (to Risk
Weighted Assets) $ 8,608,032 13.61% $2,529,914 >=4% $3,794,871 >=6%
Tier I Capital (to Average
Assets) $ 8,608,032 11.33% $3,039,023 >=4% $3,798,778 >=5%
AS OF DECEMBER 31, 1995:
Total Capital (to Risk
Weighted Assets) $ 6,149,829 10.99% $4,476,673 >= 8% $5,595,841 >=10%
Tier I Capital (to Risk
Weighted Assets) $ 5,441,181 9.73% $2,236,868 >=4% $3,355,302 >=6%
Tier I Capital (to Average
Assets) $ 5,441,181 7.62% $2,856,263 >=4% $3,570,329 >=5%
</TABLE>

<PAGE>
SCHEDULE OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
--------------------------------------------------------------

The following schedule shows the average balances of the Company's assets,
liabilities and shareholders' equity accounts and the percentage distribution of
the items, computed using the daily a average balances, for the periods
indicated.

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

1997 1996 1995
------- ---------- -------
Amount Percent(1) Amount Percent(1) Amount Percent(1)
------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
- --------------------------------
Cash and due from banks $ 3,203 3.7% $ 2,726 3.7% $ 2,378 3.7%
Federal funds sold 8,129 9.3 5,632 7.7 5,506 8.6
Time deposits in other financial
institutions 2,092 2.4 1,524 2.1 2,763 4.3
Investment Securities 3,887 4.4 1,636 2.2 672 1.0
</TABLE>

14
<PAGE>

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

1997 1996 1995
-------- ---------- --------
Amount Percent(1) Amount Percent(1) Amount Percent(1)
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Loans:
Commercial $13,637 15.6% $14,300 19.7% $13,821 21.5%
Real estate 20,612 23.6 19,418 26.7 14,546 22.6
Unguaranteed portions of loans
insured by the SBA 21,345 24.4 15,617 21.5 15,886 24.7
Installment 4,239 4.8 5,925 8.1 3,532 5.5
Loan participations purchased - real
estate 1,333 1.5 746 1.0 876 1.4
Less allowance for loan losses (1,333) (1.5) (1,351) (1.9) (1,484) (2.3)
Less net deferred loan fees and
premiums (30) - (26) - (41) (.1)
Less discount on loan pool purchase (488) (.6) (423) (.6) (664) (1.0)
-------- ---------- -------- ---------- -------- ----------
Net Loans 59,315 67.8 54,206 74.5 46,472 72.3
Loans held for sale 5,428 6.2 1,682 2.3 2,668 4.2
Other real estate owned 216 0.3 173 0.2 408 0.6
Premises and equipment, net 2,547 2.9 1,856 2.6 1,384 2.2
Excess servicing asset 788 .9 1,705 2.2 271 0.4
Accrued interest receivable and other
assets 1,863 2.1 1,578 2.2 1,994 2.7
-------- ---------- -------- ---------- -------- ----------
TOTAL ASSETS $87,468 100.0% $72,718 100.0% $64,245 100.0%
======== ========== ======== ========== ======== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $16,915 19.3% $13,862 19.1% $10,292 16.0%
Interest-bearing demand 12,936 14.8 12,277 16.9 12,185 19.0
Savings 10,413 11.9 10,699 14.7 9,703 15.1
Time certificates, $100,000 or more 14,533 16.6 10,336 14.2 7,651 11.9
Other time certificates 21,165 24.2 17,858 24.6 18,425 28.7
-------- ---------- -------- ---------- -------- ----------
Total deposits 75,962 86.8 65,032 89.4 58,256 90.7
Accrued interest payable and other
liabilities 661 0.8 137 0.2 354 0.5
-------- ---------- -------- ---------- -------- ----------
Total Liabilities 76,623 87.6 65,169 89.6 58,610 91.2
</TABLE>

15
<PAGE>

<TABLE>
<CAPTION>
Year Ended December 31,

1997 1996 1995
Amount Percent(1) Amount Percent(1) Amount Percent(1)
------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity
Common Stock 8,332 9.5 6,207 8.6 4,787 7.5
Retained earnings 2,513 2.9 1,342 1.8 848 1.3
------- ---------- ------- ---------- ------- ----------
Total stockholders' equity 10,845 12.4 7,549 10.4 5,635 8.8
------- ---------- ------- ---------- ------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $87,468 100.0% $72,718 100.0% $64,245 100.0%
======= ========== ======= ========== ======= ==========
</TABLE>

INVESTMENT PORTFOLIO. The following table summarizes the amounts, terms,
- ---------------------
distributions and yields of the Company's investment securities as of December
31, 1997. As of year end, all securities were held at the Company level.
(Dollars in thousands)

One Year After One Year
or Less to Five Years Total
--------- ---------------- -------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997 Amount Yield Amount Yield Amount Yield
--------- ---------------- ------- ------ ------- ------

U.S. Treasury & Government Agencies $ 998 5.59% $ - N/A $ 998 5.59%
FRB Stock $ - $ - $ 251 5.99% $ 251 5.99%
--------- ---------------- ------- ------ ------- ------
Total $ 998 5.59% $ 251 5.99% $ 1,249 5.64%
========= ================ ======= ====== ======= ======
</TABLE>

In addition to the above, the Company holds Interest-Only strip assets in the
amount of $2,528,587. These Interest-Only strips represent the present value of
the right to the excess cash flows generated by the sold loans that represent
the difference between (a) interest at the stated rate paid by borrowers and (b)
the sum of (i) pass-through interest paid to third-party investors, (ii)
stipulated servicing fees and (iii) estimated loan portfolio losses. The Company
determines the present value of this anticipated cash flow stream at the time of
the loan sale close, utilizing valuation assumptions appropriate for each
particular transaction.

The signnificant valuation assumptions are related to the anticipated average
lives of the loans sold, the anticipated prepayment speeds and the anticipated
credit losses related thereto. In order to determine the present value of this
excess cash flow, the Company currently applies an estimated market discount
rate of 11% to the expected pro forma gross cash flows, which are calculated
utilizing the weighted average lives of the loans,. Accordingly, the overall
effective discount rate utilized on the cash flows, net of expected credit
losses is approximatley 11%. The annual prepayment rate of the loans is a
function of full and partial prepayments and defaults. In the Interest-Only
Strips' fair value estimates, the Company makes assumptions of the prepayment
rates of the underlying loans, which the Company believes are reasonable. During
fiscal 1997, the Company utilized proprietary prepayment curves generated by the
Company (reaching an approximate maximum annual rate of 15%)

16
<PAGE>

The following table summarizes the year-end balances and distributions of the
Company's investment securities held on December 31, 1997, 1996, and 1995.
(Dollars in thousands):a

<TABLE>
<CAPTION>
December 31,
-------------
<S> <C> <C> <C>
1997 1996 1995
------------- ------ ------

U.S. Treasury & Government Agencies $ 998 $1,998 $ 994
FRB Stock 251 156 137
------------- ------ ------
Total $ 1,249 $2,154 $1,131
============= ====== ======
</TABLE>

LOAN PORTFOLIO

The Company's largest lending categories are commercial loans, real estate
loans, unguaranteed portion of loans insured by the SBA, installment loans,
loans held for sale and real estate loan participations purchased. These
categories accounted for approximately 23.1%, 34.9%, 25.3%, 6.1%, 6.6% and 4.0%,
respectively, of the Company's total loan portfolio at December 31, 1997, and
approximately 26.8%, 36.6%, 15.1%, 7.2%, 13.0% and 1.3%, respectively, at
December 31, 1996. Loans are carried at face amount, less payments collected,
the allowance for possible loan losses, deferred loan fees and discounts on
loans purchased. Interest on all loans is accrued daily on primarily a simple
interest basis. It is generally the Company's policy to place loans on
nonaccrual status when they are 90 days past due. Thereafter, interest income is
no longer recognized and the full amount of all payments received, whether
principal or interest, are applied to the principal balance of the loan. Problem
loans are maintained on accrual status only when management of the Company is
confident of full repayment within a very short period of time.

The rates of interest charged on variable rate loans are set at specified
increments in relation to the Company's published prime lending rate or other
appropriate indices and vary as those indices vary. At December 31, 1997,
approximately 72% of the Company's loan portfolio was comprised of variable
interest rate loans. At December 31, 1996, variable rate loans comprised
approximately 62% of the Company's loan portfolio.

DISTRIBUTION OF LOANS
- -----------------------

The distribution of the Company's total loans by type of loan as of the dates
indicated is shown in the following table (dollars in thousands):

<TABLE>
<CAPTION>
December 31,
--------------
<S> <C> <C> <C>
Type of loan 1997 1996 1995
- ---------------------------------------------------- -------------- ------- -------
Commercial $ 13,195 $14,017 $14,615
Real estate 19,924 19,172 17,442
Unguaranteed portion of loans insured by SBA 19,602 14,708 13,581
Installment 3,467 3,777 4,345
Loan participations purchased 2,247 709 833
-------------- ------- -------
TOTAL 58,435 52,383 50,816
-------------- ------- -------
Less:
Allowance for loan losses 1,286 1,409 1,463
Deferred loan fees and premiums (3) 39 32
Discount on loan pool purchase 428 344 490
-------------- ------- -------
NET LOANS $ 56,724 $50,591 $48,831
============== ======= =======
Guaranteed and unguaranteed portion of certain loans
insured by SBA and FHA Title I loans held-for-sale $ 14,440 $ 6,809 $ 2,743
============== ======= =======
</TABLE>

17
<PAGE>

COMMERCIAL LOANS
-----------------

In addition to traditional commercial loans made to business customers, the
Company occasionally extends lines of credit. On business credit lines, the
Company specifies a maximum amount which it stands ready to lend to the customer
during a specified period, in return for which the customer agrees to maintain
its primary banking relationship with the Company. The purpose for which such
loans will be used and the security therefor, if any, are generally determined
before the Company's commitment is extended. Normally, the Company does not make
loan commitments in material amounts for periods in excess of one year.

REAL ESTATE LOANS
- -------------------

Real estate loans are primarily made for the purpose of purchasing, improving or
constructing single family residences, and commercial and industrial properties.

Approximately 67% of the Company's real estate construction loans consist of
loans secured by first trust deeds on the construction of owner-occupied single
family dwellings and approximately 13% of the Company's construction loans
consist of loans secured by second trust deeds on the construction of
owner-occupied single family dwellings. Approximately 7% of the Company's
construction loans consist of first trust deeds on commercial properties, and
approximately 13% of the Company's construction loans consist of second trust
deeds on commercial properties. Construction loans are generally written with
terms of six to twelve months and usually do not exceed a loan to appraised
value of 80%.

UNGUARANTEED PORTION OF LOANS GUARANTEED BY THESBA
- --------------------------------------------------------

The Company is approved as a Preferred Lender by the SBA. Loans made by the
Company under programs offered by the SBA are generally made to small businesses
for the purchase of businesses, purchase or construction of facilities, purchase
of equipment or working capital. The loans generally carry guarantees from the
SBA ranging from 75% - 90% of the balance loaned. Borrowers usually are required
to provide adequate collateral for these loans, similar to other commercial
loans. The SBA does allow less-collateralized loans for its "Low Doc" program,
loans of less than $100,000. When the Company originates SBA loans, it sells the
guaranteed portion of the loans into the secondary market. The Company retains
the unguaranteed portion of the loans, as well as the servicing on the loans,
for which it is paid a fee. The loans are all variable rate based upon the Wall
Street Journal Prime Rate. The servicing spread is a minimum of 1.00% on all
loans. The gains recognized by the Company on the sales of the guaranteed
portion of these loans and the ongoing servicing income received, are
significant revenue streams for the Company.

INSTALLMENT LOANS
- ------------------

While not a large portion of its loan portfolio, the Company does originate
installment loans. These loans are comprised of automobile, small equity lines
of credit and general personal loans. These loans are primarily variable rate
with terms of five years or less.

LOAN PARTICIPATIONS PURCHASED
- -------------------------------

When the Company first opened, in an effort to generate earnings as quickly as
possible, management made the decision to purchase several packages of
commercial real estate loans. As these loans have been repaid, the Company has
had the ability to utilize the funds elsewhere and these loans have become a
very small portion of the portfolio. The Company occasionally participates in a
loan with another community bank in an overline capacity.
MATURITY OF LOANS AND SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES
- --------------------------------------------------------------------------------

The following table sets forth the amount of gross loans outstanding, of the
Company as of December 31, 1997, 1996, and 1995, which, based on the remaining
scheduled repayments of principal, have the ability to be repriced or are due
in less than one year, in one to five years, or in more than five years.

18
<PAGE>

1997 1996 1995
------- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands) Fixed Variable Fixed Variable Fixed Variable
------- --------- ------- --------- ------- ---------
Less than One Year $ 8,319 $ 43,676 $ 6,269 $ 37,011 $ 3,345 $ 37,622
One Year to Five Years 7,996 - 9,011 - 9,964 -
After Five Years 12,884 - 6,901 - 1,615 -
Total $29,199 $ 43,676 $22,181 $ 37,011 $14,924 $ 37,622
======= ========= ======= ========= ======= =========

Yearly Total 1997 $ 72,875 1996 $ 59,192 1995 $ 52,546
</TABLE>

The following table shows the Company's loan commitments outstanding at the
dates indicated:

December 31,
-------------
<S> <C> <C> <C>
(Dollars in thousands) 1997 1996 1995
------------- ------- ------
Commercial $ 12,298 $ 7,412 $6,077
Real estate 2,015 2,781 2,349
Loans insured by the SBA 4,177 1,195 142
Installment loans 1,171 1,429 1,304
Standby letters of credit 30 50 96
------------- ------- ------
Total commitments $ 20,391 $12,867 $9,968
============= ======= ======
</TABLE>

Based upon prior experience and prevailing economic conditions, it is
anticipated that approximately 90% of the commitments at December 31, 1997, will
be exercised during 1998. All commercial commitments in the preceding table are
commitments to grant such loans.

SUMMARY OF LOAN LOSSES EXPERIENCE
- -------------------------------------

As a natural corollary to the Company's lending activities, some loan losses are
experienced. The risk of loss varies with the type of loan being made and the
creditworthiness of the borrower over the term of the loan. The degree of
perceived risk is taken into account in establishing the structure of, and
interest rates and security for, specific loans and for various types of loans.
The Company attempts to minimize its credit risk exposure by use of thorough
loan application and approval procedures.

The Company maintains a program of systematic review of its existing loans.
Loans are graded for their overall quality. Those loans which the Company's
management determines require further monitoring and supervision are segregated
and reviewed on a periodic basis. Significant problem loans are reviewed on a
monthly basis by the Company's Loan Committee.

The recorded investment in loans that are considered to be impaired under SFAS
No. 114 was as follows:

19
<PAGE>

DECEMBER 31,
1997 1996 1995
<S> <C> <C> <C>
Impaired loans without specific valuation allowances $ 1,547,168 $ 764,388 $1,531,318
Impaired loans with specific valuation allowances 1,250,964 1,178,435 1,432,783
Specific Valuation allowance allocated to impaired loans (505,994) (432,853) (583,600)
-------------- ----------- -----------
Impaired loans, net $ 2,292,138 $1,509,970 $2,380,501
============== =========== ===========

Average investment in impaired loans $ 1,901,054 $1,945,236 $1,805,251
============== =========== ===========

Interest Income recognized on impaired loans $ 287,309 $ 85,559 $ 66,919
============== =========== ===========
</TABLE>

It is generally the Company's policy to place loans on nonaccrual status when
they are 90 days past due. Thereafter, interest income is no longer recognized
and the full amount of all payments received, whether principal or interest, are
applied to the principal balance of the loan. As such, interest income may be
recognized on impaired loans to the extent they are not past due by 90 days or
more.

At December 31, 1997, loans on nonaccrual status totaled $1,259,107, compared to
$618,095 and $1,036,782 at December 31, 1996 and 1995. Upon the adoption of SFAS
No. 114, the Company classified all loans on nonaccrual status as impaired.
Accordingly, the impaired loans disclosed above include all loans that were on
nonaccrual status as of December 31, 1997, 1996 and 1995.

Financial difficulties encountered by certain borrowers may cause the Company to
restructure the terms of their loans to facilitate loan payments. As of December
31, 1997, 1996 and 1995, gross troubled debt restructured loans totaled
$2,375,000, $843,000, and $436,000. In accordance with the provisions of SFAS
No. 114, a troubled loan that is restructured subsequent to the adoption of SFAS
No. 114 would generally be considered impaired, while a loan restructured prior
to adoption would not be considered impaired if, at the date of measurement, it
was probable that the Company would collect all amounts due under the
restructured terms. Accordingly, the balance of impaired loans disclosed above
includes all troubled debt restructured loans that, as of December 31, 1997,
1996, and 1995 are considered impaired.

Interest foregone on nonaccrual loans and troubled debt restructurings
outstanding during the years ended December 31, 1997, 1996, and 1995 amounted to
approximately $190,750, $225,955, and $96,036, respectively.

The Company charges off that portion of any loan which management considers to
represent a loss. A loan is generally considered by management to represent a
loss in whole or in part when an exposure beyond any collateral value is
apparent, servicing of the unsecured portion has been discontinued or collection
is not anticipated based on the borrower's financial condition and general
economic conditions in the borrower's industry. The principal amount of any loan
which is declared a loss is charged against the Company's allowance for loan
losses.

The following table sets forth the amount of loans which were 30 to 89 days
past due at the dates indicated:

December 31,
<S> <C> <C> <C>
(Dollars in thousands) 1997 1996 1995
------------- ----- ------
Commercial $ 631 $ 786 $ 567
Real estate - 52 468
------------- ----- ------
Total $ 631 $ 838 $1,035
============= ===== ======
</TABLE>

20
<PAGE>

The following table sets forth the amount of loans which were on nonaccrual
status at the dates indicated:

<TABLE>
<CAPTION>
December 31,
<S> <C> <C> <C>
(Dollars in thousands) 1997 1996 1995
------------- ----- ------
Commercial $ 1,259 $ 618 $ 595
Real estate - - 442
------------- ----- ------
Total $ 1,259 $ 618 $1,037
============= ===== ======
</TABLE>

Year Ended December 31,
(Dollars in thousands) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
BALANCES
Loans:
Average gross loans $66,595 $57,688 $51,329
Gross loans at end of period 72,875 59,192 53,559
Loans charged off 401 510 308
Recoveries of loans previously charged off 17 22 20
-------- -------- --------
Net loans charged off 384 489 288
-------- -------- --------
Allowance for possible loan losses 1,286 1,409 1,463
Provisions for possible loan losses 260 435 360
Ratios:
Net loan charge-offs to average loans .6% .8% .6%
Net loan charge-offs to loans at end of period .5% .9% .5%
Allowance for possible loan losses to average loans 1.9% 2.4% 2.9%
Allowance for possible loan losses to loans at end of period 1.8% 2.4% 2.7%
Net loan charge-offs to allowance for possible loan losses at
end of period 29.9% 34.7% 19.7%
Net loan charge-offs to provision for possible loan losses at
end of period 147.7% 112.4% 80.0%
</TABLE>

The Company's allowance for loan losses is designed to provide for loan losses
which can be reasonably anticipated. The allowance for loan losses is
established through charges to operating expenses in the form of provisions for
loan losses. Provisions for possible loan losses amounted to $260,000 in 1997,
$435,000 in 1996 and $360,000 in 1995. Actual loan losses or recoveries are
charged or credited, directly to the allowance for loan losses. The amount of
the allowance is determined by management of the Company. Among the factors
considered in determining the allowance for loan losses are the current
financial condition of the Company's borrowers and the value of the security, if
any, for their loans. Estimates of future economic conditions and their impact
on various industries and individual borrowers are also taken into
consideration, as are the Company's historical loan loss experience and reports
of banking regulatory authorities. Because these estimates, factors and
evaluations are primarily judgmental, no assurance can be given as to whether or
not the Company will sustain loan losses substantially higher in relation to the
size of the allowance for loan losses or that subsequent evaluation of the loan
portfolio may not require substantial changes in such allowance.

21
<PAGE>

At December 31, 1997, 1996, and 1995, the allowance was 1.8%, 2.4%, and 2.7%
respectively, of the gross loans then outstanding, respectively. Although the
current level of the allowance is deemed adequate by management, future
provisions will be subject to continuing reevaluation of risks in the loan
portfolio.

Management of the Company reviews with the Board of Directors the adequacy of
the allowance for possible loan losses on a quarterly basis. The loan loss
provision is adjusted when specific items reflect a need for such an adjustment.
Management of the Company charged off loans totaling $400,745 in 1997, $510,494
in 1996, and $308,287 in 1995. Recoveries of loans previously charged off were
$17,276 in 1997, $21,876 in 1996, and $19,910 in 1995. Management believes that
there were no material loan losses during the last fiscal year that have not
been charged off. Management also believes that the Company has adequately
reserved for all individual items in its portfolio which may result in a
material loss to the Company. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
SUMMARY OF EARNINGS - Provision for Loan Losses".

INVESTMENT SECURITIES
- ----------------------

The Investment Policy of the Company sets forth the types and maturities of
investments the Company may hold. The policy is quite conservative and allows no
derivative type investments. As a practical matter, because the Company
originates such a high volume of loans and, therefore uses most of its resources
to fund those loans, the Company's investment portfolio is short term in nature
and of high quality. As of December 31, 1997, the only investment securities
held by the Company were the Federal Reserve Bank stock required to be held by
the Company and two $500,000 U.S. Treasury Notes pledged as collateral for the
Company's Treasury, Tax & Loan Account. The Company's investment portfolio is
reviewed by the Chief Financial Officer of the Company on a daily basis and by
the Investment Committee of the Board of Directors on a quarterly basis.

INTEREST RATES AND DIFFERENTIALS
- -----------------------------------

Certain information concerning interest-earning assets and interest-bearing
liabilities and yields thereon is set forth in the following table. Amounts
outstanding are daily average balances:

(DOLLARS IN THOUSANDS) YEAR ENDED DECEMBER 31,
-----------------------

1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Time deposits in other
financial institutions:
Average outstanding $ 2,092 $ 1,524 $ 2,763
Average yield 5.8% 5.8% 6.3%
Interest income $ 121 $ 88 $ 174
Federal funds sold:
Average outstanding $ 8,129 $ 5,632 $ 5,506
Average yield 5.2% 5.0% 5.5%
Interest income $ 424 $ 283 $ 305
U.S. Government Investment
securities:
Average outstanding $ 1,830 $ 1,489 $ 535
Average yield 5.6% 6.1% 7.5%
Interest income $ 102 $ 91 $ 40
Federal Reserve Bank Stock
Investment securities:
Average outstanding $ 215 $ 147 $ 137
Average yield 6.0% 6.1% 5.8%
Interest income $ 13 $ 9 $ 8

22
<PAGE>

Loans:
Average net outstanding $64,743 $55,888 $49,140
Average yield 11.4% 11.3% 12.2%
Interest income $ 7,350 $ 6,341 $ 5,977
TOTAL INTEREST-EARNING ASSETS:
Average outstanding $77,009 $64,680 $58,081
Average Yield 10.4% 10.5% 11.2%
Interest income $ 8,009 $ 6,812 $ 6,504
INTEREST-BEARING LIABILITIES:
Interest-bearing demand
accounts:
Average outstanding $12,936 $12,277 $12,185
Average yield 3.4% 3.5% 3.7%
Interest expense $ 442 $ 434 $ 455
Savings deposits:
Average outstanding $10,413 $10,699 $ 9,703
Average yield 3.8% 3.9% 4.5%
Interest expense $ 391 $ 414 $ 441
Time certificates of deposit:
Average outstanding $35,698 $28,194 $26,076
Average yield 5.8% 5.6% 6.0%
Interest expense $ 2,077 $ 1,577 $ 1,555
TOTAL INTEREST-BEARING
LIABILITIES:
Average outstanding $59,047 $51,170 $47,964
Average yield 4.9% 4.7% 5.1%
1997 1996 1995
-------- -------- --------
Interest expense $ 2,910 $ 2,425 $ 2,451
Net interest income 5099 4387 4053
AVERAGE NET INTEREST MARGIN
ON INTEREST-EARNING ASSETS 6.6% 6.8% 7.0%
</TABLE>

LIQUIDITY MANAGEMENT
---------------------

The Company has two federal funds lines of credit with its correspondent banks,
of $2,700,000. This line has never been used. At times when the Company has more
funds than it needs for its reserve requirements or short term liquidity needs,
the Company increases its securities investments and sells federal funds. It is
management's policy to maintain a substantial portion of its portfolio of assets
and liabilities on a short-term or highly liquid basis in order to maintain rate
flexibility and to meet loan funding and liquidity needs.

23
<PAGE>

The following table shows the Company's average deposits for each of the periods
indicated below, based upon average daily balances:

Year Ended December 31,
-----------------------
(Dollars in thousands) 1997 1996 1995
-------- --------- --------
Average Percent Average Percent Average Percent
Balance of Total Balance of Total Balance of Total
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing demand $ 16,915 22.3% $ 13,853 21.3% $ 10,292 17.7%
Interest-bearing demand 12,936 17.0% 12,277 18.9% 12,185 20.9%
Savings 10,413 13.7% 10,699 16.5% 9,703 16.7%
TCDs of $100,000 or more 14,533 19.1% 10,336 15.9% 7,651 13.1%
Other TCDs 21,165 27.9% 17,858 27.4% 18,425 31.6%
-------- --------- -------- --------- -------- ---------
Total deposits $ 75,962 100.0% $ 65,023 100.0% $ 58,256 100.0%
======== ========= ======== ========= ======== =========
</TABLE>

DEPOSITS
- --------

The maturities of time certificates of deposit ("TCDs") were as follows:

December 31, 1997 December 31, 1996
----------------- -----------------
(Unaudited) TCDs TCDs
over Other over Other
$100,000 TCDs $100,000 TCDs
-------- ------- -------- -------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Less than three months $ 8,643 $ 8,336 $ 5,512 $ 9,704
Over three months
through six months 2,257 2,917 2,796 7,439
Over six months
through twelve months 5,833 9,960 2,941 4,188
Over twelve months
through five years 100 483 100 749
-------- ------- -------- -------
Total $ 16,833 $21,696 $ 11,349 $22,080
======== ======= ======== =======
</TABLE>

While the deposits of the Company may fluctuate up and down somewhat with local
and national economic conditions, management of the Company does not believe
that such deposits, or the business of the Company in general, are seasonal in
nature. Liability management is monitored by the Chief Financial Officer daily
and by the Asset/Liability Committee of the Company's Board of Directors which
meets quarterly,

YEAR 2000
- ----------

As the year 2000 approaches, a critical issue has emerged regarding how existing
application software programs and operating systems can accommodate this date
value. In brief, many existing application software products in the marketplace
were designed to only accommodate a two digit date position which represents the
year (for example, '97' is stored on the system and represents the year as
1997). As a result, the year 1999 could be the maximum date value these systems
will be able to accurately process. A time-sensitive software may recognize a
date using "00" as the year 1900 rather than year 2000. This could result in a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions or engage in
similar normal business activities.

24
<PAGE>

The Company has adopted a plan of action to minimize the risk of the year 2000
event including the establishment of an oversight committee. The committee will
coordinate the identification, evaluation, and implementation of changes to
computer systems and software. The committee's goal is to achieve a year 2000
date conversion with no effect on customers or disruption to business
operations. The Company plans on completing the testing process of all
significant applications by December 31, 1998.

The Company has initiated formal communications with all of its vendors,
including the U.S. Government, to determine their Year 2000 compliance
readiness. The Company is reviewing the extent the interface systems are
vulnerable to any third parties' year 2000 issues. There can be no guarantee
that the systems of other companies on which the Company systems rely will be
timely converted and would not have an adverse effect on the Company's systems.
Many of the Company's systems include new hardware and software purchased from
vendors who have represented that these systems are already year 2000 compliant.
The Company is in the process of obtaining assurances from vendors that timely
updates will be made available to make all remaining systems compliant.

