Section 408 of SOX requires the SEC to review the financial statements and other disclosures issued by public companies on a "regular and systematic" basis which, in any event, shall not be "less frequently than once every three years." In scheduling the reviews, the SEC will take into account issuers (i) that have issued material restatements of its financial statements, (ii) that have experienced significant volatility in their stock price, (iii) whose operations effect material sectors of the economy, (iv) with the largest market capitalization, and (v) emerging companies.

to be established by the SEC by April 26, 2003. The Board will have the power to inspect the firms, conduct investigations and disciplinary proceedings and oversee compliance by the public accounting firms with the standards established to restore investor confidence in the periodic reports of public companies.

The definition of "affiliated person" for this purpose has not yet been established by the SEC. As Section 301 amends Section 10A of the 1934 Act, and since Section 3(a)(19) of the 1934 Act refers to the definition provided in the Investment Company Act several commentators have suggested that the definition of an "affiliated person" in that statute should apply. An "affiliate person" therein is and owner or holder with the power to vote of five percent or more of outstanding voting securities of the company or any officer, director, or employee of the company. This definition would require that all directors be precluded from serving on the Audit Committee. Obviously, further clarification from the SEC is needed.

The audit committee is responsible for the appointment, compensation and oversight of the company's auditors. Section 202 requires that the audit committee pre-approve all audit and non-audit services to be performed by the outside accountants. The auditors must report directly to the audit committee. The committee has authority to engage its own legal counsel and advisors to assist them in carrying out their duties. The public company is obligated to provide adequate funding for the committee to meet its obligations.

Section 407 of SOX requires public companies to disclose in their periodic reports whether the audit committee of the company includes at least one member whose education and experience as a public accountant, auditor or principal financial or accounting officer renders them capable of understanding generally accepted accounting principles, gives them experience in the preparation of financial statements and the application of principles as well as experience in internal accounting controls and audit committee functions. While this provision does not require the inclusion of such an "audit committee financial expert" on the committee, the likely market reaction to the disclosure that the company has failed to appoint such a person is likely to result in public companies working diligently to include at least one "audit committee financial expert" on its audit committee. Public companies must comply with the disclosure requirements of Section 407 in their annual reports for fiscal years ending on or after July 15, 2003. Small business issuers have to comply in their annual reports for fiscal years ending on or after December 15, 2003.

Section 303 of SOX makes it unlawful for any officer or director of a public company to influence, coerce, manipulate or mislead any auditor of the company's financial statements. The SEC is empowered to enforce this provision in civil proceedings.

state that the directors must have no relationship which, in the company's board of directors' opinion, would interfere with the exercise of independent judgments as a director. A director is not independent if that person: (i) has received more than $60,000 from the company for services (other than board or committees service), (ii) is or was an employee of the company's auditing firm that worked on the company audit, (iii) is a partner or controlling shareholder or executive officer of any entity that receives from or makes payments to the company in an amount that exceeds 5% of the entity's gross revenues or $200,000 which ever is greater in the current year or in any of the past three years or
(iv) is a part of an interlocking compensation committee. The independent directors must meet regularly in executive session. Adoption of the final rules by NASDAQ is awaiting SEC approval.

NASDAQ proposed rules also require that any compensation committee established be comprised of independent directors with the exception that one non-independent director may serve for two years under specified exceptional circumstances. This committee must approve all executive officer compensation. If no such committee is established, a majority of the independent directors must approve all executive officer compensation.

judgment in bankruptcy thereby causing the officer to remain personally liable until the judgment is satisfied.

Although no assurances can be given, it is anticipated that this far reaching legislation and the rules to be issued by the SEC and the national securities exchanges pursuant to SOX will result in significant additional regulations and requirements for compliance by banks and their bank holding companies. It is likely that these additional obligations will result in additional significant and material expenditures by the public companies in auditors' fees, directors' fees, attorneys' fees, outside advisor fees, increased errors and omissions insurance premium costs, increased errors and omissions insurance premium costs and other costs of compliance for the public companies to satisfy the new requirements for corporate governance imposed by SOX and the accompanying rules and regulations.

THE CALIFORNIA CORPORATE DISCLOSURE ACT

On January 1, 2003, the California Corporate Disclosure Act ("CCD") became effective. The new law requires that all "publicly traded companies" file with the California Secretary of State a statement on an annual basis that includes at least the following information:

- The name of the independent auditor for the publicly traded company, a description of the services rendered by the auditor during the previous 24 months, the date of the last audit and a copy of the report
- The annual compensation paid to each director and executive officer including options or shares granted to them that were not available to other employees of the company
- A description of any loans made to any director at a preferential loan rate during the previous 24 months including the amount and terms
- A statement indicating whether any bankruptcy has been filed by the company's executive officers or directors during the past 10 years
- The statement indicating whether any member of the board of directors or executive officer was convicted of fraud during the past 10 years
- A statement indicating whether the corporation has bee adjudicated as guilty of having violated any federal securities laws or any banking or securities laws of California during the past 10 years which a judgment of over $10,000 was imposed

For purposes of the CCD, a "publicly traded company" is any company whose securities are listed on a national or foreign exchange or which is the subject of a two-way quotation system that is regularly published.

BANK HOLDING COMPANY LIQUIDITY

The Company is a legal entity, separate and distinct from its Bank subsidiary. Although it has the ability to raise capital on its own behalf or borrow from

external sources, the Company may also obtain additional funds through dividends paid by, and fees for services provided to, the Bank. However, regulatory constraints may restrict or totally preclude the bank from paying dividends to the Company. See "- Limitations on Dividend Payments."

The FRB's policy regarding dividends provides that a bank holding company should not pay cash dividends exceeding its net income or which can only be funded in ways, such as by borrowing, that weaken the bank holding company's financial health or its ability to act as a source of financial strength to its subsidiary banks. The FRB also possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. In March 2000, the Company entered into a MOU with the FRB, which requires the Company to refrain from declaring any dividends on the Company's stock or redeeming any of its stock without the approval of the FRB. See "- Memorandum of Understanding With the Federal Reserve Bank."

TRANSACTIONS WITH AFFILIATES

The Company and any subsidiaries it may purchase or organize are deemed to be affiliates of the bank subsidiary within the meaning of Sections 23A and 23B of the Federal Reserve Act, herein referred to as the "FRA," as amended. Pursuant thereto, loans by Goleta to affiliates, investments by Goleta in affiliates' stock, and taking affiliates' stock as collateral for loans to any borrower will be limited to 10% of Goleta's capital, in the case of any one affiliate, and will be limited to 20% of Goleta'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. Specifically, a bank and its subsidiaries generally may not purchase from an affiliate a low-quality asset, as defined in the FRA. 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 Goleta are also subject to certain restrictions with respect to engaging in the underwriting, public sale and distribution of securities. See "- Supervision and Regulation of the Bank Subsidiary - Significant Legislation."

LIMITATIONS ON BUSINESSES AND INVESTMENT ACTIVITIES

Under the BHCA, a bank holding company must obtain the FRB's approval before:

- directly or indirectly acquiring more than 5% ownership or control of any voting shares of another bank or bank holding company

- acquiring all or substantially all of the assets of another bank

- merging or consolidating with another bank holding company

The FRB may allow a bank holding company to acquire banks located in any state of the United States without regard to whether the acquisition is prohibited by the law of the state in which the target bank is located. In approving interstate acquisitions, however, the FRB must give effect to applicable state laws limiting the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured depository institutions in the state in which the target bank is located, provided that those limits do not discriminate