Management does not anticipate the Company will be required to purchase any
additional hardware or sftware to be year 2000 compliant. However, management
does anticipate some administrative costs relative to the identification and
testing of the Company's electronic data processing systems. The costs and
timing of the year 2000 project is based on management's best estimates, which
were derived utilizing numerous assumptions of future events, including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ from these plans.

SUPERVISION AND REGULATION

Community West Bancshares (the "Company") is a bank holding company registered
under the Bank Holding Company Act of 1956, as amended (the "Act"), and is
subject to supervision by the Federal Reserve Board (the "FRB"). As a bank
holding company, the Company is required to file with the FRB an annual report
and such other additional information as the FRB may require pursuant to the
Act. The FRB may also make examinations of the Company and its subsidiaries.

The Act requires prior approval by the FRB for, among other things, the
acquisition by a bank holding company of direct or indirect ownership or control
of more than 5% of the voting shares, or substantially all the assets, of any
bank or for a merger or consolidation by a bank holding company with any other
bank holding company.

Goleta National Bank (the "Bank") is a wholly-owned subsidiary of the Company.
The Company and any subsidiaries it may organize are deemed to be affiliates of
the Bank within the meaning of the Act. Pursuant thereto, loans by the Bank to
affiliates, investments by the Bank in affiliates' stock, and taking affiliates'
stock by the Bank as collateral for loans to any borrower will be limited to 10%
of the Bank's capital, in the case of any one affiliate, and will be limited to
20% of the Bank's capital in the case of all affiliates. In addition, such
transactions must be on terms and conditions that are consistent with safe and
sound banking practices; in particular, a bank and its subsidiaries generally
may not purchase from an affiliate a low-quality asset, as defined in the Act.
Such restrictions also prevent a bank holding company and its other affiliates
from borrowing from a banking subsidiary of the bank holding company unless the
loans are secured by marketable collateral of designated amounts. The Company
and the Bank are also subject to certain restrictions with respect to engaging
in the underwriting, public sale and distribution of securities.

25
<PAGE>

With certain limited exceptions, a bank holding company is prohibited from
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of any company which is not a bank or bank holding company and from
engaging directly or indirectly in any activity other than banking or managing
or controlling banks or furnishing services to or performing services for its
authorized subsidiaries. A bank holding company may, however, engage or acquire
an interest in a company that engages in activities which the FRB has determined
to be closely related to banking or managing or controlling banks as to be
properly incident thereto. In making such a determination, the FRB is required
to consider whether the performance of such activities can reasonably be
expected to produce benefits to the public, such as greater convenience,
increased competition, or gains in efficiency, that outweigh possible adverse
effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interests, or unsound banking practices. Although the
future scope of permitted activities is uncertain and cannot be predicted, some
of the activities that the FRB has determined by regulation to be closely
related to banking are: (i) making or acquiring loans or other extensions of
credit for its own account or for the account of others; (ii) servicing loans
and other extensions of credit for any person; (iii) operating an industrial
bank, Morris Plan bank, or industrial loan company, as authorized under state
law, so long as the institution is not a bank; (iv) operating a trust company in
the manner authorized by federal or state law, so long as the institution is not
a bank and does not make loans or investments or accept deposits, except as
permitted under the FRB's Regulation Y; (v) subject to certain limitations,
acting as an investment or financial adviser to investment companies and other
persons; (vi) leasing personal and real property or acting as agent, broker, or
adviser in leasing such property in accordance with various restrictions imposed
by Regulation Y, including a restriction that it is reasonably anticipated that
each lease will compensate the lessor for not less than the lessor's full
investment in the property; (vii) making equity and debt investments in
corporations or projects designed primarily to promote community welfare; (viii)
providing financial, banking, or economic data processing and data transmission
services, facilities, data bases, or providing access to such services,
facilities, or data bases; (ix) acting as principal, agent, or broker for
insurance directly related to extensions of credit which are limited to assuring
the repayment of debts in the event of death, disability, or involuntary
unemployment of the debtor; (x) acting as agent or broker for insurance directly
related to extensions of credit by a finance company subsidiary; (xi) owning,
controlling, or operating a savings association provided that the savings
association engages only in activities permitted for bank holding companies
under Regulation Y; (xii) providing courier services of limited character;
(xiii) providing management consulting advice to non-affiliated bank and nonbank
depository institutions, subject to the limitations imposed by Regulation Y;
(xiv) selling money orders, travelers' checks and U.S. Savings Bonds; (xv)
appraisal of real estate and personal property; (xvi) acting as an intermediary
for the financing of commercial or industrial income-producing real estate;
(xvii) providing securities brokerage services, related securities credit
activities pursuant to Regulation T, and other incidental activities; (xiii)
underwriting and dealing in obligations of the U.S., general obligations of
states and their political subdivisions, and other obligations authorized for
state member banks under federal law; and (xix) providing general information
and statistical forecasting, advisory and transactional services with respect to
foreign exchange through a separately incorporated subsidiary.

Federal law prohibits a holding company and any subsidiary banks from engaging
in certain tie-in arrangements in connection with the extension of credit.
Thus, for example, the Bank may not extend credit, lease or sell property, or
furnish any services, or fix or vary the consideration for any of the foregoing
on the condition that: (i) the customer must obtain or provide some additional
credit, property or services from or to the Bank other than a loan, discount,
deposit or trust service; or (ii) the customer must obtain or provide some
additional credit, property or service from or to the Company or any other
subsidiary of the Company; or (iii) the customer may not obtain some other
credit, property or services from competitors, except reasonable requirements to
assure soundness of credit extended.

The FRB's risk-based capital adequacy guidelines for bank holding companies and
state member banks, discussed in more detail below (see "SUPERVISION AND
REGULATION - THE BANK - RECENT LEGISLATION AND REGULATORY CHANGES - 3.
Risk-Based Capital Guidelines"), assign various risk percentages to different
categories of assets, and capital is measured as a percentage of risk assets.
While in many cases total risk assets calculated in accordance with the
guidelines is less than total assets calculated absent the rating, certain non-
balance sheet assets, including loans sold with recourse, legally binding loan
commitments and standby letters of credit, are treated as risk assets, with the
assigned rate varying with the type of asset. As a result, it is possible that
total risk assets for purposes of the guidelines exceeds total assets under
generally accepted accounting principles, thereby reducing the capital-to-assets
ratio. Under the terms of the guidelines, bank holding companies are expected
to meet capital adequacy guidelines based both on total assets and on total risk
assets.

The Company is also a bank holding company within the meaning of Section 3700 of
the California Financial Code. As such, the Company and its subsidiaries are
subject to examination by, and may be required to file reports with, the
Commissioner. Regulations have not yet been proposed or adopted or steps
otherwise taken to implement the Commissioner's powers under this statute.

26
<PAGE>

SUPERVISION AND REGULATION - THE BANK

GENERAL. The Bank is organized under the laws of the United States. As a
- -------
national bank whose deposits are insured by the Federal Deposit Insurance
Corporation (the "FDIC") up to the maximum extent provided by law, the Bank is
subject to supervision, examination and regulation by the Office of the
Comptroller of the Currency (the "OCC"). The Bank's primary federal bank
regulatory agency is the OCC but the Bank is also subject to certain regulations
of the FDIC. The regulations of these agencies govern most aspects of the
Bank's business, including capital adequacy ratios, reserves against deposits,
restrictions on the rate of interest which may be paid on some deposit
instruments, limitations on the nature and amount of loans which may be made,
the location of branch offices, borrowings, and dividends. Supervision,
regulation and examination of the Bank by the regulatory agencies are generally
intended to protect depositors and are not intended for the protection of the
Bank's shareholders.

RECENT LEGISLATION AND REGULATORY CHANGES.
- ---------------------------------------------

.INTRODUCTION
------------

General. From time to time legislation is proposed or enacted which has the
- -------
effect of increasing the cost of doing business and changing the competitive
balance between banks and other financial and non-financial institutions.
Various federal laws enacted over the past several years have provided, among
other things, for the maintenance of mandatory reserves with the Federal Reserve
Bank on deposits by depository institutions (state reserve requirements have
been eliminated); the phasing-out of the restrictions on the amount of interest
which financial institutions may pay on certain of their customers' accounts;
and the authorization of various types of new deposit accounts, such as NOW
accounts, "Money Market Deposit" accounts and "Super NOW" accounts, designed to
be competitive with money market mutual funds and other types of accounts and
services offered by various financial and non-financial institutions. The
lending authority and permissible activities of certain non-bank financial
institutions such as savings and loan associations and credit unions have been
expanded, and federal regulators have been given increased authority and means
for providing financial assistance to insured depository institutions and for
effecting interstate and cross-industry mergers and acquisitions of failing
institutions. These laws have generally had the effect of altering competitive
relationships existing among financial institutions, reducing the historical
distinctions between the services offered by banks, savings and loan
associations and other financial institutions, and increasing the cost of funds
to banks and other depository institutions.

Other legislation has been proposed or is pending before the United States
Congress which would effect the financial institutions industry. Such
legislation includes wide-ranging proposals to further alter the structure,
regulation and competitive relationships of the nation's financial institutions,
to reorganize the federal regulatory structure of the financial institutions
industry, to subject banks to increased disclosure and reporting requirements,
and to expand the range of financial services which banks and bank holding
companies can provide. Other proposals which have been introduced or are being
discussed would equalize the relative powers of savings and loan holding
companies and bank holding companies, and authorize such holding companies to
engage in insurance underwriting and brokerage, real estate development and
brokerage, and certain securities activities, including underwriting and dealing
in United States Government securities and municipal securities, sponsoring and
managing investment companies and underwriting the securities thereof. It
cannot be predicted whether or in what form any of these proposals will be
adopted, or to what extent they will effect the various entities comprising the
financial institutions industry.

Certain of the potentially significant changes which have been enacted in the
past several years are discussed below.

Interstate Banking. The Riegle-Neal Interstate Banking and Branching Efficiency
- ------------------
Act of 1994 (the "Riegle-Neal Act"), enacted on September 29, 1994, repealed the
McFadden Act of 1927, which required states to decide whether national or state
banks could enter their state, and, effective June 1, 1997, allows banks to open
branches across state lines. The Riegle-Neal Act also repealed the 1956 Douglas
Amendment to the Bank Holding Company Act, which placed the same requirements on
bank holding companies. The repeal of the Douglas Amendment made it possible
for bank holding companies to buy out-of-state banks in any state after
September 29, 1995, which, after June 1, 1997, may now be converted into
interstate branches.

27
<PAGE>

The Riegle-Neal Act permitted interstate banking to begin effective September
29, 1995. The amendment to the Bank Holding Company Act permits bank holding
companies to acquire banks in other states provided that the acquisition does
not result in the bank holding company controlling more than 10 percent of the
deposits in the United States, or 30 percent of the deposits in the state in
which the bank to be acquired is located. However, the Riegle-Neal Act also
provides that states have the authority to waive the state concentration limit.
Individual states may also require that the bank being acquired be in existence
for up to five years before an out-of-state bank or bank holding company may
acquire it.

The Riegle-Neal Act provides that, since June 1, 1997, interstate branching and
merging of existing banks is permitted, provided that the banks are at least
adequately capitalized and demonstrate good management. Interstate mergers and
branch acquisitions were permitted at an earlier time if the state choose to
enact a law allowing such activity. The states were also authorized to enact
laws to permit interstate banks to branch de novo.

On September 28, 1995, the California Interstate Banking and Branching Act of
1995 ("CIBBA") was enacted and signed into law. CIBBA authorized out-of-state
banks to enter California by the acquisition of or merger with a California bank
that has been in existence for at least 5 years, unless the California bank is
in danger of failing or in certain other emergency situations. CIBBA allows a
California state bank to have agency relationships with affiliated and
unaffiliated insured depository institutions and allows a bank subsidiary of a
bank holding company to act as an agent to receive deposits, renew time
deposits, service loans and receive payments for a depository institution
affiliate.

Proposed Expansion of Securities Underwriting Authority. Various bills have
- -----------------------------------------------------------
been introduced in the United States Congress which would expand, to a lesser or
greater degree and subject to various conditions and limitations, the authority
of bank holding companies to engage in the activity of underwriting and dealing
in securities. Some of these bills would authorize securities firms (through
the holding company structure) to own banks, which could result in greater
competition between banks and securities firms. No prediction can be made as to
whether any of these bills will be passed by the United States Congress and
enacted into law, what provisions such a bill might contain, or what effect it
might have on the Bank.

Expansion of Investment Opportunities for California State-Chartered Banks.
- -------------------------------------------------------------------------------
Legislation enacted by the State of California has substantially expanded the
authority of California state-chartered banks to invest in real estate,
corporate stock and other corporate securities. National banks are governed in
these areas by federal law, the provisions of which are more restrictive than
California law. However, provisions of the Federal Deposit Insurance
Corporation Improvement Act of 1991, discussed below, limit state-authorized
activities to that available to national banks, unless approved by the FDIC.

Recent Accounting Pronouncements: In March 1997, the Financial Accounting
- -------------------------------------
Standards Board ("FASB") issued SFAS No. 128, "Earnings per Share." This
statement establishes standards for computing and presenting earnings per share
("EPS") and applies to all entities with publicly held common stock or potential
common stock. This statement replaces the presentation of primary EPS and fully
diluted EPS with a presentation of basic EPS and diluted EPS, respectively.
Basic EPS excludes dilution and is computed by dividing net income applicable to
common stockholders by the weighted -average number of common shares outstanding
for the period. Similar to fully diluted EPS, diluted EPS reflects the potential
dilution of securities that could share in the earnings. Restatement of all
prior period EPS data presented is required. This statement was adopted for the
year ended December 31, 1997, and is reflected in the Company's consolidated
financial statements. The adoption of this statement did not have a material
impact on the Company's consolidated financial statements for the year ended
December 31, 1997.

In August 1997, the FASB issued SFAS No. 129, "Disclosure of Information about
Capital Structure." This statement establishes standards for disclosing
information about capital structure, including pertinent rights and privileges
of various securities outstanding. SFAS No. 129 is effective for financial
statements for periods ending after December 15, 1997. The Company adopted this
statement for the year ended December 31, 1997, and is reflected in the
Company's consolidated financial statements. the adoption of this statement did
not have a material impact on the Company's consolidated financial statements
for the year ended December 31, 1997.

28
<PAGE>

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
effective for fiscal years beginning after December 15, 1997. This statement
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. This Statement further requires that an entity display an amount
representing total comprehensive income for the period in that financial
statement. This Statement also requires that an entity classify items of other
comprehensive income by their nature in a financial statement. For example,
other comprehensive income may include foreign currency items, minimum pension
liability adjustments, and unrealized gains and losses on certain debt and
equity securities. Reclassification of financial statements for earlier periods,
provided for comparative purposes, is required. Based on current accounting
standards, this Statement is not expected to have a material impact on the
Company's consolidated financial statements.

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," effective for financial statements for
periods beginning after December 15, 1997. This statement establishes standards
for reporting information about operating segments in annual financial
statements and requires that enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement is not expected to have a
material impact on the Company's financial statements.

Reclassifications - Certain amounts in the accompanying financial statements for
1996 and 1995 have been reclassified to conform to the 1997 presentation.

2. FINANCIAL INSTITUTIONS REFORM, RECOVERY, AND ENFORCEMENT ACT OF 1989
--------------------------------------------------------------------

General. On August 9, 1989, the Financial Institutions Reform, Recovery, and
- -------
Enforcement Act of 1989 ("FIRREA") was signed into law. This legislation has
resulted in major changes in the regulation of insured financial institutions,
including significant changes in the authority of government agencies to
regulate insured financial institutions.

Under FIRREA, the Federal Savings and Loan Insurance Corporation ("FSLIC") and
the Federal Home Loan Bank Board were abolished and the FDIC was authorized to
insure savings associations, including federal savings associations, state
chartered savings and loans and other corporations determined to be operated in
substantially the same manner as a savings association. FIRREA established two
deposit insurance funds to be administered by the FDIC. The money in these two
funds is separately maintained and not commingled. The FDIC Permanent Insurance
Fund was replaced by the Bank Insurance Fund (the "BIF") and the FSLIC deposit
insurance fund was replaced by the Savings Association Insurance Fund (the
"SAIF").

Deposit Insurance Assessments. Under FIRREA, the premium assessments made on
- -------------------------------
banks and savings associations for deposit insurance were initially increased,
with rates set separately for banks and savings associations, subject to
statutory restrictions. The Omnibus Budget Reconciliation Act of 1990, designed
to address the federal budget deficit, increased the insurance assessment rates
for members of the BIF and the SAIF over that provided by FIRREA, and eliminated
FIRREA's maximum reserve-ratio constraints on the BIF. The FDIC raised BIF
premiums to 23 per $100 in insured deposits for 1993 from a base of 12 in
1990.

Effective January 1, 1994, the FDIC implemented a risk-based assessment system,
under which an institution's premium assessment is based on the probability that
the deposit insurance fund will incur a loss with respect to the institution,
the likely amount of such loss, and the revenue needs of the deposit insurance
fund. As long as BIF's reserve ratio is less than a specified "designated
reserve ratio," 1.25%, the total amount raised from BIF members by the
risk-based assessment system may not be less than the amount that would be
raised if the assessment rate for all BIF members were 23 per $100 in insured
deposits. The FDIC determined that the designated reserve ratio was achieved on
May 31, 1995. Accordingly, on August 8, 1995, the FDIC issued final regulations
adopting an assessment rate schedule for BIF members of 4 to 31 per $100 in
insured deposits that became effective June 1, 1995. On November 14, 1995, the
FDIC further reduced the BIF assessment rates by 4 so that effective January 1,
1996, the premiums ranged from zero to 27 per $100 in insured deposits, but in
any event not less than $2,000 per year.

29
<PAGE>

Under the risk-based assessment system, a BIF member institution such as the
Bank is categorized into one of three capital categories (well capitalized,
adequately capitalized, and undercapitalized) and one of three categories based
on supervisory evaluations by its primary federal regulator (in the Bank's case,
the Comptroller). The three supervisory categories are: financially sound with
only a few minor weaknesses (Group A), demonstrates weaknesses that could result
in significant deterioration (Group B), and poses a substantial probability of
loss (Group C). The capital ratios used by the Comptroller to define
well-capitalized, adequately capitalized and undercapitalized are the same as in
the Comptroller's prompt corrective action regulations (discussed below). The
BIF assessment rates since January 1, 1997 are summarized below; assessment
figures are expressed in terms of cents per $100 in insured deposits.

Assessment Rates Effective January 1, 1997
- -----------------------------------------------

Supervisory Group
------------------

Capital Group Group A Group B Group C
- ---------------------- ------- ------- -------
<S> <C> <C> <C>
Well Capitalized . . . 0 3 17
Adequately Capitalized 3 10 24
Undercapitalized . . . 10 24 27
</TABLE>

The Deposit Insurance Funds Act of 1996, signed into law on September 30, 1996,
eliminated the minimum assessment, commencing with the fourth quarter of 1996.
In addition, after December 31, 1996, banks are required to share in the payment
of interest on Financing Corp. ("FICO") bonds. Previously, the FICO debt was
paid out of the SAIF assessment base. The assessments imposed on insured
depository institutions with respect to any BIF-assessable deposit will be
assessed at a rate equal to 1/5 of the rate of the assessments imposed on
insured depository institutions with respect to any SAIF-assessable deposit.
Although the FICO assessment rates are annual rates, they are subject to change
quarterly. For the first quarter of 1997, the SAIF-FICO assessment rate was
6.48 per $100 in insured deposits. Accordingly, the BIF-FICO assessment rate
was 1.296 per $100 in insured deposits. For the second quarter of 1997, the
SAIF-FICO assessment rate was 6.5 per $100 in insured deposits and the BIF-FICO
assessment rate was 1.3 per $100 in insured deposits. For the third quarter of
1997, the SAIF- FICO assessment rate was 6.3 and the BIF-FICO assessment rate
was 1.26 . For the fourth quarter of 1997, the SAIF-FICO assessment rate was
6.32 and the BIF-FICO assessment rate was 1.264 . Since the FICO bonds do not
mature until the year 2019, it is conceivable that banks will continue to share
in the payment of the interest on the bonds until then.

With certain limited exceptions, FIRREA prohibits a bank from changing its
status as an insured depository institution with the BIF to the SAIF and
prohibits a savings association from changing its status as an insured
depository institution with the SAIF to the BIF, without the prior approval of
the FDIC.

FDIC Receiverships. Pursuant to FIRREA, the FDIC may be appointed conservator
- -------------------
or receiver of any insured bank or savings association. In addition, FIRREA
authorized the FDIC to appoint itself as sole conservator or receiver of any
insured state bank or savings association for any, among others, of the
following reasons: (i) insolvency of such institution; (ii) substantial
dissipation of assets or earnings due to any violation of law or regulation or
any unsafe or unsound practice; (iii) an unsafe or unsound condition to transact
business, including substantially insufficient capital or otherwise; (iv) any
willful violation of a cease and desist order which has become final; (v) any
concealment of books, papers, records or assets of the institution; (vi) the
likelihood that the institution will not be able to meet the demands of its
depositors or pay its obligations in the normal course of business; (vii) the
incurrence or likely incurrence of losses by the institution that will deplete
all or substantially all of its capital with no reasonable prospect for the
replenishment of the capital without federal assistance; and (viii) any
violation of any law or regulation, or an unsafe or unsound practice or
condition which is likely to cause insolvency or substantial dissipation of
assets or earnings, or is likely to weaken the condition of the institution or
otherwise seriously prejudice the interest of its depositors.

30
<PAGE>

As a receiver of any insured depository institution, the FDIC may liquidate such
institution in an orderly manner and make such other disposition of any matter
concerning such institution as the FDIC determines is in the best interests of
such institution, its depositors and the FDIC. Further, the FDIC shall as the
conservator or receiver, by operation of law, succeed to all rights, titles,
powers and privileges of the insured institution, and of any stockholder,
member, account holder, depositor, officer or director of such institution with
respect to the institution and the assets of the institution; may take over the
assets of and operate such institution with all the powers of the members or
shareholders, directors and the officers of the institution and conduct all
business of the institution; collect all obligations and money due to the
institution and preserve; and conserve the assets and property of such
institution.

Enforcement Powers. Some of the most significant provisions of FIRREA were the
- -------------------
expansion of regulatory enforcement powers. FIRREA has given the federal
regulatory agencies broader and stronger enforcement authorities reaching a
wider range of persons and entities. Some of those provisions included those
which: (i) expanded the category of persons subject to enforcement under the
Federal Deposit Insurance Act; (ii) expanded the scope of cease and desist
orders and provided for the issuance of a temporary cease and desist orders;
(iii) provided for the suspension and removal of wrongdoers on an expanded basis
and on an industry-wide basis; (iv) prohibited the participation of persons
suspended or removed or convicted of a crime involving dishonesty or breach of
trust from serving in another insured institution; (v) required regulatory
approval of new directors and senior executive officers in certain cases; (vi)
provided protection from retaliation against "whistleblowers" and establishes
rewards for "whistleblowers" in certain enforcement actions resulting in the
recovery of money; (vii) required the regulators to publicize all final
enforcement orders; (viii) required each insured financial institution to
provide its independent auditor with its most recent Report of Condition ("Call
Report"); (ix) significantly increased the penalties for failure to file
accurate and timely Call Reports; and (x) provided for extensive increases in
the amounts and circumstances for assessment of civil money penalties, civil and
criminal forfeiture and other civil and criminal fines and penalties.

Crime Control Act of 1990. The Crime Control Act of 1990 further strengthened
- ---------------------------
the authority of federal regulators to enforce capital requirements, increased
civil and criminal penalties for financial fraud, and enacted provisions
allowing the FDIC to regulate or prohibit certain forms of golden parachute
benefits and indemnification payments to officers and directors of financial
institutions.

2. RISK-BASED CAPITAL GUIDELINES
-------------------------------

The federal banking agencies have established risk-based capital guidelines.
The risk- based capital guidelines include both a new definition of capital and
a framework for calculating risk weighted assets by assigning assets and
off-balance sheet items to broad credit risk categories. A bank's risk-based
capital ratio is calculated by dividing its qualifying capital (the numerator of
the ratio) by its risk weighted assets (the denominator of the ratio).

A bank's qualifying total capital consists of two types of capital components:
"core capital elements" (comprising Tier 1 capital) and "supplementary capital
elements" (comprising Tier 2 capital). The Tier 1 component of a bank's
qualifying capital must represent at least 50% of qualifying total capital and
may consist of the following items that are defined as core capital elements:
(i) common stockholders' equity; (ii) qualifying noncumulative perpetual
preferred stock (including related surplus); and (iii) minority interest in the
equity accounts of consolidated subsidiaries. The Tier 2 component of a bank's
qualifying total capital may consist of the following items: (i) allowance for
loan and lease losses (subject to limitations); (ii) perpetual preferred stock
and related surplus (subject to conditions); (iii) hybrid capital instruments
(as defined) and mandatory convertible debt securities; and (iv) term
subordinated debt and intermediate-term preferred stock, including related
surplus (subject to limitations).

Assets and credit equivalent amounts of off-balance sheet items are assigned to
one of several broad risk categories, according to the obligor, or, if relevant,
the guarantor or the nature of collateral. The aggregate dollar value of the
amount in each category is then multiplied by the risk weight associated with
that category. The resulting weighted values from each of the risk categories
are added together, and this sum is the bank's total risk weighted assets that
comprise the denominator of the risk-based capital ratio.

31
<PAGE>

Risk weights for all off-balance sheet items are determined by a two-step
process. First, the "credit equivalent amount" of off-balance sheet items such
as letters of credit and recourse arrangements is determined, in most cases by
multiplying the off-balance sheet item by a credit conversion factor. Second,
the credit equivalent amount is treated like any balance sheet asset and
generally is assigned to the appropriate risk category according to the obligor,
or, if relevant, the guarantor or the nature of the collateral.

The supervisory standards set forth below specify minimum supervisory ratios
based primarily on broad risk considerations. The risk-based ratios do not take
explicit account of the quality of individual asset portfolios or the range of
other types of risks to which banks may be exposed, such as interest rate,
liquidity, market or operational risks. For this reason, banks are generally
expected to operate with capital positions above the minimum ratios.

All banks are required to meet a minimum ratio of qualifying total capital to
risk weighted assets of 8%, of which at least 4% should be in the form of Tier 1
capital net of goodwill, and a minimum ratio of Tier 1 capital to risk weighted
assets of 4%. The maximum amount of supplementary capital elements that
qualifies as Tier 2 capital is limited to 100% of Tier 1 capital net of
goodwill. In addition, the combined maximum amount of subordinated debt and
intermediate-term preferred stock that qualifies as Tier 2 capital is limited to
50% of Tier 1 capital. The maximum amount of the allowance for loan and lease
losses that qualifies as Tier 2 capital is limited to 1.25% of gross risk
weighted assets. Allowance for loan and lease losses in excess of this limit
may, of course, be maintained, but would not be included in a bank's risk-based
capital calculation.

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

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

The federal banking agencies have recently revised their risk-based capital
rules to take account of concentrations of credit and the risks of
non-traditional activities. Concentrations of credit refers to situations where
a lender has a relatively large proportion of loans involving one borrower,
industry, location, collateral or loan type. Non-traditional activities are
considered those that have not customarily been part of the banking business but
that start to be conducted as a result of developments in, for example,
technology or financial markets. The regulations require institutions with high
or inordinate levels of risk to operate with higher minimum capital standards.
The federal banking agencies also are authorized to review an institution's
management of concentrations of credit risk for adequacy and consistency with
safety and soundness standards regarding internal controls, credit underwriting
or other operational and managerial areas.

Further, the banking agencies recently have adopted modifications to the
risk-based capital rules to include standards for interest rate risk exposures.
Interest rate risk is the exposure of a bank's current and future earnings and
equity capital arising from adverse movements in interest rates. While interest
rate risk is inherent in a bank's role as financial intermediary, it introduces
volatility to bank earnings and to the economic value of the bank. The banking
agencies have addressed this problem by implementing changes to the capital
standards to include a bank's exposure to declines in the economic value of its
capital due to changes in interest rates as a factor that the banking agencies
will consider in evaluating an institution's capital adequacy. Bank examiners
consider a bank's historical financial performance and its earnings exposure to
interest rate movements as well as qualitative factors such as the adequacy of a
bank's internal interest rate risk management. The federal banking agencies
recently considered adopting a uniform supervisory framework for all
institutions to measure and assess each bank's exposure to interest rate risk
and establish an explicit capital charge based on the assessed risk, but
ultimately elected not to adopt such a uniform framework. Even without such a
uniform framework, however, each bank's interest rate risk exposure is assessed
by its primary federal regulator on an individualized basis, and it may be
required by the regulator to hold additional capital for interest rate risk if
it has a significant exposure to interest rate risk or a weak interest rate risk
management process.

32
<PAGE>

Effective April 1, 1995, the federal banking agencies issued rules which limit
the amount of deferred tax assets that are allowable in computing a bank's
regulatory capital. The standard had been in effect on an interim basis since
March, 1993. Deferred tax assets that can be realized for taxes paid in prior
carryback years and from future reversals of existing taxable temporary
differences are generally not limited. Deferred tax assets that can only be
realized through future taxable earnings are limited for regulatory capital
purposes to the lesser of: (i) the amount that can be realized within one year
of the quarter-end report date; or (ii) 10% of Tier 1 capital. The amount of
any deferred tax in excess of this limit would be excluded from Tier 1 capital,
total assets and regulatory capital calculations.

3. FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
--------------------------------------------------------------------

General. The Federal Deposit Insurance Corporation Improvement Act of 1991
- -------
("FDICIA") was signed into law on December 19, 1991. FDICIA recapitalized the
FDIC's Bank Insurance Fund, granted broad authorization to the FDIC to increase
deposit insurance premium assessments and to borrow from other sources, and
continued the expansion of regulatory enforcement powers, along with many other
significant changes.

Prompt Corrective Action. FDICIA established five categories of bank
- ---------------------------
capitalization: "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized" and mandated the establishment of a system of "prompt
corrective action" for institutions falling into the lower capital categories.
Under FDICIA, banks are prohibited from paying dividends or management fees to
controlling persons or entities if, after making the payment the bank would be
undercapitalized, that is, the bank fails to meet the required minimum level for
any relevant capital measure. Asset growth and branching restrictions apply to
undercapitalized banks, which are required to submit acceptable capital plans
guaranteed by its holding company, if any. Broad regulatory authority was
granted with respect to significantly undercapitalized banks, including forced
mergers, growth restrictions, ordering new elections for directors, forcing
divestiture by its holding company, if any, requiring management changes, and
prohibiting the payment of bonuses to senior management. Even more severe
restrictions are applicable to critically undercapitalized banks, those with
capital at or less than 2%, including the appointment of a receiver or
conservator after 90 days, even if the bank is still solvent.

The federal banking agencies have promulgated substantially similar regulations
to implement this system of prompt corrective action. Under the regulations, a
bank shall be deemed to be: (i) "well capitalized" if it has a total risk-based
capital ratio of 10.0% or more, has a Tier 1 risk-based capital ratio of 6.0% or
more, has a leverage capital ratio of 5.0% or more and is not subject to
specified requirements to meet and maintain a specific capital level for any
capital measure; (ii) "adequately capitalized" if it has a total risk-based
capital ratio of 8.0% or more, a Tier 1 risk-based capital ratio of 4.0% or more
and a leverage capital ratio of 4.0% or more (3.0% under certain circumstances)
and does not meet the definition of "well capitalized"; (iii) "undercapitalized"
if it has a total risk-based capital ratio that is less than 8.0%, a Tier 1
risk- based capital ratio that is less than 4.0%, or a leverage capital ratio
that is less than 4.0% (3.0% under certain circumstances); (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, a Tier 1 risk-based capital ratio that is less than 3.0% or a leverage
capital ratio that is less than 3.0%; and (v) "critically undercapitalized" if
it has a ratio of tangible equity to total assets that is equal to or less than
2.0%.

FDICIA and the implementing regulations also provide that a federal banking
agency may, after notice and an opportunity for a hearing, reclassify a well
capitalized institution as adequately capitalized and may require an adequately
capitalized institution or an undercapitalized institution to comply with
supervisory actions as if it were in the next lower category if the institution
is in an unsafe or unsound condition or engaging in an unsafe or unsound
practice. (The federal banking agency may not, however, reclassify a
significantly undercapitalized institution as critically undercapitalized.)

Operational Standards. FDICIA also granted the regulatory agencies authority to
- ---------------------
prescribe standards relating to internal controls, credit underwriting, asset
growth and compensation, among others, and required the regulatory agencies to
promulgate regulations prohibiting excessive compensation or fees. Many
regulations have been adopted by the regulatory agencies to implement these
provisions and subsequent legislation (the Riegal Community Development Act,
discussed below) gave the regulatory agencies the option of prescribing the
safety and soundness standards as guidelines rather than regulations.

33
<PAGE>

Regulatory Accounting Reports. Each bank with $500 million or more in assets is
- -----------------------------
required to submit an annual report to the FDIC, as well as any other federal
banking agency with authority over the bank, and any appropriate state banking
agency; in the Bank's case, the OCC. This report must contain a statement
regarding management's responsibilities for: (i) preparing financial statements;
(ii) establishing and maintaining adequate internal controls; and (iii)
complying with applicable laws and regulations. In addition to having an
audited financial statement by an independent accounting firm on an annual
basis, the accounting firm must determine and report as to whether the financial
statements are presented fairly and in accordance with generally accepted
accounting principles and comply with other requirements of the applicable
federal banking authority. In addition, the accountants must attest to and
report to the regulators separately on management's compliance with internal
controls.

Truth in Savings. FDICIA further established a new truth in savings scheme,
- ------------------
providing for clear and uniform disclosure of terms and conditions on which
interest is paid and fees are assessed on deposits. The FRB's Regulation DD,
implementing the Truth in Savings Act, became effective June 21, 1993.

Brokered Deposits. Effective June 16, 1992, FDICIA placed restrictions on the
- ------------------
ability of banks to obtain brokered deposits or to solicit and pay interest
rates on deposits that are significantly higher than prevailing rates. FDICIA
provides that a bank may not accept, renew or roll over brokered deposits
unless: (i) it is "well capitalized"; or (ii) it is adequately capitalized and
receives a waiver from the FDIC permitting it to accept brokered deposits paying
an interest rate not in excess of 75 basis points over certain prevailing market
rates. FDIC regulations define brokered deposits to include any deposit
obtained, directly or indirectly, from any person engaged in the business of
placing deposits with, or selling interests in deposits of, an insured
depository institution, as well as any deposit obtained by a depository
institution that is not "well capitalized" for regulatory purposes by offering
rates significantly higher (generally more than 75 basis points) than the
prevailing interest rates offered by depository institutions in such
institution's normal market area. In addition to these restrictions on
acceptance of brokered deposits, FDICIA provides that no pass-through deposit
insurance will be provided to employee benefit plan deposits accepted by an
institution which is ineligible to accept brokered deposits under applicable law
and regulations.

Lending. New regulations have been issued in the area of real estate lending,
- -------
prescribing standards for extensions of credit that are secured by real property
or made for the purpose of the construction of a building or other improvement
to real estate. In addition, the aggregate of all loans to executive officers,
directors and principal shareholders and related interests may now not exceed
100% (200% in some circumstances) of the depository institution's capital.

State Authorized Activities. The new legislation also created restrictions on
- ----------------------------
activities authorized under state law. FDICIA generally restricts activities
through subsidiaries to those permissible for national banks, unless the FDIC
has determined that such activities would pose no risk to the insurance fund of
which it is a member and the bank is in compliance with applicable regulatory
capital requirements, thereby effectively eliminating real estate investment
authorized under California law, and provided for a five-year divestiture period
for impermissible investments. Insurance activities were also limited, except
to the extent permissible for national banks.

5. RIEGLE COMMUNITY DEVELOPMENT AND REGULATORY IMPROVEMENT ACT OF 1994
--------------------------------------------------------------------

The Riegle Community Development and Regulatory Improvement Act of 1994 (the
"1994 Act"), which has been viewed as the most important piece of banking
legislation since the enactment of FDICIA, was signed into law on September 23,
1994. In addition to providing funding for the establishment of a Community
Development Financial Institutions Fund (the "Fund"), which provides assistance
to new and existing community development lenders to help to meet the needs of
low- and moderate-income communities and groups, the 1994 Act mandated changes
to a wide range of banking regulations. These changes included modifications to
the publication requirements for Call Reports, less frequent regulatory
examination schedules for small institutions, small business and commercial real
estate loan securitization, amendments to the money laundering and currency
transaction reporting requirements of the Bank Secrecy Act, clarification of the
coverage of the Real Estate Settlement Procedures Act for business, commercial
and agricultural real estate secured transactions, amendments to the national
flood insurance program, and amendments to the Truth in Lending Act to provide
greater protection for consumers by reducing discrimination against the
disadvantaged.

34
<PAGE>

The "Paperwork Reduction and Regulatory Improvement Act," Title III of the 1994
Act, required the federal banking agencies to consider the administrative
burdens that new regulations will impose before their adoption and requires a
transition period in order to provide adequate time for compliance. This Act
also requires the federal banking agencies to work together to establish uniform
regulations and guidelines as well as to work together to eliminate duplicative
or unnecessary requests for information in connection with applications or
notices. This act reduces the frequency of examinations for well-rated
institutions, simplifies the quarterly Call Reports and eliminated the
requirement that financial institutions publish their Call Reports in local
newspapers. This Act also established an internal regulatory appeal process and
independent ombudsman to provide a means for review of material supervisory
determinations. The Paperwork Reduction and Regulatory Improvement Act also
amended the Bank Holding Company Act and Securities Act of 1933 to simplify the
formation of bank holding companies.

Title IV of the 1994 Act amended the Bank Secrecy Act by reducing the reporting
requirements imposed on financial institutions for large currency transactions,
expanding the ability of financial institutions to provide exemptions to the
reporting requirements for businesses that regularly deal in large amounts of
currency, and providing for the delegation of civil money penalty enforcement
from the Treasury Department to the individual federal banking agencies.

6. SAFETY AND SOUNDNESS STANDARDS
---------------------------------

In July, 1995, the federal banking agencies adopted final guidelines
establishing standards for safety and soundness, as required by FDICIA and the
1994 Act. The guidelines set forth operational and managerial standards
relating to internal controls, information systems and internal audit systems,
loan documentation, credit underwriting, interest rate exposure, asset growth
and compensation, fees and benefits. Guidelines for asset quality and earnings
standards will be adopted in the future. The guidelines establish the safety
and soundness standards that the agencies will use to identify and address
problems at insured depository institutions before capital becomes impaired. If
an institution fails to comply with a safety and soundness standard, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan or to implement an
accepted plan may result in enforcement action.

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

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

4. CONSUMER PROTECTION LAWS AND REGULATIONS
--------------------------------------------

The bank regulatory agencies are focusing greater attention on compliance with
consumer protection laws and their implementing regulations. Examination and
enforcement have become more intense in nature, and insured institutions have
been advised to monitor carefully compliance with various consumer protection
laws and their implementing regulations. Banks are subject to many federal
consumer protection laws and their regulations including, but not limited to,
the Community Reinvestment Act (the "CRA"), the Truth in Lending Act (the
"TILA"), the Fair Housing Act (the "FH Act"), the Equal Credit Opportunity Act
(the "ECOA"), the Home Mortgage Disclosure Act ("HMDA"), and the Real Estate
Settlement Procedures Act ("RESPA").

35
<PAGE>

The CRA, enacted into law in 1977, is intended to encourage insured depository
institutions, while operating safely and soundly, to help meet the credit needs
of their communities. The CRA specifically directs the federal bank regulatory
agencies, in examining insured depository institutions, to assess their record
of helping to meet the credit needs of their entire community, including low-
and moderate-income neighborhoods, consistent with safe and sound banking
practices. The CRA further requires the agencies to take a financial
institution's record of meeting its community credit needs into account when
evaluating applications for, among other things, domestic branches, consummating
mergers or acquisitions, or holding company formations.

The federal banking agencies have adopted regulations which measure a bank's
compliance with its CRA obligations on a performance-based evaluation system.
This system bases CRA ratings on an institution's actual lending service and
investment performance rather than the extent to which the institution conducts
needs assessments, documents community outreach or complies with other
procedural requirements. The ratings range from "outstanding" to a low of
"substantial noncompliance."

The ECOA, enacted into law in 1974, prohibits discrimination in any credit
transaction, whether for consumer or business purposes, on the basis of race,
color, religion, national origin, sex, marital status, age (except in limited
circumstances), receipt of income from public assistance programs, or good faith
exercise of any rights under the Consumer Credit Protection Act. In March,
1994, the Federal Interagency Task Force on Fair Lending issued a policy
statement on discrimination in lending. The policy statement describes the
three methods that federal agencies will use to prove discrimination: overt
evidence of discrimination, evidence of disparate treatment and evidence of
disparate impact. This means that if a creditor's actions have had the effect
of discriminating, the creditor may be held liable - even when there is no
intent to discriminate.

The FH Act, enacted into law in 1968, regulates may practices, including making
it unlawful for any lender to discriminate in its housing-related lending
activities against any person because of race, color, religion, national origin,
sex, handicap, or familial status. The FH Act is broadly written and has been
broadly interpreted by the courts. A number of lending practices have been
found to be, or may be considered, illegal under the FH Act, including some that
are not specifically mentioned in the FH Act itself. Among those practices that
have been found to be, or may be considered, illegal under the FH Act are:
declining a loan for the purposes of racial discrimination; making excessively
low appraisals of property based on racial considerations; pressuring,
discouraging, or denying applications for credit on a prohibited basis; using
excessively burdensome qualifications standards for the purpose or with the
effect of denying housing to minority applicants; imposing on minority loan
applicants more onerous interest rates or other terms, conditions or
requirements; and racial steering, or deliberately guiding potential purchasers
to or away from certain areas because of race.

The TILA, enacted into law in 1968, is designed to ensure that credit terms are
disclosed in a meaningful way so that consumers may compare credit terms more
readily and knowledgeably. As a result of the TILA, all creditors must use the
same credit terminology and expressions of rates, the annual percentage rate,
the finance charge, the amount financed, the total payments and the payment
schedule.

HMDA, enacted into law in 1975, grew out of public concern over credit shortages
in certain urban neighborhoods. One purpose of HMDA is to provide public
information that will help show whether financial institutions are serving the
housing credit needs of the neighborhoods and communities in which they are
located. HMDA also includes a "fair lending" aspect that requires the
collection and disclosure of data about applicant and borrower characteristics
as a way of identifying possible discriminatory lending patterns and enforcing
anti-discrimination statutes. HMDA requires institutions to report data
regarding applications for one-to-four family loans, home improvement loans, and
multifamily loans, as well as information concerning originations and purchases
of such types of loans. Federal bank regulators rely, in part, upon data
provided under HMDA to determine whether depository institutions engage in
discriminatory lending practices.

36
<PAGE>

RESPA, enacted into law in 1974, requires lenders to provide borrowers with
disclosures regarding the nature and costs of real estate settlements. Also,
RESPA prohibits certain abusive practices, such as kickbacks, and places
limitations on the amount of escrow accounts.

Violations of these various consumer protection laws and regulations can result
in civil liability to the aggrieved party, regulatory enforcement including
civil money penalties, and even punitive damages.

8. CONCLUSION
----------

As a result of the recent federal and California legislation, there has been a
competitive impact on commercial banking. There has been a lessening of the
historical distinction between the services offered by banks, savings and loan
associations, credit unions, and other financial institutions, banks have
experienced increased competition for deposits and loans which may result in
increases in their cost of funds, and banks have experienced increased costs.
Further, the federal banking agencies have increased enforcement authority over
banks and their directors and officers.
Future legislation is also likely to impact the Bank's business. Consumer
legislation has been proposed in Congress which may require banks to offer
basic, low-cost, financial services to meet minimum consumer needs. Various
proposals to restructure the federal bank regulatory agencies are currently
pending in Congress, some of which include proposals to expand the ability of
banks to engage in previously prohibited businesses. Further, the regulatory
agencies have proposed and may propose a wide range of regulatory changes,
including the calculation of capital adequacy and limiting business dealings
with affiliates. These and other legislative and regulatory changes may have
the impact of increasing the cost of business or otherwise impacting the
earnings of financial institutions. However, the degree, timing and full extent
of the impact of these proposals cannot be predicted.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- --------------------------------------------------------------------------

A derivative financial instrument includes futures, forwards, interest rate
swaps, option contracts, and other financial instruments with similar
characteristics. The Company currently does not enter into derivative financial
instruments. The Company's primary market risk is interest rate risk. Interest
rate risk is the potential of economic losses caused by future interest rate
change. These economic losses can be reflected as a loss of future net interest
income and/or a loss of current fair market values. The objective is to measure
the effect on net interest income and to adjust the balance sheet to minimize
the risks. Community West Bancshares' exposure to market risk is reviewed on a
regular basis by the Asset/Liability committee. Tools used by management include
the standard GAP report. The Company has no market risk instruments held for
trading purposes except for its interest only strip. Management believes the
Company's market risk is reasonable at this time.

See "Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset and Liability Management".

The table below provides information about the Company's non-derivative
financial instruments that are sensitive to changes in interest rates. For all
outstanding financial instruments, the table presents the principle outstanding
balance at December 31, 1997 and the weighted average interest yield/rate of the
instruments by either the date the instrument can be repriced for variable rate
financial instruments or the expected maturity date for fixed rate financial
instruments,

37
<PAGE>

At December 31, 1997
Expected maturity dates or repricing dates by year

Fair
Value
at
(Dollars in thousands) 1998 1999 2000 2001 2002 Total 12/31/97
-------- ----- ----- ----- ----- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance sheet financial
instruments:

ASSETS:
Federal Funds Sold $ 8,440 - - - - $ 8,440 $ 8,440
Average Yield 5.2% - - - - 5.2% -
Time deposits in other
financial institutions 2,477 - - - - 2,477 2,477
Average Yield 5.8% - - - - 5.8% -

Investment securities
- -held to maturity 998 - - - - 998 993
Average yield 6.0% - - - - 6.0% -
Interest only strip 2,529 - - - - 2,529 2,529
Average Yield 11% - - - - 11% -
Servicing Assets 664 - - - - 664 664
Average yield 11% - - - - 11% -

LIABILITIES:
Non-interest bearing
demand $15,133 - - - - $15,133 $ 15,133
Average Yield 0% - - - - 0% -
Interest- bearing
demand 13,608 - - - - 13,608 13,608
Average yield 3.4% - - - - 3.4% -
Savings 12,983 - - - - 12,983 12,983
Average Yield 3.8% - - - - 3.8% -
Time certificates of
deposit 37,105 522 47 11 3 38,529 38,683
Average yield 5.8% 5.8% 5.3% 5.3% 5.1% 5.8% -
</TABLE>

38
<PAGE>

39
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders
Community West Bancshares:

We have audited the consolidated balance sheets of Community West Bancshares and
its wholly-owned subsidiary, Goleta National Bank, (together, known as the
"Company") as of December 31, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity and cash flows, for the three years
ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted accounting
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatements. An audit includes the 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
the 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, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Community West
Bancshares at December 31, 1997 and 1996 and the results of their operations and
their cash flows for the three years ended December 31, 1997 in conformity with
generally accepted accounting principles.

February 6, 1998
Los Angeles, California

40
<PAGE>

COMMUNITY WEST BANCSHARES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996

ASSETS 1997 1996
<S> <C> <C>
Cash and due from banks. . . . . . . . . . . . . . . . . . . . . . . . . $ 3,662,513 $ 3,776,649
Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,440,000 9,015,000
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . 12,102,513 12,791,649
Time deposits in other financial institutions. . . . . . . . . . . . . . 2,477,000 2,378,000
Federal reserve bank stock . . . . . . . . . . . . . . . . . . . . . . . 251,300 155,650
Investment securities held to maturity, at cost; fair value of $992,851
in 1997 and $1,988,450 in 1996 (Note 2). . . . . . . . . . . . . . . . 998,451 1,997,705
Interest Only Strip, held for trading, at fair value . . . . . . . . . . 2,528,587 -
Loans (Notes 3 and 4):
Held for investment, net of allowance for loan losses of $1,285,852
in 1997 and $1,409,321 in 1996 . . . . . . . . . . . . . . . . . . . 56,724,346 50,590,863
Held for sale, at lower of cost or fair value. . . . . . . . . . . . . 14,440,356 6,808,800
Other real estate owned, net . . . . . . . . . . . . . . . . . . . . . . - 59,524
Premises and equipment, net (Note 5) . . . . . . . . . . . . . . . . . . 2,725,465 2,406,837
Servicing assets (Note 3). . . . . . . . . . . . . . . . . . . . . . . . 664,402 2,233,641
Accrued interest receivable and other assets (Note 7). . . . . . . . . . 2,400,025 1,460,877

TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $95,312,445 $80,883,546

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
Deposits: (Note 6)
Noninterest-bearing demand . . . . . . . . . . . . . . . . . . . . . . $15,132,830 $15,235,335
Interest-bearing demand. . . . . . . . . . . . . . . . . . . . . . . . 13,607,852 11,578,510
Savings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,982,741 10,361,875
Time certificates of $100,000 or more. . . . . . . . . . . . . . . . . 16,832,753 11,349,493
Other time certificates. . . . . . . . . . . . . . . . . . . . . . . . 21,696,263 22,080,385

Total deposits. . . . . . . . . . . . . . . . . . . . . . . . . . 80,252,439 70,605,598
Accrued interest payable and other liabilities (Note 7). . . . . . . . . 2,931,142 218,807

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . 83,183,581 70,824,405

COMMITMENTS AND CONTINGENCIES (NOTE 9)

STOCKHOLDERS' EQUITY (Notes 8 and 10)
Common stock, no par value; 20,000,000 shares authorized;
3,081,316, and 2,946,984 shares issued and outstanding at
December 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . 8,570,310 8,089,527
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,558,554 1,969,614

Total stockholders' equity. . . . . . . . . . . . . . . . . . . . 12,128,864 10,059,141

TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $95,312,445 $80,883,546
<FN>

See notes to consolidated financial statements.
</TABLE>

41
<PAGE>

COMMUNITY WEST BANCSHARES

CONSOLIDATED STATEMENTS OF INCOME
THREE YEARS ENDED DECEMBER 31, 1997

1997 1996 1995
<S> <C> <C> <C>
INTEREST INCOME:
Loans, including fees . . . . . . . . . . . . . $ 7,349,925 $6,340,842 $5,977,282
Federal funds sold. . . . . . . . . . . . . . . 423,666 283,137 305,249
Time deposits in other financial institutions . 120,588 87,793 173,571
Investment securities . . . . . . . . . . . . . 115,253 100,300 48,213

Total interest income. . . . . . . . . . 8,009,432 6,812,072 6,504,315

INTEREST EXPENSE ON DEPOSITS . . . . . . . . . . . 2,910,450 2,424,730 2,451,472

NET INTEREST INCOME. . . . . . . . . . . . . . . . 5,098,982 4,387,342 4,052,843

PROVISION FOR LOAN LOSSES (Note 3) . . . . . . . . 260,000 435,000 360,000

NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES. . . . . . . . . . . . . . . . . . . . . 4,838,982 3,952,342 3,692,843

OTHER INCOME:
Gains from loan sales . . . . . . . . . . . . . 4,101,222 2,614,360 2,522,355
Loan origination fees - sold or brokered loans. 2,960,385 2,057,282 731,249
Loan servicing fees . . . . . . . . . . . . . . 631,551 674,598 578,943
Service charges . . . . . . . . . . . . . . . . 896,295 590,239 371,511
Document processing fees. . . . . . . . . . . . 819,355 509,650 83,786
Other income . . . . . . . . . . . . . . . . . . 23,407 174,362 193,412

Total other income . . . . . . . . . . . 9,432,215 6,620,491 4,481,256

OTHER EXPENSES:
Salaries and employee benefits (Note 11). . . . 7,315,447 5,452,981 3,925,434
Occupancy expenses (Note 9) . . . . . . . . . . 1,508,435 1,185,502 986,986
Other operating expenses. . . . . . . . . . . . 714,119 787,064 647,967
Postage & Freight. . . . . . . . . . . . . . . 822,162 542,890 165,110
Advertising Expense . . . . . . . . . . . . . . 582,636 311,187 281,561
Professional Services . . . . . . . . . . . . . 425,828 245,766 317,920
Office Supplies . . . . . . . . . . . . . . . . 155,279 141,543 111,293

Total other expenses . . . . . . . . . . 11,523,906 8,666,933 6,436,271

INCOME BEFORE PROVISION FOR INCOME TAXES . . . . . 2,747,291 1,905,900 1,737,828

PROVISION FOR INCOME TAXES (Note 7). . . . . . . . 1,158,351 800,478 730,000

NET INCOME . . . . . . . . . . . . . . . . . . . . $ 1,588,940 $1,105,422 $1,007,828

NET INCOME PER SHARE -- BASIC. . . . . . . . . . . $ 0.53 $ 0.47 $ 0.50

NET INCOME PER SHARE -- DILUTED. . . . . . . . . . $ 0.44 $ 0.44 $ 0.47
<FN>
See notes to consolidated financial statements.
</TABLE>

42
<PAGE>

COMMUNITY WEST BANCSHARES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1997

TOTAL
STOCK-
COMMON STOCK RETAINED HOLDERS'
SHARES AMOUNT EARNINGS EQUITY
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 . . . . . . . . . . . . . 1,829,284 $4,573,210 $ 522,316 $ 5,095,526

Stock dividend. . . . . . . . . . . . . . . . . 182,904 548,724 (548,724) -

Cash dividend . . . . . . . . . . . . . . . . . - - (45,793) (45,793)

Exercise of stock options . . . . . . . . . . . 24,412 55,480 - 55,480

Net income. . . . . . . . . . . . . . . . . . . - - 1,007,828 1,007,828

BALANCE, DECEMBER 31, 1995 . . . . . . . . . . . . 2,036,600 5,177,414 935,627 6,113,041

Secondary offering of common stock and warrants 859,368 2,788,048 - 2,788,048

Cash dividend . . . . . . . . . . . . . . . . . - - (71,435) (71,435)

Exercise of warrants. . . . . . . . . . . . . . 3,848 16,835 - 16,835

Exercise of stock options . . . . . . . . . . . 47,168 107,230 - 107,230

Net income. . . . . . . . . . . . . . . . . . . - - 1,105,422 1,105,422

BALANCE, DECEMBER 31, 1996 . . . . . . . . . . . . 2,946,984 8,089,527 1,969,614 10,059,141

Issuance of founders stock. . . . . . . . . . . - 10,000 - 10,000

Exercise of warrants. . . . . . . . . . . . . . 63,692 278,653 - 278,653

Exercise of stock options . . . . . . . . . . . 70,640 192,130 - 192,130

Net income. . . . . . . . . . . . . . . . . . . - - 1,588,940 1,588,940

BALANCE, DECEMBER 31, 1997 . . . . . . . . . . . . 3,081,316 $8,570,310 $3,558,554 $12,128,864

<FN>

See notes to consolidated financial statements.
</TABLE>

43
<PAGE>
<TABLE>
<CAPTION>

COMMUNITY WEST BANCSHARES

CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1997

1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,588,940 $ 1,105,422 $ 1,007,828
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . 260,000 435,000 360,000
Deferred income taxes provision (benefit) . . . . . . . . . . . . . . . 77,892 203,094 (117,174)
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . 593,433 477,101 309,154
(Gain) loss on sale of other real estate owned. . . . . . . . . . . . . (38,707) (41,430) 27,106
Gain on sale of loans held for sale . . . . . . . . . . . . . . . . . . (4,101,222) (1,121,312) (1,433,737)
(Transfer) origination of servicing assets, net of amortization. . . . 2,233,641 (1,191,149) (1,042,492)
Origination of interest-only strip assets, net of amortization. . . . . (2,528,588) - -
Net change in deferred loan fees and premiums . . . . . . . . . . . . . (42,059) 6,549 (33,708)
Changes in operating assets and liabilities:
Accrued interest receivable and other assets. . . . . . . . . . . . . (1,561,491) 800,155 (552,770)
Accrued interest payable and other liabilities. . . . . . . . . . . . 2,634,443 (394,009) (372,409)

Net cash provided by (used in) operating activities. . . . . . . . (883,718) 279,421 (1,848,202)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of held-to-maturity investment securities
and Federal Reserve Bank stock. . . . . . . . . . . . . . . . . . . . . (1,096,395) (2,022,218) (993,581)
Maturities of held-to-maturity investment securities. . . . . . . . . . . 2,000,000 1,000,000 485,052
Net (increase) decrease in time deposits in other financial institutions. (99,000) (1,000,000) 2,474,000
Net increase in loans . . . . . . . . . . . . . . . . . . . . . . . . . (10,196,186) (5,551,129) (5,120,625)
Proceeds from sale of other real estate owned . . . . . . . . . . . . . . 370,600 393,430 625,964
Purchase of premises and equipment. . . . . . . . . . . . . . . . . . . . (912,061) (1,308,297) (658,263)

Net cash used in investing activities. . . . . . . . . . . . . . . (9,933,042) (8,488,214) (3,187,453)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits, and savings accounts . . . . 4,547,703 (600,306) 10,499,382
Net increase (decrease) in time certificates. . . . . . . . . . . . . . . 5,099,138 7,613,846 (1,811,112)
Proceeds from the secondary offering of common stock and warrants . . . . - 2,788,048 -
Proceeds from the exercise of stock options and warrants. . . . . . . . . 480,783 124,065 55,480
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . - (71,435) (45,793)

Net cash provided by financing activities. . . . . . . . . . . . . 10,127,624 9,854,218 8,697,957

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . (689,136) 1,645,425 3,662,302

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR . . . . . . . . . . . . . . . . 12,791,649 11,146,224 7,483,922

CASH AND CASH EQUIVALENTS, END OF YEAR . . . . . . . . . . . . . . . . . . . $ 12,102,513 $12,791,649 $11,146,224

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION -
Cash paid during the year for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,869,088 $ 2,386,367 $ 2,483,069
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 789,956 460,000 1,469,000

NONCASH INVESTING ACTIVITY -
Loans transferred to other real estate owned. . . . . . . . . . . . . . . 272,369 411,524 -
<FN>

See notes to consolidated financial statements.
</TABLE>

44
<PAGE>

COMMUNITY WEST BANCSHARES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997____
- ----------------------------------------

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting and reporting policies of Community West Bancshares (the
"Company") and its wholly-owned subsidiary, Goleta National Bank are in
accordance with generally accepted accounting principles and general practices
within the financial services industry. All material intercompany transactions
and accounts have been eliminated. The following are descriptions of the more
significant of those policies.

Nature of Operations - The Company's primary operations are related to
traditional banking activities, including the acceptance of deposits and the
lending and investing of money. In addition, the Company also engages in
electronic services. The Company's customers consist of small to mid-sized
businesses and individuals located in California, Georgia, Nevada and Florida.
The Company also originates and sells U. S. Small Business Administration
("SBA"), FHA Title I and 125 LTV loans through its normal operations and
thirteen loan production offices.

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 purchased for one day periods.

Loans - Generally, loans are stated at amounts advanced less payments
collected. Interest on loans is accrued daily on a simple-interest basis, except
where serious doubt exists as to collectibility of the loan, in which case the
accrual of interest income is discontinued.

Loans Held for Sale - The guaranteed portion on loans insured by the SBA
and FHA Title I home improvement loans and 125 loan-to-value loans, which are
originated and are intended for sale in the secondary market, are carried at the
lower of cost or fair value. Funding for SBA and FHA programs depends on annual
appropriations by the U.S. Congress, and accordingly, the sale of loans under
these programs is dependent on the continuation of such programs.

Investment Securities - The Company classifies as held to maturity those
debt securities it has the positive intent and ability to hold to maturity.
Securities held to maturity are accounted for at cost and adjusted for
amortization of premiums and accretion of discounts.

Provision and Allowance for Loan Losses - The allowance for loan losses is
maintained at a level believed adequate by management to absorb possible losses
on existing loans through a provision for loan losses charged to expense. The
allowance is charged for losses when management believes that full recovery on
loans is unlikely. Management's determination of the adequacy of the allowance
is based on periodic evaluations of the loan portfolio, which take into
consideration such factors as changes in the growth, size and composition of the
loan portfolio, overall portfolio quality, review of specific problem loans,
collateral, guarantees and economic conditions that may affect the borrowers'
ability to pay and/or the value of the underlying collateral. These estimates
depend on the outcome of future events and, therefore, contain inherent
uncertainties.

Management believes the level of the allowance for loan losses as of
December 31, 1997, is adequate to absorb future losses; however, changes in the
local economy, the ability of borrowers to repay amounts borrowed and other
factors may result in the need to increase the allowance through charges to
earnings.

Loan Fees and Costs - Loan origination fees and costs are deferred and
recognized as an adjustment to the loan yield over the life of the loan using
the straight-line method, which approximates the interest method.

45
<PAGE>

Interest Only Strips - The Company retains an interest only ("I/O") strip,
which represents the present value of the right to the excess cash flows
generated by the serviced loans which represents the difference between (a)
interest at the stated rate paid by borrowers and (b) the sum of (i)
pass-through interest paid to third-party investors, (ii) trustee fees, (iii)
FHA insurance fees (if applicable), (iv) third-party credit enhancement fees (if
applicable), and (v) stipulated servicing fees. The Company determines the
present value of this anticipated cash flow stream at the time each loan sale
transaction closes, utilizing valuation assumptions appropriate for each
particular transaction.

The significant valuation assumptions are related to the anticipated
average lives of the loans sold, including the anticipated prepayment speeds and
the anticipated credit losses related thereto. In order to determine the present
value of this excess cash flow, the Company currently applies an estimated
market discount rate of 11% to the expected pro forma gross cash flows, which is
calculated utilizing the weighted average lives of the serviced loans.

The I/O Strips are accounted for under Statement of Financial Accounting
Standards ("SFAS") No. 115 "Accounting for Investments in Certain Debt and
Equity Marketable Securities." As an I/O Strip is subject to significant
prepayment risk, and therefore has an undetermined maturity date, it cannot be
classified as held to maturity. The Company has chosen to classify its I/O
Strips as trading securities. Based on this classification, the Company is
required to mark these securities to fair value with the accompanying increases
or decreases in fair value being recorded as earnings in the current period. The
determination of fair value is based on the previously mentioned basis.

As the gain recognized in the year of sale is equal to the net estimated
future cash flows from the I/O Strips, discounted at a market interest rate, the
amount of cash actually received over the lives of the loans is expected to
exceed the gain previously recognized at the time the loans are sold. The I/O
Strips are amortized based on an accelerated method against the cash flows
resulting in income recognition that is not materially different from the
interest method. The Company generally retains the fight to service loans it
originates or purchases and subsequently sales.

Other Real Estate Owned - Real estate acquired by foreclosure is recorded
at fair value at the time of foreclosure, less estimated selling costs. Any
subsequent operating expenses or income, reduction in estimated values, and
gains or losses on disposition of such properties are charged to current
operations.

Premises and Equipment - Premises and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, which range
from 2 to 31.5 years. Leasehold improvements are amortized over the term of the
lease or the estimated useful lives, whichever is shorter.

Income Taxes - Deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income.

Net Income per Share and Share Equivalent - Net income per share - basic
has been computed based on the weighted average number of shares outstanding
during each year, which was 3,016,208, 2,356,162 and 2,013,830 in 1997, 1996,
and 1995. Net income per share - diluted has been computed based on the weighted
average number of shares outstanding during each year plus the dilutive effect
of outstanding warrants and options, which was 3,588,477, 2,510,352, and
2,128,212 in 1997, 1996, and 1995. Net income per share amounts have been
retroactively restated to reflect the 10% stock dividend issued in 1995 and the
two-for-one stock splits in 1996 and 1998.

46
<PAGE>

Reserve Requirements - All depository institutions are required by law to
maintain reserves on transaction accounts and nonpersonal time deposits in the
form of cash balances at the Federal Reserve Bank. These reserve requirements
can be offset by cash balances held at the Company. At December 31, 1997, the
Company's cash balance was sufficient to offset the Federal Reserve requirement.

Use of Estimates in the Preparation of Financial Statements - The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures 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.

Current Accounting Pronouncements - In March 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 128, "Earnings per Share." This
statement establishes standards for computing and presenting earnings per share
("EPS") and applies to all entities with publicly held common stock or potential
common stock. This statement replaces the presentation of primary EPS and fully
diluted EPS with a presentation of basic EPS and diluted EPS, respectively.
Basic EPS excludes dilution and is computed by dividing net income applicable to
common stockholders by the weighted -average number of common shares outstanding
for the period. Similar to fully diluted EPS, diluted EPS reflects the potential
dilution of securities that could share in the earnings. Restatement of all
prior period EPS data presented is required. This statement was adopted for the
year ended December 31, 1997, and is reflected in the Company's consolidated
financial statements. The adoption of this statement did not have a material
impact on the Company's consolidated financial statements for the year ended
December 31, 1997.

In August 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure." This statement establishes standards for disclosing
information about capital structure, including pertinent rights and privileges
of various securities outstanding. SFAS No. 129 is effective for financial
statements for periods ending after December 15, 1997. The Company adopted this
statement for the year ended December 31, 1997, and is reflected in the
Company's consolidated financial statements. the adoption of this statement did
not have a material impact on the Company's consolidated financial statements
for the year ended December 31, 1997.

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," effective for fiscal years beginning after December 15, 1997. This
statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This Statement further requires that an entity display an
amount representing total comprehensive income for the period in that financial
statement. This Statement also requires that an entity classify items of other
comprehensive income by their nature in a financial statement. For example,
other comprehensive income may include foreign currency items, minimum pension
liability adjustments, and unrealized gains and losses on certain debt and
equity securities. Reclassification of financial statements for earlier periods,
provided for comparative purposes, is required. Based on current accounting
standards, this Statement is not expected to have a material impact on the
Company's consolidated financial statements.

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," effective for financial statements for
periods beginning after December 15, 1997. This statement establishes standards
for reporting information about operating segments in annual financial
statements and requires that enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement is not expected to have a
material impact on the Company's financial statements.

Reclassifications - Certain amounts in the accompanying financial
statements for 1996 and 1995 have been reclassified to conform to the 1997
presentation.

47
<PAGE>

2. INVESTMENT SECURITIES

The amortized cost and estimated fair value of investment securities at
December 31 were as follows:

1997 AMORTIZED COST GROSS UNREALIZED GAIN GROSS UNREALIZED LOSS
<S> <C> <C> <C>
Held to maturity:
Due in less than one year:
U.S. Treasury note, par value $500,000, 5.125%, due 2/28/98 $ 499,700 $ - $ 3,200
U.S. Treasury note, par value $500,000, 5.125%, due 6/30/98 498,751 - 2,400
--------------- ---------------------- ----------------------
$ 998,451 $ - $ 5,600
=============== ====================== ======================

1996 AMORTIZED COST GROSS UNREALIZED GAIN GROSS UNREALIZED LOSS
Held to maturity:
Due in less than one year:
U.S. Treasury note, par value $500,000, 4.75%, due 2/15/97. $ 499,632 $ - $ 3,232
U.S. Treasury note, par value $500,000, 5.625%, due 6/30/97 499,531 519 -
U.S. Treasury note, par value $500,000, 5.625%, due 8/31/97 499,792 - 3,392
U.S. Treasury note, par value $500,000, 5.25%, due 12/31/97 498,750 - 3,150
--------------- ---------------------- ----------------------
$ 1,997,705 $ 519 $ 9,774
=============== ====================== ======================

<S> <C>
1997 FAIR VALUE
-----------
Held to maturity:
Due in less than one year:
U.S. Treasury note, par value $500,000, 5.125%, due 2/28/98
$ 496,500
U.S. Treasury note, par value $500,000, 5.125%, due 6/30/98
496,351
-----------
$ 992,851
===========

1996 FAIR VALUE
-----------
Held to maturity:
Due in less than one year:
U.S. Treasury note, par value $500,000, 4.75%, due 2/15/97. $ 496,400
U.S. Treasury note, par value $500,000, 5.625%, due 6/30/97 500,050
U.S. Treasury note, par value $500,000, 5.625%, due 8/31/97 496,400
U.S. Treasury note, par value $500,000, 5.25%, due 12/31/97 495,600
-----------
$ 1,988,450
===========
</TABLE>

48
<PAGE>

3. LOANS

The composition of the Company's loan portfolio at December 31 was as
follows:

<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Installment . . . . . . . . . . . . . . . . $ 3,466,774 $ 3,776,425
Commercial. . . . . . . . . . . . . . . . . 13,195,325 14,017,173
Real estate . . . . . . . . . . . . . . . . 19,924,139 19,172,017
Loan participations purchased - real estate 2,246,855 709,040
Unguaranteed portion of SBA loans . . . . . 19,602,136 14,708,048
------------ -----------
58,435,229 52,382,703
Less:
Allowance for loan losses . . . . . . . . 1,285,852 1,409,321
Net deferred loan fees and premiums . . . (3,245) 38,813
Other discount on SBA loans . . . . . . . 428,276 343,706
------------ -----------

Loans held for investment, net. . . . . . . $56,724,346 $50,590,863
============ ===========

Loans held for sale . . . . . . . . . . . . $14,440,356 $ 6,808,800
============ ===========
</TABLE>

Loans held for sale include the guaranteed and unguaranteed portion of
loans insured by the SBA and FHA Title I, first and second mortgages, and high
loan to value loans. Loans are held for sale and are recorded at the lower of
cost or fair value.

The Company generates substantial revenues from the origination of home
improvement loans under Title I of FHA regulations. This is the oldest
government insured loan program in existence, having begun in 1934. The Company
originates Title I loans and sells them into the secondary market and retains
the servicing. In early 1995, the Company was approved as one of a small number
of financial institutions to be able to sell Title I loans directly to the
Federal National Mortgage Association ("FNMA").

The Company also offers 125 Loan-to-Value ('LTV') loans. These loans allow
the borrower to receive up to 125% of their home value for debt consolidation,
home improvement, school tuition, or any worthwhile cash outlay. There is an
upper limit on these loans of $100,000. In 1997, the Bank sold these loans at a
premium to third-parties.

The Company retains a servicing spread on Title I and SBA loan sales that
creates servicing assets. The servicing spread is separated into two assets. A
servicing asset is recorded for the present value of the excess of the
contractual servicing spread over the expected cost of servicing the portfolio
for the expected life of the loans sold. An interest-only asset is recorded for
the present value of the servicing spread less the contractual servicing for the
estimated expected life of the loans. The Company uses industry prepayment
statistics and its own prepayment experience in estimating the expected life of
the loans. The present value asset is amortized as an offset to loan servicing
income over the estimated expected life of the loans.

The significant valuation assumptions are related to the anticipated
average lives of the loans sold, the anticipated prepayment speeds and the
anticipated credit losses related thereto. In order to determine the present
value of this excess cash flow, the Company currently applies an estimated
market discount rate of 11% to the expected pro forma gross cash flows, which
are calculated utilizing the weighted average lives of the loans,. Accordingly,
the overall effective discount rate utilized on the cash flows, net of expected
credit losses is approximatley 11%. The annual prepayment rate of the loans is a
function of full and partial prepayments and defaults.

49
<PAGE>

The Company monitors actual prepayment experience on a monthly basis. When
actual experience differs materially from the original assumptions, the Company
makes a new estimate of the expected remaining life of the loans, and adjusts
the amortization of the present value asset.

The Company makes loans to borrowers in a number of different industries.
No single industry comprises 10% or more of the Company's loan portfolio.
Although the Company has a diversified loan portfolio, the ability of the
Company's customers to honor their loan agreements is dependent upon, among
other things, the general economy of the Company's market area.

Transactions in the allowance for loan losses for the years ended December
31 are summarized as follows:

1997 1996 1995
<S> <C> <C> <C>
Balance, beginning of year . . . . . . . . $1,409,321 $1,462,939 $1,391,316
Provision for loan losses. . . . . . . . . 260,000 435,000 360,000
Loans charged off. . . . . . . . . . . . . (400,745) (510,494) (308,287)
Recoveries on loans previously charged off 17,276 21,876 19,910
----------- ----------- -----------
Balance, end of year . . . . . . . . . . . $1,285,852 $1,409,321 $1,462,939
=========== =========== ===========
</TABLE>

The recorded investment in loans that are considered to be impaired under
SFAS No. 114 was as follows:

DECEMBER 31,
------------------------------
1997 1996 1995
<S> <C> <C> <C>
Impaired loans without specific valuation allowances . . $1,547,168 $ 764,388 $1,531,318
Impaired loans with specific valuation allowances. . . . 1,250,964 1,178,435 1,432,783
Specific valuation allowance allocated to impaired loans (505,994) (432,853) (583,600)
----------- ----------- -----------
Impaired loans, net. . . . . . . . . . . . . . . . . . . $2,292,138 $1,509,970 $2,380,501
=========== =========== ===========

Average investment in impaired loans . . . . . . . . . . $1,901,054 $1,945,235 $1,805,251
=========== =========== ===========

Interest income recognized on impaired loans . . . . . . $ 287,309 $ 85,559 $ 66,919
=========== =========== ===========
</TABLE>

It is generally the Company's policy to place loans on nonaccrual status
when they are 90 days past due. Thereafter, interest income is no longer
recognized and the full amount of all payments received, whether principal or
interest, is applied to the principal balance of the loan. As such, interest
income may be recognized on impaired loans to the extent they are not past due
by 90 days or more.

At December 31, 1997, loans on nonaccrual status totaled $1,259,107
compared to $618,095 and $1,036,782 at December 31, 1996, and 1995. Upon the
adoption of SFAS No. 114, the Company classified all loans on nonaccrual status
as impaired. Accordingly, the impaired loans disclosed above include all loans
that were on nonaccrual status as of December 31, 1997, 1996, and 1995.

50
<PAGE>

Financial difficulties encountered by certain borrowers may cause the
Company to restructure the terms of their loans to facilitate loan payments. As
of December 31, 1997, 1996, and 1995, gross troubled debt restructured loans
totaled $2,375,000, $843,000 and $436,000. In accordance with the provisions of
SFAS No. 114, a troubled loan that is restructured subsequent to the adoption of
SFAS No. 114 would generally be considered impaired, while a loan restructured
prior to adoption would not be considered impaired if, at the date of
measurement, it was probable that the Company will collect all amounts due under
the restructured terms. Accordingly, the balance of impaired loans disclosed
above includes all troubled debt restructured loan that, as of December 31,
1997, 1996, and 1995, are considered impaired.

Interest foregone on nonaccrual loans and troubled debt restructurings
outstanding during the years ended December 31, 1997, 1996, and 1995 amounted to
approximately $190,000, $226,000 and $96,000.

4. TRANSACTIONS INVOLVING DIRECTORS AND EMPLOYEES

In the ordinary course of business, the Company has extended credit to
directors and employees of the Company. Such loans are subject to approval by
the Loan Committee and ratification by the Board of Directors, exclusive of the
borrowing director. The following is an analysis of the activity of all such
loans:

1997 1996 1995
<S> <C> <C> <C>
Outstanding balance, beginning of year $2,253,822 $1,326,111 $2,007,151
Credit granted, including renewals . . 751,534 957,883 57,723
Repayments . . . . . . . . . . . . . . (796,236) (30,172) (738,763)
----------- ----------- -----------
Outstanding balance, end of year . . . $2,209,120 $2,253,822 $1,326,111
=========== =========== ===========
</TABLE>

5. PREMISES AND EQUIPMENT

Premises and equipment as of December 31 was as follows:

1997 1996
<S> <C> <C>
Furniture, fixtures and equipment. . . . . . . $3,105,026 $2,368,402
Building & land. . . . . . . . . . . . . . . . 782,423 782,423
Leasehold improvements . . . . . . . . . . . . 757,566 648,845
Construction in progress . . . . . . . . . . . 65,657 39,786
---------- ----------
4,710,672 3,839,456
Less accumulated depreciation and amortization 1,985,207 1,432,619
---------- ----------
Premises and equipment, net. . . . . . . . . . $2,725,465 $2,406,837
========== ==========
</TABLE>

51
<PAGE>

6. DEPOSITS

At December 31, 1997, the scheduled maturities of time certificates of
deposits are as follows:

<TABLE>
<CAPTION>
<S> <C>
1998. . . . . . . . $37,945,985
1999. . . . . . . . 521,596
2000. . . . . . . . 47,329
2001. . . . . . . . 11,000
2002 and thereafter 3,106
-----------
$38,529,016
===========
</TABLE>

7. INCOME TAXES

Significant components of the Company's net deferred tax account at
December 31, are as follows:

<TABLE>
<CAPTION>
1997 1996
-------------- -----------------
FEDERAL STATE FEDERAL STATE
<S> <C> <C> <C> <C>
Deferred tax assets:
Provision for loan losses . . . . . . . . . . . $ 361,455 $ 113,033 $ 349,734 $ 105,430
State taxes . . . . . . . . . . . . . . . . . . 101,589 - 63,114 -
Depreciation. . . . . . . . . . . . . . . . . . - 2,914 - -
Deferred loan fees. . . . . . . . . . . . . . . - - - -
Other . . . . . . . . . . . . . . . . . . . . . 7,900 2,518 - -
---------- ---------- ---------- ----------
Total deferred tax assets . . . . . . . . . . . . 470,944 118,465 412,848 105,430
---------- ---------- ---------- ----------

Deferred tax liabilities:
Depreciation. . . . . . . . . . . . . . . . . . (11,002) - (38,994) (3,617)
Section 481 -
deferred loan fees (109,995) (35,069) (65,349) (21,719)
Cash to accrual adjustment
Adjustment (12,295) (3,398) (24,591) (7,608)
Deferred loan fees. . . . . . . . . . . . . . . (237,427) (75,697) (135,018) (44,874)
Capitalized loan costs . . . . . . . . . . . . . (26,404) (8,418) (20,552) (6,831)
Prepaid expenses. . . . . . . . . . . . . . . . (75,331) (24,017) (75,699) (25,159)
---------- ---------- ---------- ----------
Total deferred tax
Liabilities (472,454) (146,599) (360,203) (109,808)
---------- ---------- ---------- ----------
Net deferred tax asset
(liability) $ (1,510) $ (28,134) $ 52,645 $ (4,378)
========== ========== ========== ==========
</TABLE>

52
<PAGE>

The provision for income taxes for the years ended 1997, 1996 and 1995
consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Current:
Federal. . . . . . . . $ 828,398 $456,370 $ 634,761
State. . . . . . . . . 252,061 141,014 212,413
---------- -------- ----------
Total current. . . . . . 1,080,459 597,384 847,174

Deferred:
Federal. . . . . . . . 54,155 153,518 (103,797)
State . . . . . . . . 23,737 49,576 (13,377)
---------- -------- ----------
Total deferred . . . . . 77,892 203,094 (117,174)
---------- -------- ----------
Total income tax expense $1,158,351 $800,478 $ 730,000
========== ======== ==========
</TABLE>

The reasons for the difference between income tax expense and the amount
computed by applying the federal statutory income tax rate to income before
income taxes are as follows:

<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Tax expense at federal statutory rate. . . . . . . . . 35% 35% 35%
State franchise tax, net of federal income tax benefit 7 7 8
Other, net . . . . . . . . . . . . . . . . . . . . . . - - (1)
----- ----- -----
Actual tax expense . . . . . . . . . . . . . . . . . . 42% 42% 42%
===== ===== =====
</TABLE>

8. STOCKHOLDERS' EQUITY

Common Stock

In 1996 and 1995, cash dividends of $.04 and $.03 per share, respectively,
were declared and paid. In 1995, the Company declared and issued a 10% stock
dividend.

In the first quarter of 1996, the shareholders of the Company approved a
two-for-one stock split effective for shareholders of record on February 18,
1996.

During the third quarter of 1996, the Company successfully completed a
secondary stock offering which resulted in the issuance of 472,653 warrants and
859,368 additional shares of common stock. Net proceeds of $2,788,048 were
realized on this offering after issuance costs of $219,740. Each warrant
entitles the holder to purchase two shares of common stock for $4.375 per share,
and expires on June 30, 1998. In conjunction with the secondary stock offering,
the Company listed its common stock on the NASDAQ National Market under the
symbol 'CWBC'.

Stock Options

Under the terms of the Company's stock option plan, full-time salaried
employees may be granted nonqualified stock options or incentive stock options,
and directors may be granted nonqualified stock options. Options may be granted
at a price not less than 100% of the fair market value of the stock on the date
of grant. Options are generally exercisable in cumulative 20% installments.
However, in certain circumstances, the vesting of these options may be adjusted,
as determined by the Board of Directors. All options expire no later than ten
years from the date of grant. As of December 31, 1997, all options are
outstanding at prices of $2.28 - $9.125 per share with 280,132 options
exercisable and 564,743 options available for future grant. Stock option
activity is as follows:

53
<PAGE>

<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Options outstanding, January 1, . 427,812 398,680 350,992

Granted . . . . . . . . . . . . . 20,000 93,740 58,000
Increase for stock dividend . . . - - 35,700
Canceled. . . . . . . . . . . . . (17,520) (17,440) (21,600)
Exercised . . . . . . . . . . . . (70,640) (47,168) (24,412)
-------- -------- --------
Options outstanding, December 31, 359,652 427,812 398,680
======== ======== ========
</TABLE>

The estimated fair value of options granted ranged from $3.78 -
$5.11 per share in 1997, $2.34 - $3.05 per share in 1996 and was $2.00 per share
in 1995. The Company applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its stock option plan. Accordingly, no
compensation cost has been recognized for its stock option plan. Had
compensation cost for the Company's stock option plan been determined based on
the fair value at the grant dates for awards under the plan consistent with the
method prescribed by SFAS No. 123, the Company's net income and earnings per
share for the ended December 31, 1997, 1996, and 1995 would have been reduced to
the pro forma amounts indicated below:

<TABLE>
<CAPTION>
Net income. . . . . . . . . . . . . . . . . . . 1997 1996 1995
<S> <C> <C> <C>
As reported . . . . . . . . . . . . . . . . . . $1,588,940 $1,105,422 $1,007,828
Pro forma . . . . . . . . . . . . . . . . . . . 1,553,592 997,562 999,428
Net income per common share - Basic
As reported . . . . . . . . . . . . . . . . . . $ .53 $ .47 $ .50
Pro forma . . . . . . . . . . . . . . . . . . . $ .52 $ .42 $ .50
Net income per common share - assuming dilution
As reported . . . . . . . . . . . . . . . . . . $ .44 $ .44 $ .47
Pro forma . . . . . . . . . . . . . . . . . . . $ .43 $ .40 $ .47
</TABLE>

The fair value of options granted under the Company's fixed stock option
plan during 1997, 1996 and 1995 was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used: 8.5% annual dividend yield, expected volatility of 53%, risk
free interest rate of 6.5%, and expected lives of 6 years.

54
<PAGE>

9. COMMITMENTS AND CONTINGENCIES

The Company leases twelve office facilities under various operating lease
agreements with terms that expire at various dates between March 1998, and
November 2002, plus options to extend the lease terms for periods of up to six
years. The minimum lease commitments as of December 31, 1997, under all
operating lease agreements are as follows:

FOR THE YEAR ENDING DECEMBER 31,
<S> <C>
1998. . . . . . . . . . . . . . $291,643
1999. . . . . . . . . . . . . . 199,994
2000. . . . . . . . . . . . . . 126,620
2001. . . . . . . . . . . . . . 110,273
2002 . . . . . . . . . . . . . . 97,443
--------
TOTAL. . . . . . . . . . . . . . $825,973
========
</TABLE>

Rent expense for the years ended December 31, 1997, 1996 and 1995 was
$294,230, $219,587 and $283,219.

The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the balance
sheet. The Company's exposure to credit loss in the event of nonperformance by
the other party to commitments to extend credit and standby letters of credit is
represented by the contractual notional amount of those instruments. At December
31, 1997, the Company had commitments to extend credit of $20,361,000 and
obligations under standby letters of credit of $30,000.

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 Company
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support private borrowing arrangements. All guarantees
are short term and expire within one year.

The Company uses the same credit policies in making commitments and
conditional obligations as it does for extending loan facilities to customers.
The Company evaluates each customer's creditworthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation of the
counterparty. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment; and income-producing commercial
properties.

The Company has sold loans that are guaranteed or insured by government
agencies for which the Company retains all servicing rights and
responsibilities. The Company is required to perform certain monitoring
functions in connection with these loans to preserve the guarantee by the
government agency and prevent loss to the Company in the event of nonperformance
by the borrower. Management believes that the Company is in compliance with
these requirements. The outstanding balance of the sold portion of such loans
was approximately $78,000,000 at December 31, 1997.
The Company is involved in various litigation through the normal course of
business. In the opinion of management, based upon the advice of the Company's
legal counsel, the disposition of all pending litigation should not have a
material effect on the Company's financial position or results of operations.

55
<PAGE>

10. REGULATORY MATTERS

The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company must meet specific capital guidelines that involve quantitative measures
of the Company's assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Company's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios of total and Tier I
capital (primarily common stock and retained earnings less goodwill) to
risk-weighted assets, and of Tier I capital to average assets. Management
believes, as of December 31, 1997, that the Company meets all capital adequacy
requirements to which it is subject.

As of December 31, 1997 and 1996, the most recent notification from the
Federal Deposit Insurance Corporation ("FDIC") categorized the Company as "well
capitalized" under the regulatory framework for prompt corrective action. To be
categorized as "well capitalized" the Company must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the
table below. There are no conditions or events since that notification which
management believes have changed the Company's category.

The Company's actual capital amounts and ratios at December 31 are as
follows:

TO BE CATEGORIZED
WELL CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE ACTION
ACTUAL ADEQUACY PURPOSES: PROVISIONS:
------------------- ----------------- ---------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1997:
Total Capital (to Risk Weighted Assets). $12,357,179 17.20% $5,746,643 >= 8% $7,183,304 >=10%
Tier I Capital (to Risk Weighted Assets) 11,454,477 15.95% 2,873,321 >=4% 4,309,982 >=6%
Tier I Capital (to Average Assets) . . . . . . . 11,454,477 12.02% 3,812,315 >=4% 4,765,393 >=5%
</TABLE>

<TABLE>
<CAPTION>
TO BE CATEGORIZED
WELL CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE ACTION
ACTUAL ADEQUACY PURPOSES: PROVISIONS:
------------------- ----------------- ---------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1996:
Total Capital (to Risk Weighted Assets) 14.88% $5,057,001 >= 8% 6,321,251 >=10%
9,406,022
Tier I Capital (to Risk Weighted Assets) 8,608,032 13.61% 2,529,914 >=4% 3,794,871 >=6%
Tier I Capital (to Average Assets) . . . . . . . 8,608,032 11.33% 3,039,023 >=4% 3,798,778 >=5%
</TABLE>

56
<PAGE>

11. EMPLOYEE PROFIT SHARING PLAN
On September 1, 1995, the Company established a 401(k) plan for benefit of
its employees. Employees are eligible to participate in the plan if they were
employed by the Company on September 1, 1995, or after 6 months of consecutive
service. Employees may make contributions to the plan under the plan's 401(k)
component, and the Company may make contributions under the plan's profit
sharing component, subject to certain limitations. The Company's contributions
are determined by the Board of Directors and amounted to $112,592, $39,132, and
$15,315 in 1997, 1996, and 1995, respectively.

12. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires the Company disclose estimated fair values for its financial
instruments. The estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required to interpret market
data to develop estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts the Company could realize
in a current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair
amounts.

<TABLE>
<CAPTION>
(in thousands) DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------------------------- --------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE CARRYING AMOUNT ESTIMATED FAIR VALUE
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 12,103 $ 12,103 $ 12,791 $ 12,791
Time deposits in
other financial institutions 2,477 2,477 2,378 2,378
U.S. Treasury Notes 998 998 1,998 1,988
FRB Stock 251 251 156 156
Interest Only Strip 2,529 2,529 - -
Loans 71,165 73,382 57,400 58,952
Servicing Assets 664 664 2,234 2,234
Liabilities:
Deposits 80,252 80,661 70,606 70,602
</TABLE>

The methods and assumptions used to estimate the fair value of each class
of financial instruments for which it is practicable to estimate that value are
explained below:

Cash and cash equivalents and time deposits in other financial
institutions - The carrying amounts approximate fair values because of
short-term nature of these investments.

Investment securities - The fair value is based on quoted market
prices from security brokers or dealers if available. If a quoted market price
is not available, fair value is estimated using the quoted market price for
similar securities. It is not practicable to estimate the fair value of Federal
Reserve Company Stock.

Loans held for investment and for sale - Fair values are estimated for
portfolios of loans with similar financial characteristics, primarily fixed and
adjustable rate interest terms. The fair values of fixed rate mortgage loans are
based upon discounted cash flows utilizing the rate that the Company currently
offers as well as anticipated prepayment schedules. The fair values of
adjustable rate loans are also based upon discounted cash flows utilizing
discount rates that the Company currently offers, as well as anticipated
prepayment schedules. No adjustments have been made for changes in credit within
the loan portfolio. It is management's opinion that the allowance for estimated
loan losses pertaining to performing and nonperforming loans results in a fair
valuation of such loans. Fair values of commitments to extend credit are not
materially different than the amounts of deferred fees associated with such
commitments and reflected in the accompanying balance sheets.

57
<PAGE>

Deposits - The fair values of deposits are estimated based upon the
type of deposit products. Demand accounts, which include savings and transaction
accounts, are presumed to have equal book and fair values, since the interest
rates paid on these accounts are based on prevailing market rates. The estimated
fair values of time deposits are determined by discounting the cash flows of
segments of deposits that have similar maturities and rates, utilizing a yield
curve that approximates the prevailing rates offered to depositors as of the
measurement date.

The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 1997 and 1996. Although
management is not aware of any factors that would significantly effect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since those dates, and
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.

13. QUARTERLY FINANCIAL DATA (unaudited)

Summarized quarterly financial data follows:
(All amounts in thousands except per share data)

<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------------------------------------------
<S> <C> <C> <C> <C>
1997
Net interest income . . . . . . . . . . . . . $ 1,161 $1,340 $ 1,306 $ 1,292
Provision for loan losses . . . . . . . . . . 80 80 100 -
Net income. . . . . . . . . . . . . . . . . . 309 404 438 438
Net income per share - basic . . . . . . . . $ .10 $ .13 $ .15 $ .15
- diluted $ .09 $ .11 $ .12 $ .12
</TABLE>

<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------------------------------------------
<S> <C> <C> <C> <C>
1996
Net interest income . . . . . . . . . . . . . $1,016 $1,082 $ 1,168 $ 1,121
Provision for loan losses . . . . . . . . . . 120 105 110 100
Net income. . . . . . . . . . . . . . . . . . 232 270 305 298
Net income per share - basic . . . . . . . . $ .10 $ .11 $ .13 $ .13
- diluted $ .09 $ .11 $ .12 $ .12
</TABLE>

14. SUBSEQUENT EVENT

On January 22, 1998, the Company declared a two-for-one stock split for
shareholders of record on February 3, 1998, to be paid on February 27, 1998. All
share and per share amounts included in the accompanying financial statements
and related notes have been retroactively restated for the effect of this split.

58
<PAGE>

15. COMMUNITY WEST BANCSHARES (PARENT COMPANY ONLY)
(dollars in thousands)

DECEMBER 31, 1997
<S> <C>
ASSETS
Cash and equivalents. . . . . . . . . . . . $ 255
Investment in the Bank. . . . . . . . . . . 12,358
Other Assets. . . . . . . . . . . . . . . . 21
------------------
TOTAL ASSETS. . . . . . . . . . . . . . . $ 12,634
==================
LIABILITIES AND SHAREHOLDER EQUITY
Other Liabilities . . . . . . . . . . . . . $ 266
Common Stock. . . . . . . . . . . . . . . . 8,810
Retained Earnings . . . . . . . . . . . . . 3,558
------------------
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY $ 12,634
==================
</TABLE>

Community West Bancshares was created for the purposes of forming a bank holding
company. Prior to the acquisition of Goleta National Bank, which became
effective on December 31, 1997, the Company had minimal activity.
******

59
<PAGE>

PART III

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

None

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
- ------------------------------------------------------------------------------
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
- --------------------------------------------------------

YEAR FIRST
APPOINTED PRINCIPAL OCCUPATION
DIRECTOR DURING THE
NAME AND TITLE AGE OR OFFICER PAST FIVE YEARS
-------------- --- ---------- ---------------
<S> <C> <C> <C>
Michael A. Alexander. . . . . . . . . 67 Re-elected Chief Executive Officer of
Chairman of the Board 1992 Utilicom Corp. since 1994.
Prior to that time, Director
of Programs of Delco
Electronics.
Mounir R. Ashamalla . . . . . . . . . 60 1989 Oral-Maxillo-Facial
Director Surgeon
Robert H. Bartlein. . . . . . . . . . 50 1989 President of Bartlein
Director and Vice Chairman Group, Inc. and President
of the Board of Bartlein & Company,
Inc.
Jean W. Blois . . . . . . . . . . . . 70 1989 Independent consultant.
Director
John D. Illgen. . . . . . . . . . . . 53 1989 President and Chairman of
Director Illgen Simulation
Technologies, Inc.
John D. Markel. . . . . . . . . . . . 54 1989 Private investor
Director
Michel Nellis . . . . . . . . . . . . 51 1989 Partner with Nellis
Director Associates.
William R. Peeples. . . . . . . . . . 54 1989 Private investor.
Director
C. Randy Shaffer. . . . . . . . . . . 51 1992 Executive Vice President
Director and Executive Vice President and Chief Financial Officer
of the Company.
James R. Sims, Jr.. . . . . . . . . . 62 1989 Realtor.
Director
Llewellyn W. Stone. . . . . . . . . . 55 1989 President and Chief
President, Chief Executive Executive Officer of the
Officer and Director Company.
</TABLE>

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

60
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION
- ----------------------------------
The persons serving as excutive officers of the Bank received during 1997, and
will receive in 1998, cash compensation in their capacities as excutive officers
of the Bank .

SUMMARY COMPENSATION TABLE
--------------------------
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
-------------------------------- --------------------------------------
Awards Payouts
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(a). . . . . . . . . . . . . . . . . . (b) (c) (d) (e) (f) (g) (h) (i)
All
Other Restricted Op- LTIP Other
Name and Annual Stock tions/ PayOuts Compen-
Principal Compen- Award(s) SARs sation
Position . . . . . . . . . . . . . . . Year Salary Bonus sation
($) ($) ($) ($) ($) ($)
Llewellyn W. Stone . . . . . . . . . . 1997 179,250 51,000 - - - - -
President and Chief Executive Officer. 1996 127,123 51,000 - - - - -
1995 124,600 51,000 - - - - 636
C. Randy Shaffer . . . . . . . . . . . 1997 118,605 30,000 - - - - -
Executive Vice . . . . . . . . . . . . 1996 90,973 30,000 - - - - -
President. . . . . . . . . . . . . . . 1995 87,744 25,000 - - - - 1,867
</TABLE>

OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE
---------------------------------------------

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

<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Value of
Number of Unexercised In-
Unexercised the-Money
Options/SARs at Options/SARs at
Year-end (#) Year-End ($)
Exercisable/ Exercisable/
Name Shares Acquired on Exercise (#) Value Realized($) Unexercisable Unexercisable
- ------------------- ------------------------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Llewellyn W. Stone. N/A N/A Options Only Options Only
79,000/- $ 496,460/-
C. Randy Shaffer. . 43,000 $ 138,620 Options Only Options Only
-/- -/-
</TABLE>

61
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- --------------------------------------------------------------------------------

The following table sets forth, as of February 27, 1998, the number and
percentage of shares of the Company's Common Stock beneficially owned, directly
or indirectly, by each of the Company's directors, named officers and principal
shareholders , and by the directors and named officers of the Company as a
group. The shares "beneficially owned " are determined under Securities and
Exchange Commission Rules, and do not necessarily indicate ownership for any
other purpose, In general, beneficial ownership includes shares over which the
director, named officer or principal shareholder has sole or shared voting or
investment power and shares which such person has the right to acquire within 60
days of February 27, 1998. 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.

<TABLE>
<CAPTION>
Beneficial Amount and Nature Percent
Owner of Beneficial Ownership of Class(1)
<S> <C> <C>
Michael A. Alexander. . . . . . . . . . . . . . . . . . 74,370(2) 2.3%
Mounir R. Ashamalla . . . . . . . . . . . . . . . . . . 74,856(3) 2.3%
Robert H. Bartlein. . . . . . . . . . . . . . . . . . . 86,472(4) 2.7%
Jean W. Blois . . . . . . . . . . . . . . . . . . . . . 51,068(5) 1.6%
John D. Illgen. . . . . . . . . . . . . . . . . . . . . 42,080(6) 1.3%
John D. Markel. . . . . . . . . . . . . . . . . . . . . 314,664(7) 9.5%
Michel Nellis . . . . . . . . . . . . . . . . . . . . . 40,952(8) 1.3%
William R. Peeples. . . . . . . . . . . . . . . . . . . 309,588(9) 9.7%
C. Randy Shaffer. . . . . . . . . . . . . . . . . . . . 44,230(10) 1.4%
James R. Sims, Jr.. . . . . . . . . . . . . . . . . . . 17,400(11) .6%
Llewellyn W. Stone. . . . . . . . . . . . . . . . . . . 85,424(12) 2.7%
All Directors and Named Officers as a Group (11 in all)
1,141,104(1) 32.4%
======================== ===========
<FN>

(1) Includes shares subject to options held by each director and named officer and the
directors and named officers as a group that are exercisable within 60 days of February 27,
1998. These are treated as issued and outstanding for the purpose of computing the percentage
of each director and the directors and named officers as a group but not for the purpose of
computing the percentage of class of any other person.

(2) Mr. Alexander has shared voting and investment powers as to 39,632 of these shares, has
9,460 shares acquirable by exercise of stock options, and has 13,538 shares acquirable by
exercise of stock warrants.

(3) Dr. Ashamalla has 10,164 shares acquirable by exercise of stock options and has 12,986
shares acquirable by exercise of stock warrants.

(4) Mr. Bartlein has 23,804 shares acquirable by exercise of stock options and has 13,822
shares acquirable by exercise of stock warrants.

(5) Ms. Blois has 24,244 shares acquirable by exercise of stock options.

(6) Mr. Illgen has 15,444 shares acquirable by exercise of stock options and has 5,574
shares acquirable by exercise of stock warrants.

(7) Mr. Markel has shared voting and investment powers as to 27,720 of these shares, has
15,840 shares acquirable by exercise of stock options and has 120,652 shares acquirable by
exercise of stock warrants.

(8) Ms. Nellis has shared voting and investment powers as to 7,246 of these shares, has
15,444 shares acquirable by exercise of stock options and has 1,990 shares acquirable by
exercise of stock warrants.

(9) Mr. Peeples has 2,860 shares acquirable by exercise of stock options and has 28,000
shares acquirable by exercise of stock warrants.

(10) Mr. Shaffer has shared and voting investment powers as 1,300 of these shares.

(11) Mr. Sims has 9,152 shares acquirable by exercise of stock options and 464 shares
acquirable by exercise of stock warrants.

(12) Mr. Stone has shared voting and investment powers as to 1,584 of these shares and has
24,000 shares acquirable by exercise of stock options.
</TABLE>

62
<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ---------------------------------------------------------------

Some of the directors and executive officers of the Company, members of their
immediate families, and the companies with which they are associated are
customers of the Bank, and have banking transactions with the Bank in the
ordinary course of the Bank's business, and the Bank expects to continue to have
such banking transactions with such persons in the future. In management's
opinion, all loans and commitments to lend included in such transactions have
been made in the ordinary course of the Bank's business, have been made on
substantially the same terms, including interest rates and collateral as those
prevailing at the Bank at the time for comparable transactions with other
persons of similar credit worthiness and, in the opinion of the management of
the Company, have not involved more than the normal risk of collectibility or
presented any other unfavorable features. The maximum aggregate amount of all
such loans during the period January 1, 1997 to December 31, 1997 was
approximately $2,200,000, which represented approximately 18% of the Company's
total equity as of that date.

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

(a)(1) The following financial statements of Community West Bancshares are
filed as part of this Annual Report.

Report of Independent Accountants 40

Balance Sheets as of December 31, 1997 and 1996 41

Statements of Operations for the three years ended
December 31, 1997 42

Statements of Shareholders' Equity for the three years ended
December 31, 1997 43

Statements of Cash Flows for the three years ended
December 31, 1997 44

Notes to Consolidated Financial Statements 45
(a)(2)

Fianancial statement schedues other than those listed above have been omitted
because they are either not required, not applicable or the information is
otherwise included.

(a)(3) Exhibits

(2) Plan of Reorganization (1)

(3)(i) Articles of Incorporation

(3)(ii) By-laws

(4)(i) Common Stock Certificate (2)

(4)(ii) Warrant Certificate (2)

(10)(i) 1997 Stock Option Plan and Form of Stock Option Agreement (1)

(10)(ii) Employment Contract between Goleta National Bank and Llewellyn
Stone, President & CEO

(10)(iii) Salary Continuation Agreement between Goleta National Bank and
Llewellyn Stone, President & CEO

(10)(iv) Lease Agreements between Goleta National Bank and Santa Barbara
Commercial Properties (3)

(10)(v) Lease Agreement between Goleta National Bank and GRC, International
(3)

(10)(vi) Lease Agreement between Goleta National Bank and Festival
Professional Park (3)

(10)(vii) Employee Profit Sharing Plan (3)

(21) Subsidiaries of the Registrant

(23) Consent of Deloitte & Touche

(27) Financial Data Schedule

(1) Filed as an exhibit to the Registrant's Registration Statement on Form
S-8 filed with the Commission on 12-31-97 and incorporated herein by
reference.

(2) Filed as an exhibit to the Registrant's Amendment to Registration
Statement on Form 8-A filed with the Commission on 3-12-98 and
incorporated herein by reference.

(3) The Registrant has submitted a request to the Commission for a
continuing hardship exemption persuant to Rule 202 of Regulation S-T
with respect to this exhibit. If the request is granted, a paper copy of the
exhibit shall be filed with the Commission. If the request is not granted, the
exhibit shall be filed as part of an amendment to the Report on form 10-K.

(b) There were no reports on Form 8-K filed by the Registrant during the
fourth quarter of the fiscal year ended December 31, 1997.

64
<PAGE>

SIGNATURES 1
----------

Pursuant to the requirements of Section 13 or 15 (d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 26th day of
March, 1998.

COMMUNITY WEST BANCSHARES
(Registrant)

By /S/ Llewellyn W. Stone
-------------------------
Llewellyn W. Stone
President and
Chief Executive Officer

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

<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/S/ Chairman of the Board March 26, 1998
- --------------------
Michael A. Alexander
/S/Mounir R. Ashamalla Director March 26, 1998
- --------------------
Mounir R. Ashamalla
/S/Robert H. Bartlein Director and Vice Chairman of the Board March 26, 1998
- --------------------
Robert H. Bartlein
/S/Jean W. Blois Director March 26, 1998
- --------------------
Jean W. Blois
/S/John D. Illgen Director March 26, 1998
- --------------------
John D. Illgen
/S/John D. Markel Director March 26, 1998
- --------------------
John D. Markel
/S/Michel Nellis Director and Secretary March 26, 1998
- --------------------
Michel Nellis
/S/William R. Peeples Director March 26, 1998
- --------------------
William R. Peeples
Director,Executive Vice President and Chief March 26, 1998
Financial Officer (Principal Financial and
/S/C. Randy Shaffer Accounting Officer)
- --------------------
C. Randy Shaffer
/S/James R. Sims Jr. Director March 26, 1998
- --------------------
James R. Sims Jr.
Director, President and Chief Executive Officer March 26, 1998
/S/Llewellyn W. Stone (Principal Executive Officer)
- --------------------
Llewellyn W. Stone
</TABLE>
65
<PAGE>

Exhibit (3)(i) Articles of Incorporation

ARTICLES OF INCORPORATION

COMMUNITY WEST BANCSHARES

ARTICLE I

The name of this corporation is:

COMMUNITY WEST BANCSHARES

ARTICLE II

The purpose of this corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business or
the practice of a profession permitted to be incorporated by the California
Corporations Code.

ARTICLE III

The name and complete business address in the State of California of
this corporation's initial agent for service of process is:

C. RANDY SHAFFER
COMMUNITY WEST BANCSHARES
5827 HOLLISTER AVENUE
GOLETA, CALIFORNIA 93117

ARTICLE IV

This corporation is authorized to issue only one class of shares of
stock which shall be designated common stock, no par value per share; and the
total number of shares which the corporation is authorized to issue is
10,000,000.

ARTICLE V

(a) The liability of directors of the corporation for monetary
damages shall be eliminated to the fullest extent permissible under California
law.

(b) The corporation is authorized to provide indemnification of
agents (as defined in Section 317 of the California Corporations Code) through
bylaw provisions, agreements with agents, vote of shareholders or disinterested
directors, or otherwise, in excess of the indemnification otherwise permitted by
Section 317 of California Corporations Code subject only to the applicable
limits set forth in Section 204 of the California Corporations Code with respect
to actions for breach of duty to the corporation and its shareholders.

(c) The corporation is authorized to purchase and maintain
insurance on behalf of its agents against any liability asserted against or
incurred by the agent in such capacity or arising out of the agent's status as
such from a company, the shares of which are owned in whole or in part by the
corporation, provided that any policy issued by such company is limited to the
extent provided by applicable law.

(d) Any amendment, repeal or modification of any provision of this
Article V shall not adversely affect any right or protection of an agent of this
corporation existing at the time of such amendment, repeal or modification.

/S/Arthur A. Coren, Incorporator
--------------------------------
Arthur A. Coren, Incorporator

Exhibit (3)(ii) By-Laws

BYLAWS

COMMUNITY WEST BANCSHARES
a California corporation

<PAGE>
<TABLE>
<CAPTION>
BYLAWS OF

COMMUNITY WEST BANCSHARES

TABLE OF CONTENTS

Page
----
<S> <C> <C>
ARTICLE I - CORPORATE OFFICES 1

1.1 PRINCIPAL OFFICE 1
1.2 OTHER OFFICES 1

ARTICLE II - MEETINGS OF SHAREHOLDERS 1

2.1 PLACE OF MEETINGS 1
2.2 ANNUAL MEETING 1
2.3 SPECIAL MEETINGS 1
2.4 NOTICE OF SHAREHOLDERS' MEETINGS 2
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE 2
2.6 QUORUM 2
2.7 ADJOURNED MEETING; NOTICE 3
2.8 VOTING 3
2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT 4
2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING 4
2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS 4
2.12 PROXIES 5
2.13 INSPECTORS OF ELECTION 5
2.14 NOMINATIONS OF DIRECTORS 6

ARTICLE III - DIRECTORS 6

3.1 POWERS 6
3.2 NUMBER OF DIRECTORS 6
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS 7
3.4 REMOVAL 7
3.5 RESIGNATION AND VACANCIES 7
3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE 8
3.7 REGULAR MEETINGS 8
3.8 SPECIAL MEETINGS; NOTICE 8
3.9 QUORUM 8
3.10 WAIVER OF NOTICE 8
3.11 ADJOURNMENT 9
3.12 NOTICE OF ADJOURNMENT 9
3.13 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING 9
3.14 FEES AND COMPENSATION OF DIRECTORS 9

ARTICLE IV - COMMITTEES 9

4.1 COMMITTEES OF DIRECTORS 9
4.2 MEETINGS AND ACTION OF COMMITTEES 10

<PAGE>
ARTICLE V - OFFICERS 10

5.1 OFFICERS 10
5.2 APPOINTMENT OF OFFICERS 10
5.3 SUBORDINATE OFFICERS 10
5.4 REMOVAL AND RESIGNATION OF OFFICERS 10
5.5 VACANCIES IN OFFICES 11
5.6 CHAIRMAN OF THE BOARD 11
5.7 VICE CHAIRMAN 11
5.8 PRESIDENT 11
5.9 VICE PRESIDENTS 11
5.10 SECRETARY 11
5.11 CHIEF FINANCIAL OFFICER 12

ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES,
AND OTHER AGENTS 12

6.1 INDEMNIFICATION OF DIRECTORS 12
6.2 INDEMNIFICATION OF OTHERS 12
6.3 PAYMENT OF EXPENSES IN ADVANCE 12
6.4 INDEMNITY NOT EXCLUSIVE 13
6.5 INSURANCE INDEMNIFICATION 13
6.6 CONFLICTS 13
6.7 RIGHT TO BRING SUIT 13
6.8 INDEMNITY AGREEMENTS 13
6.9 AMENDMENT, REPEAL OR MODIFICATION 14

ARTICLE VII - RECORDS AND REPORTS 14

7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER 14
7.2 MAINTENANCE AND INSPECTION OF BYLAWS 14
7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS 14
7.4 INSPECTION BY DIRECTORS 15
7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER 15
7.6 FINANCIAL STATEMENTS 15
7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS 16

ARTICLE VIII - GENERAL MATTERS 16

8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING 16
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS 16
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED 16
8.4 CERTIFICATES FOR SHARES 16
8.5 LOST CERTIFICATES 17
8.6 CONSTRUCTION; DEFINITIONS 17

ARTICLE IX - AMENDMENTS 17

9.1 AMENDMENT BY SHAREHOLDERS 17
9.2 AMENDMENT BY DIRECTORS 17
9.3 RECORD OF AMENDMENTS 17

ARTICLE X - INTERPRETATION 18
</TABLE>

<PAGE>
BYLAWS

COMMUNITY WEST BANCSHARES
(a California corporation)

ARTICLE I

CORPORATE OFFICES
-----------------

1.1 PRINCIPAL OFFICE
-----------------

The Board of Directors shall fix the location of the principal executive
office of the corporation at any place within or outside the State of
California. If the principal executive office is located outside California and
the corporation has one or more business offices in California, then the Board
of Directors shall fix and designate a principal business office in California.

1.2 OTHER OFFICES
--------------

The Board of Directors may at any time establish branch or subordinate
offices at any place or places.

ARTICLE II

MEETINGS OF SHAREHOLDERS
------------------------

2.1 PLACE OF MEETINGS
-------------------

Meetings of shareholders shall be held at any place within or outside the
State of California designated by the Board of Directors. In the absence of any
such designation, shareholders' meetings shall be held at the principal
executive office of the corporation or at any place consented to in writing by
all persons entitled to vote at such meeting, given before or after the meeting
and filed with the Secretary of the corporation.

2.2 ANNUAL MEETING
---------------

An annual meeting of shareholders shall be held each year on a date and at
a time designated by the Board of Directors. At that meeting, directors shall
be elected. Any other proper business may be transacted at the annual meeting
of shareholders.

2.3 SPECIAL MEETINGS
-----------------

Special meetings of the shareholders may be called at any time, subject to
the provisions of Sections 2.4 and 2.5 of these Bylaws, by the Board of
Directors, the Chairman of the Board, the President or the holders of shares
entitled to cast not less than ten percent (10%) of the votes at that meeting.

If a special meeting is called by anyone other than the Board of Directors
or the President or the Chairman of the Board, then the request shall be in
writing, specifying the time of such meeting and the general nature of the
business proposed to be transacted, and shall be delivered personally or sent by
registered mail or by other written communication to the Chairman of the Board,
the President, any Vice President or the Secretary of the corporation. The
officer receiving the request forthwith shall cause notice to be given to the
shareholders entitled to vote, in accordance with the provisions of Sections 2.4
and 2.5 of these Bylaws, that a meeting will be held at the time requested by
the person or persons calling the meeting, so long as that time is not less than
thirty-five (35) nor more than sixty (60) days after the receipt of the request.
If the notice is not given within twenty (20) days after receipt of the request,
then the person or persons requesting the meeting may give the notice. Nothing
contained in this paragraph of this Section 2.3 shall be construed as limiting,
fixing or affecting the time when a meeting of shareholders called by action of
the Board of Directors may be held.

2.4 NOTICE OF SHAREHOLDERS' MEETINGS
-----------------------------------

All notices of meetings of shareholders shall be sent or otherwise given in
accordance with Section 2.5 of these Bylaws not less than ten (10) (or, if sent
by third-class mail pursuant to Section 2.5 of these Bylaws, not less than
thirty (30)) nor more than sixty (60) days before the date of the meeting to
each shareholder entitled to vote thereat. Such notice shall state the place,
date, and hour of the meeting and (i) in the case of a special meeting, the
general nature of the business to be transacted, and no business other than that
specified in the notice may be transacted, or (ii) in the case of the annual
meeting, those matters which the Board of Directors, at the time of the mailing
of the notice, intends to present for action by the shareholders, but, subject
to the provisions of the next paragraph of this Section 2.4, any proper matter
may be presented at the meeting for such action. The notice of any meeting at
which Directors are to be elected shall include the names of nominees intended
at the time of the notice to be presented by the Board for election.

If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a director has a direct or indirect financial
interest, pursuant to Section 310 of the California Corporations Code (the
"Code"), (ii) an amendment of the Articles of Incorporation, pursuant to Section
902 of the Code, (iii) a reorganization of the corporation, pursuant to Section
1201 of the Code, (iv) a voluntary dissolution of the corporation, pursuant to
Section 1900 of the Code, or (v) a distribution in dissolution other than in
accordance with the rights of any outstanding preferred shares, pursuant to
Section 2007 of the Code, then the notice shall also state the general nature of
that proposal.

2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
--------------------------------------------------

Notice of a shareholders' meeting shall be given either personally or by
first-class mail, or, if the corporation has outstanding shares held of record
by five hundred (500) or more persons (determined as provided in Section 605 of
the Code) on the record date for the shareholders' meeting, notice may be sent
by third-class mail, or other means of written communication, addressed to the
shareholder at the address of the shareholder appearing on the books of the
corporation or given by the shareholder to the corporation for the purpose of
notice; or if no such address appears or is given, at the place where the
principal executive office of the corporation is located or by publication at
least once in a newspaper of general circulation in the county in which the
principal executive office is located. The notice shall be deemed to have been
given at the time when delivered personally or deposited in the mail or sent by
other means of written communication.

If any notice (or any report referenced in Article VII of these Bylaws)
addressed to a shareholder at the address of such shareholder appearing on the
books of the corporation is returned to the corporation by the United States
Postal Service marked to indicate that the United States Postal Service is
unable to deliver the notice to the shareholder at that address, all future
notices or reports shall be deemed to have been duly given without further
mailing if the same shall be available to the shareholder upon written demand of
the shareholder at the principal executive office of the corporation for a
period of one (1) year from the date of the giving of the notice.

An affidavit of mailing of any notice or report in accordance with the
provisions of this Section 2.5, executed by the Secretary, Assistant Secretary
or any transfer agent, shall be prima facie evidence of the giving of the notice
or report.

2.6 QUORUM
------

Unless otherwise provided in the Articles of Incorporation of the
corporation, a majority of the shares entitled to vote, represented in person or
by proxy, shall constitute a quorum at a meeting of the shareholders. The
shareholders present at a duly called or held meeting at which a quorum is
present may continue to transact business until adjournment notwithstanding the
withdrawal of enough shareholders to leave less than a quorum, if any action
taken (other than adjournment) is approved by at least a majority of the shares
required to constitute a quorum.

In the absence of a quorum, any meeting of shareholders may be adjourned
from time to time by the vote of a majority of the shares represented either in
person or by proxy, but no other business may be transacted, except as provided
in the last sentence of the preceding paragraph.

2.7 ADJOURNED MEETING; NOTICE
---------------------------

Any shareholders' meeting, annual or special, whether or not a quorum is
present, may be adjourned from time to time by the vote of the majority of the
shares represented at that meeting, either in person or by proxy.

When any meeting of shareholders, either annual or special, is adjourned to
another time or place, notice need not be given of the adjourned meeting if its
time and place are announced at the meeting at which the adjournment is taken.
However, if the adjournment is for more than forty-five (45) days from the date
set for the original meeting or if a new record date for the adjourned meeting
is fixed, a notice of the adjourned meeting shall be given to each shareholder
of record entitled to vote at the adjourned meeting in accordance with the
provisions of Sections 2.4 and 2.5 of these Bylaws. At any adjourned meeting
the corporation may transact any business which might have been transacted at
the original meeting.

2.8 VOTING
------

The shareholders entitled to vote at any meeting of shareholders shall be
determined in accordance with the provisions of Section 2.11 of these Bylaws,
subject to the provisions of Sections 702 through 704 of the Code (relating to
voting shares held by a fiduciary, in the name of a corporation, or in joint
ownership).

Elections for directors and voting on any other matter at a shareholders'
meeting need not be by ballot unless a shareholder demands election by ballot at
the meeting and before the voting begins.

Except as provided in the last paragraph of this Section 2.8, or as may be
otherwise provided in the Articles of Incorporation, each outstanding share,
regardless of class, shall be entitled to one vote on each matter submitted to a
vote of the shareholders. Any holder of shares entitled to vote on any matter
may vote part of the shares in favor of the proposal and refrain from voting the
remaining shares or may vote them against the proposal other than elections to
office, but, if the shareholder fails to specify the number of shares such
shareholder is voting affirmatively, it will be conclusively presumed that the
shareholder's approving vote is with respect to all shares which the shareholder
is entitled to vote.

The affirmative vote of the majority of the shares represented and voting
at a duly held meeting at which a quorum is present (which shares voting
affirmatively also constitute at least a majority of the required quorum) shall
be the act of the shareholders, unless the vote of a greater number or voting by
classes is required by the Code or by the Articles of Incorporation.

At a shareholders' meeting at which directors are to be elected, a
shareholder shall be entitled to cumulate votes either (i) by giving one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which that shareholder's shares are
normally entitled or (ii) by distributing the shareholder's votes on the same
principle among as many candidates as the shareholder thinks fit, if the
candidate or candidates' names have been placed in nomination prior to the
voting and the shareholder has given notice prior to the voting of the
shareholder's intention to cumulate the shareholder's votes. If any one
shareholder has given such a notice, then every shareholder entitled to vote may
cumulate votes for candidates in nomination. The candidates receiving the
highest number of affirmative votes, up to the number of directors to be
elected, shall be elected; votes against any candidate and votes withheld shall
have no legal effect.

2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT
-------------------------------------------------------

The transactions of any meeting of shareholders, either annual or special,
however called and noticed, and wherever held, are as valid as though they had
been taken at a meeting duly held after regular call and notice, if a quorum be
present either in person or by proxy, and if, either before or after the
meeting, each of the persons entitled to vote, not present in person or by
proxy, signs a written waiver of notice or a consent to the holding of the
meeting or an approval of the minutes thereof. Neither the business to be
transacted at nor the purpose of any annual or special meeting of shareholders
need be specified in any written waiver of notice or consent to the holding of
the meeting or approval of the minutes thereof, except that if action is taken
or proposed to be taken for approval of any of those matters specified in the
second paragraph of Section 2.4 of these Bylaws, the waiver of notice or consent
or approval shall state the general nature of the proposal. All such waivers,
consents, and approvals shall be filed with the corporate records or made a part
of the minutes of the meeting.

Attendance of a person at a meeting shall constitute a waiver of notice of
and presence at that meeting, except when the person objects, at the beginning
of the meeting, to the transaction of any business because the meeting is not
lawfully called or convened and except that attendance at a meeting is not a
waiver of any right to object to the consideration of matters required by the
Code to be included in the notice of such meeting but not so included, if such
objection is expressly made at the meeting.

2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------------------

Any action which may be taken at any annual or special meeting of
shareholders may be taken without a meeting and without prior notice, if a
consent in writing, setting forth the action so taken, shall be signed by the
holders of outstanding shares having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted.

Directors may not be elected by written consent except by unanimous written
consent of all shares entitled to vote for the election of directors. However,
a director may be elected at any time to fill any vacancy on the Board of
Directors, provided that it was not created by removal of a director and that it
has not been filled by the directors, by the written consent of the holders of a
majority of the outstanding shares entitled to vote for the election of
directors.

All such consents shall be maintained in the corporate records. Any
shareholder giving a written consent, or the shareholder's proxy holders, or a
transferee of the shares, or a personal representative of the shareholder, or
their respective proxy holders, may revoke the consent by a writing received by
the Secretary of the corporation before written consents of the number of shares
required to authorize the proposed action have been filed with the Secretary.

If the consents of all shareholders entitled to vote have not been
solicited in writing, the Secretary shall give prompt notice of any corporate
action approved by the shareholders without a meeting by less than unanimous
written consent to those shareholders entitled to vote who have not consented in
writing. Such notice shall be given in the manner specified in Section 2.5 of
these Bylaws. In the case of approval of (i) a contract or transaction in which
a director has a direct or indirect financial interest, pursuant to Section 310
of the Code, (ii) indemnification of a corporate "agent," pursuant to Section
317 of the Code, (iii) a reorganization of the corporation, pursuant to Section
1201 of the Code, and (iv) a distribution in dissolution other than in
accordance with the rights of outstanding preferred shares, pursuant to Section
2007 of the Code, the notice shall be given at least ten (10) days before the
consummation of any action authorized by that approval, unless the consents of
all shareholders entitled to vote have been solicited in writing.

2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS
-------------------------------------------------------------

In order that the corporation may determine the shareholders entitled to
notice of any meeting or to vote, the Board of Directors may fix, in advance, a
record date, which shall not be more than sixty (60) days nor less than ten (10)
days prior to the date of such meeting nor more than sixty (60) days before any
other action. Shareholders at the close of business on the record date are
entitled to notice and to vote, as the case may be, notwithstanding any transfer
of any shares on the books of the corporation after the record date, except as
otherwise provided in the Articles of Incorporation or the Code.

A determination of shareholders of record entitled to notice of or to vote
at a meeting of shareholders shall apply to any adjournment of the meeting
unless the Board of Directors fixes a new record date for the adjourned meeting,
but the Board of Directors shall fix a new record date if the meeting is
adjourned for more than forty-five (45) days from the date set for the original
meeting.

If the Board of Directors does not so fix a record date:

(a) The record date for determining shareholders entitled to
notice of or to vote at a meeting of shareholders shall be at the close of
business on the business day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the business day next preceding
the day on which the meeting is held.

(b) The record date for determining shareholders entitled to give
consent to corporate action in writing without a meeting, (i) when no prior
action by the Board has been taken, shall be the day on which the first written
consent is given, or (ii) when prior action by the Board has been taken, shall
be at the close of business on the day on which the Board adopts the resolution
relating thereto, or the sixtieth (60th) day prior to the date of such other
action, whichever is later.

The record date for any other purpose shall be as provided in Section 8.1
of these Bylaws.

2.12 PROXIES
-------

Every person entitled to vote for directors, or on any other matter, shall
have the right to do so either in person or by one or more agents authorized by
a written proxy signed by the person and filed with the Secretary of the
corporation. A proxy shall be deemed signed if the shareholder's name or other
authorization is placed on the proxy (whether by manual signature, typewriting,
telegraphic or electronic transmission or otherwise) by the shareholder or the
shareholder's attorney-in-fact. A validly executed proxy which does not state
that it is irrevocable shall continue in full force and effect unless (i) the
person who executed the proxy revokes it prior to the time of voting by
delivering a writing to the corporation stating that the proxy is revoked or by
executing a subsequent proxy and presenting it to the meeting or by attendance
at such meeting and voting in person, or (ii) written notice of the death or
incapacity of the maker of that proxy is received by the corporation before the
vote pursuant to that proxy is counted; provided, however, that no proxy shall
be valid after the expiration of eleven (11) months from the date thereof,
unless otherwise provided in the proxy. The dates contained on the forms of
proxy presumptively determine the order of execution, regardless of the postmark
dates on the envelopes in which they are mailed. The revocability of a proxy
that states on its face that it is irrevocable shall be governed by the
provisions of Sections 705(e) and 705(f) of the Code.

2.13 INSPECTORS OF ELECTION
------------------------

In advance of any meeting of shareholders, the Board of Directors may
appoint inspectors of election to act at the meeting and any adjournment
thereof. If inspectors of election are not so appointed or designated or if any
persons so appointed fail to appear or refuse to act, then the Chairman of the
meeting may, and on the request of any shareholder or a shareholder's proxy
shall, appoint inspectors of election (or persons to replace those who so fail
to appear) at the meeting. The number of inspectors shall be either one (1) or
three (3). If appointed at a meeting on the request of one (1) or more
shareholders or proxies, the majority of shares represented in person or by
proxy shall determine whether one (1) or three (3) inspectors are to be
appointed.

The inspectors of election shall determine the number of shares outstanding
and the voting power of each, the shares represented at the meeting, the
existence of a quorum, and the authenticity, validity, and effect of proxies,
receive votes, ballots or consents, hear and determine all challenges and
questions in any way arising in connection with the right to vote, count and
tabulate all votes or consents, determine when the polls shall close, determine
the result and do any other acts that may be proper to conduct the election or
vote with fairness to all shareholders.

2.14 NOMINATIONS OF DIRECTORS
--------------------------

Nominations for election of members of the board of directors may be made
by the board of directors or by any shareholder of any outstanding class of
capital stock of the corporation entitled to vote for the election of directors.
Notice of intention to make any nominations (other than for persons named in the
notice of the meeting at which such nomination is to be made) shall be made in
writing and shall be delivered or mailed to the president of the corporation no
more than sixty (60) days prior to any meeting of shareholders called for the
election of directors and no more than ten (10) days after the date the notice
of such meeting is sent to shareholders pursuant to Section 2.4 of these Bylaws;
provided, however, that if ten (10) days notice of such meeting is sent to
shareholders, such notice of intention to nominate must be received by the
president of the corporation not later than the time fixed in the notice of the
meeting for the opening of the meeting. Such notification shall contain the
following information to the extent known to the notifying shareholder: (a) the
name and address of each proposed nominee; (b) the principal occupation of each
proposed nominee; (c) the number of shares of capital stock of the corporation
owned by each proposed nominee; (d) the name and residence address of the
notifying shareholder; (e) the number of shares of capital stock of the
corporation owned by the notifying shareholder; (f) with the written consent of
the proposed nominee, a copy of which shall be furnished with the notification,
whether the proposed nominee has ever been convicted of or pleaded nolo
contendere to any criminal offense involving dishonesty or breach of trust,
filed a petition in bankruptcy, or been adjudged a bankrupt. The notice shall
be signed by the nominating shareholder and by the nominee. Nominations not
made in accordance herewith shall be disregarded by the chairman of the meeting
and, upon his instructions, the inspectors of election shall disregard all votes
cast for each such nominee. The restrictions set forth in this paragraph shall
not apply to nomination of a person to replace a proposed nominee who has died
or otherwise become incapacitated to serve as a director between the last day
for giving notice hereunder and the date of election of directors if the
procedure called for in this paragraph was followed with respect to the
nomination of the proposed nominee. A copy of the preceding paragraph shall be
set forth in the notice to shareholders of any meeting at which directors are to
be elected.

ARTICLE III

DIRECTORS
---------

3.1 POWERS
------

Subject to the provisions of the Code and any limitations in the Articles
of Incorporation and these Bylaws relating to action required to be approved by
the shareholders or by the outstanding shares, the business and affairs of the
corporation shall be managed and all corporate powers shall be exercised by or
under the direction of the Board of Directors. The Board may delegate the
management of the day-to-day operation of the business of the corporation to a
management company or other person provided that the business and affairs of the
corporation shall be managed and all corporate powers shall be exercised under
the ultimate direction of the Board.

3.2 NUMBER OF DIRECTORS
---------------------

The authorized number of directors of the corporation shall be not less
than six (6) nor more than eleven (11) and the exact number of directors shall
be ten (10) until changed, within the limits specified above, by a resolution
amending such exact number, duly adopted by the Board of Directors or by the
shareholders. The minimum and maximum number of directors may be changed, or a
definite number may be fixed without provision for an indefinite number, by a
duly adopted amendment to the Articles of Incorporation or by an amendment to
this Bylaw duly adopted by the vote or written consent of holders of a majority
of the outstanding shares entitled to vote; provided, however, that once the
number of directors equals or exceeds five (5) an amendment reducing the fixed
number or the minimum number of directors to a number less than five (5) cannot
be adopted if the votes cast against its adoption at a meeting, or the shares
not consenting in the case of an action by written consent, are equal to more
than sixteen and two-thirds percent (16-2/3%) of the outstanding shares entitled
to vote thereon.

No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.

3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
----------------------------------------------

At each annual meeting of shareholders, directors shall be elected to hold
office until the next annual meeting. Each director, including a director
elected to fill a vacancy, shall hold office until the expiration of the term
for which elected and until a successor has been elected and qualified, except
in the case of the death, resignation, or removal of such a director.

3.4 REMOVAL
-------

The entire Board of Directors or any individual director may be removed
from office without cause by the affirmative vote of a majority of the
outstanding shares entitled to vote on such removal; provided, however, that
unless the entire Board is removed, no individual director may be removed when
the votes cast against such director's removal, or not consenting in writing to
such removal, would be sufficient to elect that director if voted cumulatively
at an election at which the same total number of votes cast were cast (or, if
such action is taken by written consent, all shares entitled to vote were voted)
and the entire number of directors authorized at the time of such director's
most recent election were then being elected.

3.5 RESIGNATION AND VACANCIES
---------------------------

Any director may resign effective upon giving oral or written notice to the
Chairman of the Board, the President, the Secretary or the Board of Directors,
unless the notice specifies a later time for the effectiveness of such
resignation. If the resignation of a director is effective at a future time,
the Board of Directors may elect a successor to take office when the resignation
becomes effective.

Vacancies on the Board of Directors may be filled by a majority of the
remaining directors, or if the number of directors then in office is less than a
quorum by (i) unanimous written consent of the directors then in office, (ii)
the affirmative vote of a majority of the directors then in office at a meeting
held pursuant to notice or waivers of notice, or (iii) a sole remaining
director; however, a vacancy created by the removal of a director by the vote or
written consent of the shareholders or by court order may be filled only by the
affirmative vote of a majority of the shares represented and voting at a duly
held meeting at which a quorum is present (which shares voting affirmatively
also constitute at least a majority of the required quorum), or by the unanimous
written consent of all shares entitled to vote thereon. Each director so
elected shall hold office until the next annual meeting of the shareholders and
until a successor has been elected and qualified, or until his or her death,
resignation or removal.

A vacancy or vacancies in the Board of Directors shall be deemed to exist
(i) in the event of the death, resignation or removal of any director, (ii) if
the Board of Directors by resolution declares vacant the office of a director
who has been declared of unsound mind by an order of court or convicted of a
felony, (iii) if the authorized number of directors is increased, or (iv) if the
shareholders fail, at any meeting of shareholders at which any director or
directors are elected, to elect the full authorized number of directors to be
elected at that meeting.

The shareholders may elect a director or directors at any time to fill any
vacancy or vacancies not filled by the directors, but any such election by
written consent, other than to fill a vacancy created by removal, shall require
the consent of the holders of a majority of the outstanding shares entitled to
vote thereon. A director may not be elected by written consent to fill a
vacancy created by removal except by unanimous consent of all shares entitled to
vote for the election of directors.

3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
---------------------------------------------

Regular meetings of the Board of Directors may be held at any place within
or outside the State of California that has been designated from time to time by
resolution of the Board. In the absence of such a designation, regular meetings
shall be held at the principal executive office of the corporation. Special
meetings of the Board may be held at any place within or outside the State of
California that has been designated in the notice of the meeting or, if not
stated in the notice or if there is no notice, at the principal executive office
of the corporation.

Members of the Board may participate in a meeting through the use of
conference telephone or similar communications equipment, so long as all
directors participating in such meeting can hear one another. Participation in
a meeting pursuant to this paragraph constitutes presence in person at such
meeting.

3.7 REGULAR MEETINGS
-----------------

Regular meetings of the Board of Directors may be held without notice if
the time and place of such meetings are fixed by the Board of Directors.

3.8 SPECIAL MEETINGS; NOTICE
--------------------------

Subject to the provisions of the following paragraph, special meetings of
the Board of Directors for any purpose or purposes may be called at any time by
the Chairman of the Board, the President, any Vice President, the Secretary or
any two (2) directors.

Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail,
telegram, charges prepaid, or by telecopier, addressed to each director at that
director's address as it is shown on the records of the corporation. If the
notice is mailed, it shall be deposited in the United States mail at least four
(4) days before the time of the holding of the meeting. If the notice is
delivered personally or by telephone or by telecopier or telegram, it shall be
delivered personally or by telephone or by telecopier or to the telegraph
company at least forty-eight (48) hours before the time of the holding of the
meeting. Any oral notice given personally or by telephone may be communicated
either to the director or to a person at the office of the director who the
person giving the notice has reason to believe will promptly communicate it to
the director. The notice need not specify the purpose of the meeting.

3.9 QUORUM
------

A majority of the authorized number of directors shall constitute a quorum
for the transaction of business, except to adjourn as provided in Section 3.11
of these Bylaws. Every act or decision done or made by a majority of the
directors present at a meeting duly held at which a quorum is present is the act
of the Board of Directors, subject to the provisions of Section 310 of the Code
(as to approval of contracts or transactions in which a director has a direct or
indirect material financial interest), Section 311 of the Code (as to
appointment of committees), Section 317(e) of the Code (as to indemnification of
directors), the Articles of Incorporation, and other applicable law.

A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum for such meeting.

3.10 WAIVER OF NOTICE
------------------

Notice of a meeting need not be given to any director who signs a waiver of
notice or a consent to holding the meeting or an approval of the minutes
thereof, whether before or after the meeting, or who attends the meeting without
protesting, prior thereto or at its commencement, the lack of notice to such
director. All such waivers, consents, and approvals shall be filed with the
corporate records or made a part of the minutes of the meeting. A waiver of
notice need not specify the purpose of any regular or special meeting of the
Board of Directors.

3.11 ADJOURNMENT
-----------

A majority of the directors present, whether or not a quorum is present,
may adjourn any meeting to another time and place.

3.12 NOTICE OF ADJOURNMENT
-----------------------

If the meeting is adjourned for more than twenty-four (24) hours, notice of
any adjournment to another time and place shall be given prior to the time of
the adjourned meeting to the directors who were not present at the time of the
adjournment.

3.13 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
--------------------------------------------------------

Any action required or permitted to be taken by the Board of Directors may
be taken without a meeting, if all members of the Board individually or
collectively consent in writing to such action. Such written consent or
consents shall be filed with the minutes of the proceedings of the Board. Such
action by written consent shall have the same force and effect as a unanimous
vote of the Board of Directors.

3.14 FEES AND COMPENSATION OF DIRECTORS
--------------------------------------

Directors and members of committees may receive such compensation, if any,
for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the Board of Directors. This Section 3.14 shall not
be construed to preclude any director from serving the corporation in any other
capacity as an officer, agent, employee or otherwise and receiving compensation
for those services.

ARTICLE IV

COMMITTEES
----------

4.1 COMMITTEES OF DIRECTORS
-------------------------

The Board of Directors may, by resolution adopted by a majority of the
authorized number of directors, designate one (1) or more committees, each
consisting of two (2) or more directors, to serve at the pleasure of the Board.
The Board may designate one or more directors as alternate members of any
committee, who may replace any absent member at any meeting of the committee.
The appointment of members or alternate members of a committee requires the vote
of a majority of the authorized number of directors. Any such committee shall
have authority to act in the manner and to the extent provided in the resolution
of the Board and may have all the authority of the Board, except with respect
to:

(a) The approval of any action which, under the Code, also
requires shareholders' approval or approval of the outstanding shares.

(b) The filling of vacancies on the Board of Directors or in any
committee.

(d) The amendment or repeal of these Bylaws or the adoption of new
Bylaws.

(e) The amendment or repeal of any resolution of the Board of
Directors which by its express terms is not so amendable or repealable.

(f) A distribution to the shareholders of the corporation, except
at a rate, in a periodic amount or within a price range set forth in the
Articles of Incorporation or determined by the Board of Directors.

(g) The appointment of any other committees of the Board of
Directors or the members thereof.

4.2 MEETINGS AND ACTION OF COMMITTEES
-------------------------------------

Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these Bylaws, Section 3.6
(place of meetings), Section 3.7 (regular meetings), Section 3.8 (special
meetings and notice), Section 3.9 (quorum), Section 3.10 (waiver of notice),
Section 3.11 (adjournment), Section 3.12 (notice of adjournment), and Section
3.13 (action without meeting), with such changes in the context of those Bylaws
as are necessary to substitute the committee and its members for the Board of
Directors and its members; provided, however, that the time of regular meetings
of committees may be determined either by resolution of the Board of Directors
or by resolution of the committee, that special meetings of committees may also
be called by resolution of the Board of Directors, and that notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The Board of Directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these Bylaws.

ARTICLE V

OFFICERS
--------

5.1 OFFICERS
--------

The officers of the corporation shall be a President, a Secretary, and a
Chief Financial Officer. The corporation may also have, at the discretion of
the Board of Directors, a Chairman of the Board, one or more Vice Presidents,
one or more Assistant Secretaries, one or more Assistant Treasurers, and such
other officers as may be appointed in accordance with the provisions of Section
5.3 of these Bylaws. Any number of offices may be held by the same person.

5.2 APPOINTMENT OF OFFICERS
-------------------------

The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Section 5.3 or Section 5.5 of these Bylaws,
shall be chosen by the Board and serve at the pleasure of the Board, subject to
the rights, if any, of an officer under any contract of employment.

5.3 SUBORDINATE OFFICERS
---------------------

The Board of Directors may appoint, or may empower the Chairman of the
Board or the President to appoint, such other officers as the business of the
corporation may require, each of whom shall hold office for such period, have
such authority, and perform such duties as are provided in these Bylaws or as
the Board of Directors may from time to time determine.

5.4 REMOVAL AND RESIGNATION OF OFFICERS
---------------------------------------

Subject to the rights, if any, of an officer under any contract of
employment, all officers serve at the pleasure of the Board of Directors and any
officer may be removed, either with or without cause, by the Board of Directors
at any regular or special meeting of the Board or, except in case of an officer
chosen by the Board of Directors, by any officer upon whom such power of removal
may be conferred by the Board of Directors.

Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.

5.5 VACANCIES IN OFFICES
----------------------

A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these Bylaws for regular appointments to that office.

5.6 CHAIRMAN OF THE BOARD
------------------------

The Chairman of the Board, if such an officer be elected, shall, if
present, preside at meetings of the Board of Directors and shareholders and
shall exercise and perform such other powers and duties as may from time to time
be assigned by the Board of Directors or as may be prescribed by these Bylaws.
If there is no President, and in the absence of the Executive and Senior Vice
Presidents, then the Chairman of the Board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.8 of these Bylaws.

5.7 VICE CHAIRMAN
--------------

The Vice Chairman of the Board, if such officer be elected, shall, if
present and the Chairman of the Board is not present, preside at meetings of the
Board of Directors and shareholders and shall exercise and perform such other
powers and duties as may from time to time be assigned by the Board of Directors
or as may be prescribed by these Bylaws. If there is no President, and in the
absence of the Executive and Senior Vice Presidents and Chairman of the Board,
then the Vice Chairman of the Board shall also be the chief executive officer of
the corporation and shall have the powers and duties prescribed in Section 5.8
of these Bylaws.

5.8 PRESIDENT
---------

Subject to such supervisory powers, if any, as may be given by the Board of
Directors to the Chairman of the Board, and Vice Chairman of the Board, if there
be such an officer (s), the President shall be the chief executive officer of
the corporation and shall, subject to the control of the Board of Directors,
have general supervision, direction, and control of the business and the
officers of the corporation. In the absence or nonexistence of a Chairman and
Vice Chairman of the Board, the President shall preside at all meetings of the
shareholders and at all meetings of the Board of Directors. The President shall
have the general powers and duties of management usually vested in the office of
President of a corporation, and shall have such other powers and duties as may
be prescribed by the Board of Directors or these Bylaws.

5.9 VICE PRESIDENTS
----------------

In the absence or disability of the President, the Executive and Senior
Vice Presidents, if any, in order of their rank as fixed by the Board of
Directors or, if not ranked, a Vice President designated by the Board of
Directors, shall perform all the duties of the President and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
President. The Vice Presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
Board of Directors, these Bylaws, the President, the Chairman of the Board or
Vice Chairman of the Board.

5.10 SECRETARY
---------

The Secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the Board of Directors may
direct, a book of minutes of all meetings and actions of Directors, committees
of directors and shareholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized and
the notice given), the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at shareholders'
meetings, and the proceedings thereof.

The Secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the Board of Directors, a share
register, or a duplicate share register, showing the names of all shareholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.

The Secretary shall give, or cause to be given, notice of all meetings of
the shareholders and of the Board of Directors required to be given by law or by
these Bylaws. The Secretary shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the Board of Directors or by these Bylaws.

5.11 CHIEF FINANCIAL OFFICER
-------------------------

The Chief Financial Officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.

The Chief Financial Officer shall deposit all money and other valuables in
the name and to the credit of the corporation with such depositaries as may be
designated by the Board of Directors. The Chief Financial Officer shall
disburse the funds of the corporation as may be ordered by the Board of
Directors, shall render to the President and directors, whenever they request
it, an account of all of his or her transactions as Chief Financial Officer and
of the financial condition of the corporation, and shall have such other powers
and perform such other duties as may be prescribed by the Board of Directors or
these Bylaws.

ARTICLE VI

INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES,
--------------------------------------------------
AND OTHER AGENTS
----------------

6.1 INDEMNIFICATION OF DIRECTORS
------------------------------

The corporation shall, to the maximum extent and in the manner permitted by
the Code, indemnify each of its directors against expenses (as defined in
Section 317(a) of the Code), judgments, fines, settlements, and other amounts
actually and reasonably incurred in connection with any proceeding (as defined
in Section 317(a) of the Code), arising by reason of the fact that such person
is or was a director of the corporation. For purposes of this Article VI, a
"director" of the corporation includes any person (i) who is or was a director
of the corporation, (ii) who is or was serving at the request of the corporation
as a director of another foreign or domestic corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was a director of a corporation
which was a predecessor corporation of the corporation or of another enterprise
at the request of such predecessor corporation.

6.2 INDEMNIFICATION OF OTHERS
---------------------------

The corporation shall have the power, to the maximum extent and in the
manner permitted by the Code, to indemnify each of its employees, officers, and
agents (other than directors) against expenses (as defined in Section 317(a) of
the Code), judgments, fines, settlements, and other amounts actually and
reasonably incurred in connection with any proceeding (as defined in Section
317(a) of the Code), arising by reason of the fact that such person is or was an
employee, officer, or agent of the corporation. For purposes of this Article
VI, an "employee" or "officer" or "agent" of the corporation (other than a
director) includes any person (i) who is or was an employee, officer, or agent
of the corporation, (ii) who is or was serving at the request of the corporation
as an employee, officer, or agent of another foreign or domestic corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was an
employee, officer, or agent of a corporation which was a predecessor corporation
of the corporation or of another enterprise at the request of such predecessor
corporation.

6.3 PAYMENT OF EXPENSES IN ADVANCE
----------------------------------

Expenses and attorneys' fees incurred in defending any civil or criminal
action or proceeding for which indemnification is required pursuant to Section
6.1, or if otherwise authorized by the Board of Directors, shall be paid by the
corporation in advance of the final disposition of such action or proceeding
upon receipt of an undertaking by or on behalf of the indemnified party to repay
such amount if it shall ultimately be determined that the indemnified party is
not entitled to be indemnified as authorized in this Article VI.

6.4 INDEMNITY NOT EXCLUSIVE
-------------------------

The indemnification provided by this Article VI shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under any Bylaw, agreement, vote of shareholders or directors or
otherwise, both as to action in an official capacity and as to action in another
capacity while holding such office. The rights to indemnity hereunder shall
continue as to a person who has ceased to be a director, officer, employee, or
agent and shall inure to the benefit of the heirs, executors, and administrators
of the person.

6.5 INSURANCE INDEMNIFICATION
--------------------------

The corporation shall have the power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation against any liability asserted against or incurred by such person in
such capacity or arising out of that person's status as such, whether or not the
corporation would have the power to indemnify that person against such liability
under the provisions of this Article VI.

6.6 CONFLICTS
---------

No indemnification or advance shall be made under this Article VI, except
where such indemnification or advance is mandated by law or the order, judgment
or decree of any court of competent jurisdiction, in any circumstance where it
appears:

(1) That it would be inconsistent with a provision of the Articles
of Incorporation, these Bylaws, a resolution of the shareholders or an agreement
in effect at the time of the accrual of the alleged cause of the action asserted
in the proceeding in which the expenses were incurred or other amounts were
paid, which prohibits or otherwise limits indemnification; or

(2) That it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.

6.7 RIGHT TO BRING SUIT
----------------------

If a claim under this Article is not paid in full by the corporation within
90 days after a written claim has been received by the corporation (either
because the claim is denied or because no determination is made), the claimant
may at any time thereafter bring suit against the corporation to recover the
unpaid amount of the claim and, if successful in whole or in part, the claimant
shall also be entitled to be paid the expenses of prosecuting such claim. The
corporation shall be entitled to raise as a defense to any such action that the
claimant has not met the standards of conduct that make it permissible under the
Code for the corporation to indemnify the claimant for the claim. Neither the
failure of the corporation (including its Board of Directors, independent legal
counsel, or its shareholders) to have made a determination prior to the
commencement of such action that indemnification of the claimant is permissible
in the circumstances because he or she has met the applicable standard of
conduct, if any, nor an actual determination by the corporation (including its
Board of Directors, independent legal counsel, or its shareholders) that the
claimant has not met the applicable standard of conduct, shall be a defense to
such action or create a presumption for the purposes of such action that the
claimant has not met the applicable standard of conduct.

6.8 INDEMNITY AGREEMENTS
---------------------

The Board of Directors is authorized to enter into a contract with any
director, officer, employee or agent of the corporation, or any person who is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, including employee benefit plans, or any person who was a director,
officer, employee or agent of a corporation which was a predecessor corporation
of the corporation or of another enterprise at the request of such predecessor
corporation, providing for indemnification rights equivalent to or, if the Board
of Directors so determines and to the extent permitted by applicable law,
greater than, those provided for in this Article VI.

6.9 AMENDMENT, REPEAL OR MODIFICATION
------------------------------------

Any amendment, repeal or modification of any provision of this Article VI
shall not adversely affect any right or protection of a director or agent of the
corporation existing at the time of such amendment, repeal or modification.

ARTICLE VII

RECORDS AND REPORTS
-------------------

7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER
-------------------------------------------------

The corporation shall keep either at its principal executive office or at
the office of its transfer agent or registrar (if either be appointed), as
determined by resolution of the Board of Directors, a record of its shareholders
listing the names and addresses of all shareholders and the number and class of
shares held by each shareholder.

A shareholder or shareholders of the corporation holding at least five
percent (5%) in the aggregate of the outstanding voting shares of the
corporation or who hold at least one percent (1%) of such voting shares and have
filed a Schedule 14B with the United States Securities and Exchange Commission
relating to the election of directors, shall have an absolute right to do either
or both of the following (i) inspect and copy the record of shareholders' names,
addresses, and shareholdings during usual business hours upon five (5) days'
prior written demand upon the corporation, or (ii) obtain from the transfer
agent for the corporation, upon written demand and upon the tender of such
transfer agent's usual charges for such list (the amount of which charges shall
be stated to the shareholder by the transfer agent upon request), a list of the
shareholders' names and addresses who are entitled to vote for the election of
directors, and their shareholdings, as of the most recent record date for which
it has been compiled or as of a date specified by the shareholder subsequent to
the date of demand. The list shall be made available on or before the later of
five (5) business days after the demand is received or the date specified
therein as the date as of which the list is to be compiled.

The record of shareholders shall also be open to inspection and copying by
any shareholder or holder of a voting trust certificate at any time during usual
business hours upon written demand on the corporation, for a purpose reasonably
related to the holder's interests as a shareholder or holder of a voting trust
certificate.

Any inspection and copying under this Section 7.1 may be made in person or
by an agent or attorney of the shareholder or holder of a voting trust
certificate making the demand.

7.2 MAINTENANCE AND INSPECTION OF BYLAWS
----------------------------------------

The corporation shall keep at its principal executive office or, if its
principal executive office is not in the State of California, at its principal
business office in California, the original or a copy of these Bylaws as amended
to date, which shall be open to inspection by the shareholders at all reasonable
times during office hours. If the principal executive office of the corporation
is outside the State of California and the corporation has no principal business
office in such state, then it shall, upon the written request of any
shareholder, furnish to such shareholder a copy of these Bylaws as amended to
date.

7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS
-----------------------------------------------------------

The accounting books and records and the minutes of proceedings of the
shareholders and the Board of Directors, and committees of the Board of
Directors shall be kept at such place or places as are designated by the Board
of Directors or, in absence of such designation, at the principal executive
office of the corporation. The minutes shall be kept in written form, and the
accounting books and records shall be kept either in written form or in any
other form capable of being converted into written form.

The minutes and accounting books and records shall be open to inspection
upon the written demand on the corporation of any shareholder or holder of a
voting trust certificate at any reasonable time during usual business hours, for
a purpose reasonably related to such holder's interests as a shareholder or as
the holder of a voting trust certificate. Such inspection by a shareholder or
holder of a voting trust certificate may be made in person or by an agent or
attorney and the right of inspection includes the right to copy and make
extracts. Such rights of inspection shall extend to the records of each
subsidiary corporation of the corporation.

7.4 INSPECTION BY DIRECTORS
-------------------------

Every director shall have the absolute right at any reasonable time to
inspect and copy all books, records, and documents of every kind and to inspect
the physical properties of the corporation and each of its subsidiary
corporations, domestic or foreign. Such inspection by a director may be made in
person or by an agent or attorney and the right of inspection includes the right
to copy and make extracts.

7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER
-----------------------------------------

The Board of Directors shall cause an annual report to be sent to the
shareholders not later than one hundred twenty (120) days after the close of the
fiscal year adopted by the corporation. Such report shall be sent to the
shareholders at least fifteen (15) (or, if sent by third-class mail, thirty-five
(35)) days prior to the annual meeting of shareholders to be held during the
next fiscal year and in the manner specified in Section 2.5 of these Bylaws for
giving notice to shareholders of the corporation.

The annual report shall contain a balance sheet as of the end of the fiscal
year and an income statement and statement of changes in financial position for
the fiscal year, accompanied by any report thereon of independent accountants
or, if there is no such report, the certificate of an authorized officer of the
corporation that the statements were prepared without audit from the books and
records of the corporation.

The foregoing requirement of an annual report shall be waived so long as
the shares of the corporation are held by fewer than one hundred (100) holders
of record.

7.6 FINANCIAL STATEMENTS
---------------------

If no annual report for the fiscal year has been sent to shareholders, then
the corporation shall, upon the written request of any shareholder made more
than one hundred twenty (120) days after the close of such fiscal year, deliver
or mail to the person making the request, within thirty (30) days thereafter, a
copy of a balance sheet as of the end of such fiscal year and an income
statement and statement of changes in financial position for such fiscal year.

A shareholder or shareholders holding at least five percent (5%) of the
outstanding shares of any class of the corporation may make a written request to
the corporation for an income statement of the corporation for the three-month,
six-month or nine-month period of the current fiscal year ended more than thirty
(30) days prior to the date of the request and a balance sheet of the
corporation as of the end of that period. The statements shall be delivered or
mailed to the person making the request within thirty (30) days thereafter. A
copy of the statements shall be kept on file in the principal office of the
corporation for twelve (12) months and it shall be exhibited at all reasonable
times to any shareholder demanding an examination of the statements or a copy
shall be mailed to the shareholder. If the corporation has not sent to the
shareholders its annual report for the last fiscal year, the statements referred
to in the first paragraph of this Section 7.6 shall likewise be delivered or
mailed to the shareholder or shareholders within thirty (30) days after the
request.

The quarterly income statements and balance sheets referred to in this
section shall be accompanied by the report thereon, if any, of any independent
accountants engaged by the corporation or the certificate of an authorized
officer of the corporation that the financial statements were prepared without
audit from the books and records of the corporation.

7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
---------------------------------------------------

The Chairman of the Board, the President, any Vice President, the Chief
Financial Officer, the Secretary or Assistant Secretary of this corporation, or
any other person authorized by the Board of Directors or the President or a Vice
President, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority herein
granted may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.

ARTICLE VIII

GENERAL MATTERS
---------------

8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
-------------------------------------------------------------

For purposes of determining the shareholders entitled to receive payment of
any dividend or other distribution or allotment of any rights or entitled to
exercise any rights in respect of any other lawful action (other than with
respect to notice or voting at a shareholders meeting or action by shareholders
by written consent without a meeting), the Board of Directors may fix, in
advance, a record date, which shall not be more than sixty (60) days prior to
any such action. Only shareholders of record at the close of business on the
record date are entitled to receive the dividend, distribution or allotment of
rights, or to exercise the rights, as the case may be, notwithstanding any
transfer of any shares on the books of the corporation after the record date,
except as otherwise provided in the Articles of Incorporation or the Code.

If the Board of Directors does not so fix a record date, then the record
date for determining shareholders for any such purpose shall be at the close of
business on the day on which the Board adopts the resolution relating thereto or
the sixtieth (60th) day prior to the date of that action, whichever is later.

8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
---------------------------------------------

From time to time, the Board of Directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.

8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED
--------------------------------------------------------

The Board of Directors, except as otherwise provided in these Bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the Board of Directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.

8.4 CERTIFICATES FOR SHARES
-------------------------

A certificate or certificates for shares of the corporation shall be issued
to each shareholder when any of such shares are fully paid. The Board of
Directors may authorize the issuance of certificates for shares partly paid
provided that these certificates shall state the total amount of the
consideration to be paid for them and the amount actually paid. All
certificates shall be signed in the name of the corporation by the Chairman of
the Board or the Vice Chairman of the Board or the President or a Vice President
and by the Chief Financial Officer or an Assistant Treasurer or the Secretary or
an Assistant Secretary, certifying the number of shares and the class or series
of shares owned by the shareholder. Any or all of the signatures on the
certificate may be by facsimile.

In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed on a certificate has ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the corporation with the same effect as if that person were an
officer, transfer agent or registrar at the date of issue.

8.5 LOST CERTIFICATES
------------------

Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation or its transfer agent or registrar and canceled
at the same time. The Board of Directors may, in case any share certificate or
certificate for any other security is lost, stolen or destroyed (as evidenced by
a written affidavit or affirmation of such fact), authorize the issuance of
replacement certificates on such terms and conditions as the Board may require;
the Board may require indemnification of the corporation secured by a bond or
other adequate security sufficient to protect the corporation against any claim
that may be made against it, including any expense or liability, on account of
the alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.

8.6 CONSTRUCTION; DEFINITIONS
--------------------------

Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Code shall govern the construction of these
Bylaws. Without limiting the generality of this provision, the singular number
includes the plural, the plural number includes the singular, and the term
"person" includes both a corporation and a natural person.

ARTICLE IX

AMENDMENTS
----------

9.1 AMENDMENT BY SHAREHOLDERS
---------------------------

New Bylaws may be adopted or these Bylaws may be amended or repealed by the
vote or written consent of holders of a majority of the outstanding shares
entitled to vote; provided, however, that if the Articles of Incorporation of
the corporation set forth the number of authorized Directors of the corporation,
then the authorized number of Directors may be changed only by an amendment of
the Articles of Incorporation.

9.2 AMENDMENT BY DIRECTORS
------------------------

Subject to the rights of the shareholders as provided in Section 9.1 of
these Bylaws, Bylaws, other than a Bylaw or an amendment of a Bylaw changing the
authorized number of directors (except to fix the authorized number of directors
pursuant to a Bylaw providing for a variable number of directors), may be
adopted, amended or repealed by the Board of Directors.

9.3 RECORD OF AMENDMENTS
----------------------

Whenever an amendment or new Bylaw is adopted, it shall be copied in the
book of minutes with the original Bylaws. If any Bylaw is repealed, the fact of
repeal, with the date of the meeting at which the repeal was enacted or written
consent was filed, shall be stated in said book.

ARTICLE X

INTERPRETATION
--------------

Reference in these Bylaws to any provision of the California Corporations
Code shall be deemed to include all amendments thereof.

<PAGE>
SECRETARY'S CERTIFICATE OF ADOPTION OF BYLAWS
OF
COMMUNITY WEST BANCSHARES

I, the undersigned, do hereby certify that:

1. I am the duly elected and acting Secretary of Community West
Bancshares, a California corporation.

2. The foregoing Bylaws constitute the Bylaws of said corporation as
adopted by the Directors of said corporation at a duly called and held meeting
of the Board of Directors on January 23, 1997.

IN WITNESS WHEREOF, I have hereunto subscribed my name this 23rd day of
January, 1997.

/S/Michel Nellis, Secretary
---------------------------
Michel Nellis, Secretary

EXHIBIT (10)(ii)
EMPLOYMENT AGREEMENT FOR LLEWELLYN STONE

EMPLOYMENT AGREEMENT

THIS AGREEMENT is made this 16th day of November, 1993, between GOLETA
NATIONAL BANK (the "Bank"), having a principal business at 5827 Hollister
Avenue, Goleta, California 93117, and LLEWELLYN W. STONE ("Executive"), whose
residence address is 6560 Camino Venturoso, Goleta, California 93117.

WITNESSETH
- ----------

WHEREAS, the Bank is a California national banking association duly organized,
validly existing, and in good standing under the laws of the United States of
America, with power to own property and carry on business as its business as it
is now being conducted:

WHEREAS, the Bank desires to avail itself of the skill, knowledge and experience
of Executive in order to insure the successful management of its business:

WHEREAS the parties hereto desire to specify the terms of Executive's employment
by the Bank as controlling Executive's employment with the Bank;

NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth
it is agreed that as of November 16, 1997, (the "Effective Date"), the following
terms and conditions shall apply to Executive's said employment:

A. TERM OF EMPLOYMENT
--------------------
1. Term. The Bank hereby employs Executive and Executive hereby accepts
----
employment with the Bank for the period of ten (10) years (the "Term")
commencing with the Effective Date, subject, however, to prior termination of
this Agreement as hereinafter provided. Where used herein, "Term" shall refer to
the entire period of employment of Executive by the Bank hereunder, whether for
the period provided above, or whether terminated earlier as hereinafter
provided.

B. DUTIES OF EXECUTIVE
---------------------
1. Duties. Executive shall perform the duties of President and Chief
------
Executive Officer of the Bank, subject to the powers by law vested in the Board
of Directors of the Bank and in the Bank's shareholders. During the Term,
Executive shall perform exclusively the services herein contemplated to be
performed by Executive faithfully, diligently and to the best of Executive's
ability, consistent with the highest and best standards of the banking industry
and in compliance with all applicable laws and the Bank's Articles of
Association and Bylaws.

2.Conflicts of Interest. Except as permitted by the prior written consent
-----------------------
of the Board of Directors of the Bank, Executive shall devote Executive's entire
productive time, ability and attention to the business of the Bank during the
Term and Executive shall not directly or indirectly render any services of a
business, commercial or professional nature, to any other person, firm or
corporation, whether for compensation or otherwise, which are in conflict with
the Bank's interests.

C. Compensation
------------
1. Salary. For Executive's services hereunder, the Bank shall pay or cause
------
to be paid as annual base salary to the Executive a minimum of One Hundred
Seventeen Thousand Dollars ($117,000.00) per year for the first year of the
Term. Said salary shall be payable in equal installments in conformity with the
Bank's normal payroll period. Said salary shall be reviewed annually, and annual
adjustments after the first year of the Term shall be made in the discretion of
the Board of Directors.
2. Bonuses. Executive may receive such bonuses, if any, as the Board of
-------
Directors in its sole discretion shall determine.

D. EXECUTIVE BENEFITS
-------------------
1.Vacation. Executive shall be entitled to a vacation each year during the
Term, which vacation shall be not more than five (5) weeks per year, provided
however, that each year of the Term, Executive is required to and shall take at
least two (2) weeks of said vacation (the "Mandatory Vacation"), which shall be
taken consecutively. Executive shall not be entitled to vacation pay in lieu of
vacation, and any vacation time not used in excess of the Mandatory Vacation
shall be deemed waived.

2. Automobile. During the Term hereunder, the Bank shall provide Executive,
----------
for Executive's sole use, a suitable full-size automobile, the make of such
automobile to be determined by the mutual agreement of the Board of Directors
and Executive, and which automobile shall at no time be older than three (3)
years. The Bank shall pay all operating expenses of any nature whatsoever with
regard to such automobile, provided executive furnishes to the Bank adequate
records and other documentary evidence required by federal and state statutes
and regulations issued by the appropriate taxing authorities for the
substantiation of such payments and deductible compensation of executive. The
Bank shall also procure and maintain in force an automobile liability insurance
policy on such automobile, containing all reasonable and necessary coverage.

3. Club Membership. The Bank will provide the Executive with a golf
----------------
membership in La Cumbre Country Club and will pay monthly dues for basic
golf-related and business-related monthly expenses.

4. Group Medical and Life Insurance Benefits. The Bank shall provide for
Executive, at the Bank's expense, participation in medical, accident and health,
income continuation and life insurance benefits equivalent to the normal and
customary benefits available from time to time under the California Bankers
Association group Insurance Program for an employee of Executive's salary level.
Said coverage shall be in existence or shall take e effect as of the Effective
Date hereof and shall continue throughout the Term. The Bank's liability to
Executive for any breach of this paragraph shall be limited to the amount of
premiums payable by the Bank to obtain the coverage contemplated herein.

E. REIMBURSEMENT FOR BUSINESS EXPENSES
--------------------------------------
Executive shall be entitled to reimbursement by the Bank for any ordinary
and necessary business expenses incurred by Executive in the performance of
Executive's duties and in acting for the Bank during the Term, which types of
expenditures shall be determined by the Board of Directors, provided that:
(a.) Each such expenditure is of a nature qualifying it as a proper
deduction on the federal and state income tax returns of the Bank as a business
expense and not as deductible compensation to the Executive; and
(b) Executive furnishes to the Bank adequate records and other
documentary evidence required by federal and state statutes and regulations
issued by the appropriate taxing authorities for the substantiation of such
expenditures as deductible business expenses of the Bank and not as deductible
compensation to Executive.

F. TERMINATION
-----------
1. Termination. The Bank may terminate this Agreement at any time without
-----------
further obligation or liability to Executive, by action of the Board of
Directors, if in the opinion of the Board the Executive fails to perform or
habitually neglects the duties which he is required to perform hereunder, if
Executive engages in illegal activity which materially adversely affects the
Banks' reputation in the community or which evidences the lack of Executive's
fitness or ability to perform executive's duties as determined by the Board of
Directors in good faith if Executive commits any act which would cause
termination of coverage under the Bank's Bankers' Blanket Bond as to Executive
(as distinguished from termination of coverage as to the Bank as a whole), or if
Executive is found to be physically or mentally incapable (as hereinafter
defined as performing executive's duties for a period of at least ninety [90]
consecutive days [or a cumulative period of one hundred twenty (120) days] in
any one calendar year) by the Board of Directors acting in good faith. Such
termination shall not prejudice any remedy which the Bank may have at law, in
equity, or under this Agreement.

For purposes of this Agreement only, physical or mental disability shall be
defined as Executive being unable to fully perform under this Agreement for a
continuous period of ninety (90) days or a cumulative period of one hundred
twenty (120) days in any one calendar year. If there should be a dispute between
the Bank and Executive as to the Executive's physical or mental disability for
purposes of this Agreement, the question shall be settled by the opinion of an
impartial reputable physician or psychiatrist agreed upon by the parties or
their representatives, or if the parties cannot agree within ten (10) days after
a request for designation of such party, then by a physician or psychiatrist
designated by the Santa Barbara County Medical Association. The certification of
such physician or psychiatrist as to the question in dispute shall be final and
binding upon the parties hereto.

2. Action by Supervisory Authority. If the Bank is closed or taken over by
-------------------------------
the Comptroller of the Currency or other supervisory authority, including the
Federal Deposit Insurance Corporation, or if such supervisory authority should
exercise its cease and desist powers to remove Executive from office, such bank
supervisory authority may immediately terminate this Agreement without further
liability or obligation to Executive.

3. Merger or Corporate Dissolution. In the event of a merger where the Bank
-------------------------------
is not the surviving corporation, in the event of a consolidation, in the event
of a transfer of all or substantially all of the assets of the Bank, in the
event of any other corporate reorganization where there is a change in ownership
of at least twenty-five percent (25%) except as may result from a transfer of
shares to another corporation in exchange for at least eighty percent (80%)
control of that corporation, or in the event of the dissolution, of the Bank,
this Agreement may be terminated without further liability to Executive by the
Bank or the surviving bank, in the event of a merger, or the transferee of
assets, in the event of a purchase or sale, provided, however, that in such
event the Bank shall pay to Executive the amount specified in paragraph F.4
herein regarding termination at will.

4. Termination At Will. Pursuant to the provisions of 12 U.S.C. Section 24
-------------------
and notwithstanding anything to the contrary herein, the Bank may terminate this
Agreement at any time by action of the Board of Directors of the Bank. Such
termination shall be effective immediately upon receipt of notice by Executive
from the Bank, and all benefits provided by the Bank hereunder to Executive
shall thereupon cease, other than the insurance benefits provided to Executive
hereunder which shall be continued by the Bank for a period not to exceed one
hundred eighty (180) days after termination. Notwithstanding the foregoing, it
is agreed that in the event of such termination, Executive shall continue to be
paid Executive's salary for a period of six (6) months next following
Executive's termination, which payments shall be paid to Executive in accordance
with the normal method of payment as specified hereinabove. Such action shall
not be construed as breach of this Agreement, and the payment of the sum above
stated shall constitute full and complete performance by the Bank of its
obligations hereunder.

5. Effect of termination. In the event of the termination of this
Agreement prior to the completion of the Term specified herein, Executive shall
be entitled to the salary earned by Executive prior to the date of termination
as provided for in this Agreement, computed pro rata up to and including that
--------
date; but Executive shall be entitled to no further compensation for services
rendered after the date of termination, except as provided in subparagraph f.4
above for termination at will. Executive further agrees that in the event of
such termination, he will resign from the Board of Directors of the Bank on the
effective date of the termination of this Agreement.

G. GENERAL PROVISIONS
1. Trade secrets. During the Term, Executive will have access to and
become acquainted with what Executive and the Bank acknowledge are trade
secrets, to wit, knowledge or data concerning the Bank, including its operations
and business, and the identity of customers of the Bank, including knowledge of
their financial condition, their financial needs, as well as their methods of
doing business. Executive shall not disclose any of the aforesaid trade secrets,
directly or indirectly, or use them in any way, either during the Term or for a
period of three (3) years after the termination of this agreement, except as
required in the course of Executive's employment with the Bank.

2. Covenant Not to Compete. Executive hereby covenants and agrees that
for a period of three (3) years after termination of this Agreement and for any
period during which Executive receives any compensation from the Bank, Executive
shall not engage in the business of banking within the cities of Santa Barbara
or Goleta or any where else in Santa Barbara County.

3. Indemnification. To the extent permitted by law, applicable
statutes and the Articles of Association, Bylaws or resolutions of the Bank in
effect from time to time, the Bank shall indemnify Executive against liability
or loss arising out of Executive's actual or asserted misfeasance or
non-feasance in the performance of Executive's duties or out of any actual or
asserted wrongful act against, or by, the Bank including but not limited to
judgments, fines, settlements and expenses incurred in the defense of actions,
proceedings and appeals herefrom. The Bank shall endeavor to apply for and
obtain Bank and Executive from and against the aforesaid liabilities. The
provisions of this paragraph shall apply to the estate, executor, administrator,
heirs, legatees or devisees of Executive.

4. Return of Documents. Executive expressly agrees that all manuals,
documents, files, reports, studies, instruments or other materials used and/or
developed by Executive during the Term are solely the property of the Bank, and
that Executive has no right, title or interest therein. Upon termination of this
Agreement, Executive or Executive's representative shall promptly deliver
possession of all of said property to the Bank in good condition.

5. Notices. Any notice, request, demand or other communication
required or permitted hereunder shall be deemed to be properly given when
personally served in writing, when deposited in the United States mail, postage
prepaid, or when communicated to a public telegraph company for transmittal,
addressed to the party at the address appearing at the beginning of this
Agreement. Either party may change its address by written notice in accordance
with this paragraph.

6. Applicable Law. Except to the extent governed by the laws of the
United States, this Agreement is to be governed by and construed under the laws
of the State of California.

7. Captions and Paragraph Headings. Captions and paragraph headings
used herein are for convenience only and are not a part of this Agreement and
shall not be used in construing it.

8. Invalid Provisions. Should any provision of this Agreement for any
reason be declared invalid, void, or unenforceable by a court of competent
jurisdiction, the validity and binding effect of any remaining portion shall not
be affected, and the remaining portions of this Agreement shall remain in full
force and effect as if this Agreement had been executed with said provision
eliminated.

9. Entire Agreement. This Agreement contains the entire agreement of
the parties. It supersedes any and all other agreements, either oral or in
writing, between the parties hereto with respect to the employment of Executive
by the Bank. Each party to this Agreement acknowledges that no representations,
inducements, promises, or acting on behalf of any party, which are not embodied
herein, and that no other agreement, statement, or promise not contained in this
Agreement shall be valid or binding. This Agreement may not be modified or
amended by oral agreement, but only by an agreement in writing signed by the
Bank and Executive.

10. Receipt of Agreement. Each of the parties hereto acknowledges that
he has read this Agreement in its entirety and does hereby acknowledge receipt
of a fully executed copy thereof. A fully executed copy shall be an original for
all purposes, and is a duplicate original.

IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.

GOLETA NATIONAL BANK

BY /S/Michael A. Alexander
___________________
Michael A. Alexander

BY /S/Robert H. Bartlein
____________________
Robert H. Bartlein

BY /S/Gerard Bradley
_____________________
Gerard Bradley

/S/LLewellyn W. Stone
__________________
LLewellyn W. Stone

SEPARATE AGREEMENT

The undersigned agree to the following arrangement pertaining to La
Cumbre Country Club membership purchased by the Bank for Lew Stone, CEO.

If for any reason, Lew Stone, CEO of Goleta National Bank, shall leave the
employ of the Bank, the membership purchased by the Bank in the La Cumbre
Country Club shall be sold and the net proceeds shall revert to the Bank.

/S/Lew Stone /S/Michael A. Alexander
Signed:________________ Signed:_______________________
Lew Stone Michael A. Alexander
luding a directorelect

Exhibit: (10)(iii) Salary Continuation Agreement between Goleta
National Bank and Llewelyn Stone, President & CEO

EXECUTIVE SALARY CONTINUATION AGREEMENT
---------------------------------------

THIS AGREEMENT made and entered into this 1st day of January, 1994, by and
between GOLETA NATIONAL BANK, a coporation organized and existing under the laws
of the United States (hereinafter feferred to as the "Executive")

WITNESSETH:

WHEREAS, the Executive is in the Coporation serving as its President and
Chief Executive Officer; and

WHEREAS, the experience of the Executive, his knowledge of the affairs of
the Corporation, his reputation and contacts in the industry are so valuable
that assurance of his continued service is essential for the future growth and
profits of the Corporation and it is in the best interests of the Corporation to
arrange terms of continued employment fro the Executive so as to reasonably
assure his remaining in the Corporation's employment during his lifetime or
until the age of retirement; and

WHEREAS, it is the desire of the Corporation that his services be retained
as herein provided; and

WHEREAS, the Executive is willing to continue in the employ of the
Corporation provided the Corporation agrees to pay him, or has beneficiaries,
certain benefits in accordance with the terms and conditions hereinafter set
forth.

NOW, THEREFORE, in consideration of the services to be performed in the
future as well as the mutual promises and covenants herein contained it is
agreed as follow:

ARTICLE 1
---------

1.1 Employment: The Corporation agrees to employ the Executive in such
-----------
capacity as the Corporation may from time to time determine. The executive will
continue in the employ of the Corporation in such capacity and with such duties
and responsibilities as may be assigned to him, and with such compensation as
may be determined from time to timeby the Board of Directors of the Corporation.

1.2 Full Efforts: The Executive agrees to devote his full time and
--------------
attention exclusively to the business and affairs of the Corporation, except
during vacation periods, and to use his best efforts to furnish faithful and
satisfactory service to the Corporation.

1.3 Fringe Benefit: The salary continuation benefits provided by this
----------------
Agreement are granted by the Corporation as a fringe benefit to the Executive
and are not part of any salary reduction plan or any arrangement deferring a
bonus or salary continuation benefits.

ARTICLE 2
---------

2.1 Retirement: if the Executive shall continue in the employment of the
-----------
Corporation until he attains the age of sixty-on (61), he may retire from active
daily employment as of the first day of the month next following attainment of
age sixty one (61), or upon such later date as may be mutually agreed upon by
the Executive and the Corporation.

2.2 Payment: The Corporation agrees that upon such retirement it will pay
--------
to the Executive the annual sum of Fifty Thousand Dollars ($50,000.00), payable
monthly on the first day of each month following such retirement until he
attains the age of seventy-six (76): subject to the conditions and limitations
set forth.

2.3 Death Benefit: The Corporation agrees that if the Executive shall
---------------
retire, but shall die before receiving the full amount of monthly payments to
which he is entitled hereunder, it will continue to make such monthly payments
to the Executive's surviving spouse for the remaining period. If the Executive
is not survived by any spouse, said payments shall be made to the Executive's
other named beneficiary as hereinafter set forth. If the Executive is not
serviced by any spouse or named beneficiary, said payments shall revert to
Goleta National Bank.

2.4 Beneficiary: The term "Beneficiary" shall mean the person or persons
------------
whom the Executive shall designate in a valid Beneficiary Designation Notice to
receive the benefits provided hereunder. A Beneficiary Designation Notice shall
be valid only if it is in the form attached hereto and made a part hereof and is
received by the Administrator prior to the Executive's death. If the Executive
is not survived by any spouse or named beneficiary, said payments shall revert
to Goleta National Bank.

ARTICLE 3
---------

3.1 Consulting: It is mutually agreed that during the fifteen (15) year
-----------
period following retirement from active daily employment upon attainment of the
age of sixty-one (61), or such later date as may be mutually agreed upon, the
Executive shall, at the request of the Corporation, be available at reasonable
time and places as may be mutually agreed upon, to tender services to the senior
executives of the Corporation in an advisory or consulting capacity.

3.2 Informed: The Executive shall keep himself informed concerning the
---------
affairs of the Corporation through reports which the Corporation will supply,
and such other means as may be agreed upon. The Executive shall not be required
to travel from whatever place he may be then living or staying for the purpose
of such consultation unless all expenses incurred by him shall be paid by the
Corporation.

3.3 Disability: Breach of this condition shall nor be considered to have
-----------
occurred if the Executive is unable to consult because of his mental or physical
disability.

3.4 Not Employee: In furnishing such consulting services, the Executive
-------------
shall not be an employee of the Corporation, but shall act in the capacity of an
independent contractor.

3.5 No Competition: During the said fifteen (15), year period following
---------------
retirement from active daily employment, the Executive shall not become the
owner of, nor engage directly or indirectly, in any business which is
substantially similar to or competes with the business of the Corporation,
either as proprietor, partner, stockholder, officer, director, employee or
otherwise, within the cities of Santa Barbara or Goleta or anywhere else in
Santa Barbara County, unless the Corporation has first consented in writing
thereto.

3.6 Forfeiture: The payments provided under Article 2 are conditioned
-----------
upon the Executive fulfilling the foregoing requirements, the Board of Directors
of the Corporation may, by a Resolution at amy regular or special meeting,
suspend or eliminate payment during the period of such breach.

1
3.7 Termination of Payments: In the event the Board of Directors of the
------------------------
Corporation, by such Resolution, terminates further payments to the Executive as
provided in Article 3, all amounts then remaining unpaid under this Agreement
shall be fortified and the Corporation shall have no further liability to the
Executive or any persons hereunder.

ARTICLE 4
---------

4.1 Death Prior to Retirement: In the event Executive should die while
---------------------------
actively employed by the Corporation at anytime after the date of this
Agreement, by prior to attaining the age of sixty-one (61) years, then the
benefits payable under this Agreement (Fifty Thousand Dollars per year) will be
immediately payable to the Executive's designated beneficiary pursuant to the
Beneficiary Designation Notice attached hereto and made apart hereof. Said
immediate payment to the Executive's beneficiary will be payable on the first
day of the month following the executive's death and will be payable in equal
monthly installments to continue for 180 months. If the Executive chooses to
work after the age of sixty-one (61) years, but dies beforeretirement, the
Corporation will pay the annual sum of Fifty Thousand Dollars ($50,000.00) per
year to the Executive's designated beneficiary in equal monthly installments for
a period of 180 months. No death benefits shall be payable hereunder if it is
determined that the Executive's death was caused by suicide on or before January
1, 2004.
-----

4.2 Voluntary Termination of Employment: In the event the Executive
---------------------------------------
voluntarily terminates his employment with the Corporation for whatever reason,
the Executive shall be paid upon attainment of the age of sixty-one (61) that
the amount of money which the Executive was vested at the time of voluntary
termination. For example, if the Executive voluntarily terminates employment
after five (5) years from the effective date of this Agreement, he well have
been Fifty Percent (50%) vested and thus will receive Twenty-Five Thousand
Dollars per year commencing the first day of the month following arraignment of
the age of sixty-one (61), payments to continue for one hundred eighty (180)
months. In the event the Executive voluntarily terminates within a five year
period from the date of theis agreement, no compensation shall be payable to the
Executive.

4.3 If the Executive wishes to retire before the attainment of age
sixty-one (61), the Executive shall give the Bank one year's notice in order to
allow a suitable transition of management.

4.4 Disability Prior to Retirement: In the event the Executive becomes
--------------------------------
disabled while actively employed by the Corporation at any time after the date
of the Agreement, but prior to attaining the age of sixty-one (61) years, the
Executive will be entitled to equal monthly payments commencing at the age of
sixty-one (61) and in the amount commensurate with the amount the Executive was
vested at the time of disablement. For example, if the Executive will have been
fifty percent (50%) vested and will therefore be entitled to annual payments in
the amount of twenty-five thousand ($25,000.00) dollars, payable in equal
monthly installments continuing for one hundred eighty (180) moths.
ARTICLE 5
---------

5.1 Termination of Employment: The Corporation reserves the right to
----------------------------
terminate employment of the Executive at any time prior to retirement as a
result of any criminal unlawful, fraudulent, or dishonest action on the part of
the Executive. In the event the employment of the Executive shall be terminated
prior to the Executive. In the event the employment of the Executive shall be
termination, other than by reason of disability or death, then this Agreement
shall terminate upon the date of such termination of employment: provided,
however, that the Executive shall be entitled to the following benefits under
the following circumstances.

(a) Termination Without Causes: If the Executive's employment is
-----------------------------
terminated by the Corporation without cause, the Executive shall be considered
to be vested according to attached vesting schedule, attached, as Schedule A,
with payments commencing at age 61.

(b) Termination for Causes: If the Executive is terminated for cause,
-------------------------
I.e., for the willfull breach of duly by the Executive in the course of his
employment: the habitual neglect by Executive of his employment duties; the
Executive's deliberate violation of any State Of California or Federal banking
laws, or of the ByLaws, rules, policies or resolutions of the Corporation, or of
the rules or regulations of the California Superintendent of State Banks or
Federal Deposit Insurance Corporation or other regulator agency or governmental
authority having jurisdiction over the Executive; the determination by a state
or federal banking agency or governmental authority having jurisdiction over the
Corporation that executive is not suitable to act in the capacity for which he
is employed by the Corporation; the Executive is convicted of any felony or a
crime involving moral iupitude or a fraudulent or dishonest act; or the
Executive discloses without authority any secret or confidential information
not otherwise publicly available concerning the Corporation or takes any action
which the Corporation's Board of Directors determines, in good faith, fair
dealing and reasonableness, continues unfair competition with r induces any
customer to breach any contract with the Corporation, then the Executive shall
be entitled to no benefits under this Agreement and no amount shall be paid the
the Executive under this Agreement.

(c) Termination Upon Change in Control: Anything hereinabove to the
---------------------------------------
contrary notwithstanding, if the Executive is not full vested in the amount to
which he is entitled under this plan, he will become fully vested in the event
of a transfer of the controlling ownership or sale of the Corporation and shall
be entitled to the full amount, upon the terms and conditions hereof, if
termination of employment thereafter occurs under this Section 5.1

ARTICLE 6
---------

6.1 Termination of Agreement by Reason of Changes in Law: The Corporation
-----------------------------------------------------
is entering into this Agreement upon the assumption that certain existing laws
will continue in effect in substantially their current form. In the event of any
changes in such applicable laws, the Corporation shall have the option to
terminate or modify this Agreement: provided, however, that the Executive shall
be entitled to at least the same amount as he would have been entitled to under
Paragraph 4.4 of this Agreement relating to disability. The payment of said
amount shall be made upon such terms and conditions and at such time as the
Corporation shall determine, but in no event commencing later than the
executive's age of sixty-one (61) years or the date of termination of the
Executive's employment with the Corporation.

ARTICLE 7
---------

7.1 Funding: The Corporation reserves the right to determine in its sole
--------
discretion, whether, to what extent and by what method, if any, to fund this
Agreement. In the event that the Corporation elects to fund this Agreement in
whole or in part, through the use of life insurance or annuities, or both, the
Corporation shall determine the ownership and beneficial interests of any such
policy of life insurance or annuity. The Corporation further reserves the right,
in its sole discretion, to terminate any such policy, and any other funding of
this Agreement, at any time, in whole or in part. The Executive shall not have
any right, title or interest in or to any funding source or amount utilized by
the Corporation pursuant to this Agreement, and any such funding source or
amount shall not constitute security for the performance of the Corporation's
obligations pursuant to this Agreement. The Executive agrees to sign any
documents and undergo any medical examination or tests which the Corporation may
request and which may be reasonably necessary to facilitate any funding for this
Agreement including, without limitation, the acquisition of any policy of
insurance or annuity.

If the Bank should require the acquisition of additional assets due to a
failing financial condition, the Board of Directors shall have the option of
terminating this agreement such that the Executive shall receive upon retirement
only the amount commensurate with the amount the Executive was vested at the
time of the financial crisis.

ARTICLE 8
---------

8.1 Nonassignable: Neither the Executive nor the Executive's spouse nor
--------------
any other beneficiary under this Agreement shall have the power or right to
transfer, assign, anticipate, hypothecate, mortgage, modify or otherwise
encumber in advance any of the benefits payable hereunder. Nor shall any of said
benefits be subject to seizure for the payment of any debts, judgments, alimony
or separate maintenance owed by the Executive or the Executive's beneficiary or
any of them, or be transferable by operation of law in the event of bankruptcy,
insolvency or otherwise.

ARTICLE 9
---------

9.1 Claims Procedure: The Corporation shall make all determinations as to
-----------------
the rights to benefits under this agreement. Any decision by the Corporation
denying a claim by the Executive or the Executive's beneficiary for benefits
under this Agreement shall be stated in writing and delivered or mailed to the
Executive or said beneficiary. Such decision shall set forth the specific
reasons for the denial. In addition, the Corporation shall provide a reasonable
opportunity to the Executive or said beneficiary for full and fair review of the
decision denying such claim.

ARTICLE 10
----------

10.1 Unsecured General Creditor: The Executive and the Executive's
-----------------------------
beneficiary shall have no legal or equitable rights, interests or claims in or
to any property or assets of the Corporation. No assets of the Corporation shall
be held under any trust for the benefit of the Executive or his beneficiaries or
held in any way as security for the fulfillment of the obligations of the
Corporation under this Agreement. All of the Corporation's assets shall be and
remain the general unpledged, unrestricted assets of the Corporation. The
Corporation's obligation under this Agreement shall be that of an unfunded and
unsecured promise by the Corporation to pay money in the future. The Executive
and his beneficiaries shall be unsecured creditors with respect to any benefits
hereunder.

ARTICLE 11
----------

11.1 Binding Effect: This Agreement shall be binding upon and inure
---------------
to the benefit of the Executive and the Corporation and as applicable, their
respective heirs , beneficiaries, legal representatives, agents, successors and
assigns.

ARTICLE 12
----------

12.1 Contract of Employment: This Agreement shall not be deemed to
-------------------------
constitute a contract of employment between the Executive and the Corporation
nor shall any provision of this Agreement restrict the right of the Corporation
to terminate the Executive's employment or restrict the right of the Executive
to terminate his employment. In the event the Executive has a separate
Employment Agreement with the Corporation and in the event of any discrepancy or
different treatment of any term or condition in this Agreement from said
Employment Agreement, or any renewal or extension thereof, the terms and
provisions of the Employment Agreement shall control.

ARTICLE 13
----------

13.1 Notice: Any notice required or permitted of either the Executive or
-------
the Corporation under this Agreement shall be deemed to have been duly given, if
by personal delivery, upon the date received by the party or its authorized
representative; if by facsimile, upon transmission to a telephone number
previously provided by the party to whom the facsimile is transmitted as
reflected in the records of the party transmitting the facsimile and upon
reasonable confirmation of such transmission; and if by mail, on the third day
after mailing via United States first

class mail, registered or certified, postage prepaid and return receipt
requested, and addressed to the party at the address given below for the receipt
of notices, or such changed address as may be requested in writing by a party.

If to Corporation: ATTN: Randy Shaffer
If to Executive: Llewellyn Stone
6560 Camino Venturoso, Goleta, California 93117

ARTICLE 14
----------

14.1 Partial Invalidity: If any term, provision, covenant, or condition
-------------------
of this Agreement is held by a court of competent jurisdiction to be invalid,
void, or unenforceable, such determination shall not render any other term,
provision, covenant or condition invalid, void, or unenforceable, and the
Agreement shall remain in full force and effect notwithstanding such partial
invalidity.

ARTICLE 15
----------

15.1 Arbitration: All claims, disputes and other matters in question
------------
arising out of or relating to this Agreement or the breach or interpretation
thereof shall be resolved by arbitration before the Judicial Arbitration and
Mediation Services, Inc., (JAMS"), 111 Pine Street, Suite 710, San Francisco,
California, 94111. In the event JAMS is unable or unwilling to conduct the
arbitration pursuant to this provision, or has discontinues its business, the
parties agree that the American Arbitration Association ("AAA"), 417 Montgomery
Street, San Francisco, California 94104, shall be selected as substitute for
JAMS subject to the same terms set forth herein; provided, however, that the
rules of AAA shall apply to the conduct of the arbitration to the extent not
inconsistent with the intent of the parties as expresses herein. Any award
rendered by JAMS or AAA shall be final and binding upon the parties and as
applicable, their respective heirs, beneficiaries , legal representatives,
agents, successors and assigns, and the obligation of the parties to arbitrate
pursuant to this clause shall be specifically enforceable in accordance with
Title IX of the California Code of Civil Procedure. Any arbitration hereunder
----------------------------------
shall be conducted within the city limits of Santa Barbara, California.

ARTICLE 16
----------

16.1 Governing Law and Jurisdiction: The laws of the United States of
---------------------------------
America and the State of California, other than those laws denominated choice of
laws rules, and the rules and regulations of the Office of the Comptroller of
the Currency, Federal Deposit Insurance Corporation and the Board of Governors
of the Federal Reserve System shall govern the validity, construction and effect
of this Agreement.

ARTICLE 17
----------

17.1 Entire Agreement: This Agreement supersedes any and all other
------------------
agreements, either oral or in writing, between the parties with respect to the
subject matter of this Agreement and contains all of the covenants and
agreements between the parties with respect thereto. Each party to this
Agreement acknowledges that no other representations, inducements, promises, or
agreements, oral or otherwise, have been made by any party, or anyone acting on
behalf of any party, which are not set forth herein, and that no other
agreement, statement, or promise not contained in this Agreement shall be valid
or binding on either party.

ARTICLE 18
----------

18.1 Modifications: Any modification of this Agreement shall be
--------------
effective only if it is in writing and signed by both parties or their
authorized representatives.

IN WITNESS WHEREOF, the Corporation and the Executive have executed this
Agreement in the offices of Goleta National Bank, in Goleta, California, on the
date first above written.

EXECUTIVE:
- ----------

Dated /S/ LLEWELLYN STONE
_____________ ______________________________
LLEWELLYN STONE

CORPORATION:
- ------------

Dated: /S/Michael A. Alexander
_____________ _______________________________
Michael A. Alexander
CHAIRMAN OF THE BOARD

BENEFICIARY DESIGNATION NOTICE
------------------------------

To the Administrator of the LLEWELLYN STONE Executive Salary Continuation
Agreement:

Pursuant to the provisions of my Executive Salary Continuation Agreement
with GOLETA NATIONAL BANK, permitting the designation of the beneficiary or
beneficiaries by a participant, I hereby designate the following persons and/or
entities as primary and secondary beneficiaries of any benefit under said
Agreement payable by reason of my death:

PRIMARY BENEFICIARY: SECONDARY BENEFICIARY:

Name: Norma Stone Name: Brian Roberts
Present Address: 6560 Camino Venturoso Present Address: 542 Everglades
Goleta, California 93117 Jacksonville,
Florida
Relationship: Spouse Relationship: Son

THE RIGHT TO REVOKE OR CHANGE ANY BENEFICIARY DESIGNATION IS HEREBY
RESERVED. ALL PRIOR DESIGNATIONS, IF ANY, OF PRIMARY BENEFICIARIES AND
SECONDARY BENEFICIARIES ARE HEREBY REVOKED.

The Administrator shall pay all sums payable under the Agreement by reason
of my death to the Primary Beneficiary, if he or she survives me, then to the
Secondary Beneficiary, and if no named beneficiary survives me, then the
Administrator shall pay all amounts in accordance with the terms of the
Executive Salary Continuation Agreement. In the event that a named beneficiary
survives me and dies prior to receiving the entire benefit payable under said
Agreement, then the remaining unpaid benefit payable according to the terms of
the Agreement, shall be payable to the Secondary Beneficiary. In the event that
the named Primary Beneficiary and Secondary Beneficiary die before receivng the
entire benefit payable under the Agreement, then the remaining unpaid benefit
payable according to the terms of the Agreement shall revert to Goleta National
Bank.

DATED: /S/LLEWELLYN STONE/EXECUTIVE
_______________ ________________________________
LLEWELLYN STONE/EXECUTIVE

<PAGE>

SCHEDULE A
----------

VESTING SCHEDULE
----------------

January 1, 1995 Ten Percent (10%) vested

January 1, 1996 Twenty Percent (20%) vested

January 1, 1996 Thirty Percent (30%) vested

January 1, 1997 Forty Percent (40%) vested

January 1, 1998 Fifty Percent (50%) vested

January 1, 1999 Sixty Percent (60%) vested

January 1, 2000 Seventy Percent (70%) vested

January 1, 2001 Eighty Percent (80%) vested

January 1, 2002 Ninety Percent (90%) vested

January 1, 2003 One Hundred Percent (100%) vested

Exhibit 21 - Subsidiaries of the Registrant

Community West Bancshares owns 100% of Goleta National Bank, a national banking
association.

Goleta National Bank owns 70% of Electronic Paycheck, a limited liability
corporation. Electronic Paycheck, LLC is incorporated in the State of
California.

Exhibit (23) Consent of Deloitte & Touche

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in the Registration Statement No.
333-43531 of Community West Bancshares on Form S-8 of our report dated February
6, 1998, appearing in this Annual Report on Form 10-K of Community West
Bancshares for the year ended December 31, 1997.

Los Angeles, California
March 30, 1998

<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated statement of financial condition, the consolidated statement of
operations and notes thereto found in the Company's Form 10-k for the year ended
December 31, 1997 and is qualified in its entirety by reference to such
financial statements
</LEGEND>
<RESTATED>

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,662,513
<INT-BEARING-DEPOSITS> 2,477,000
<FED-FUNDS-SOLD> 8,440,000
<TRADING-ASSETS> 2,528,587
<INVESTMENTS-HELD-FOR-SALE> 251,300
<INVESTMENTS-CARRYING> 998,451
<INVESTMENTS-MARKET> 0
<LOANS> 72,450,554
<ALLOWANCE> 1,285,852
<TOTAL-ASSETS> 95,312,445
<DEPOSITS> 80,252,439
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,931,142
<LONG-TERM> 0
0
0
<COMMON> 8,570,310
<OTHER-SE> 3,558,554
<TOTAL-LIABILITIES-AND-EQUITY> 95,312,445
<INTEREST-LOAN> 7,349,925
<INTEREST-INVEST> 115,253
<INTEREST-OTHER> 544,254
<INTEREST-TOTAL> 8,009,432
<INTEREST-DEPOSIT> 2,910,450
<INTEREST-EXPENSE> 2,910,450
<INTEREST-INCOME-NET> 5,098,982
<LOAN-LOSSES> 260,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 11,523,906
<INCOME-PRETAX> 2,747,291
<INCOME-PRE-EXTRAORDINARY> 2,747,291
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,588,940
<EPS-PRIMARY> .53
<EPS-DILUTED> .44
<YIELD-ACTUAL> 6.6
<LOANS-NON> 1,259,107
<LOANS-PAST> 631,000
<LOANS-TROUBLED> 2,375,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,409,321
<CHARGE-OFFS> 400,745
<RECOVERIES> 17,276
<ALLOWANCE-CLOSE> 1,285,852
<ALLOWANCE-DOMESTIC> 1,285,852
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0

</TABLE>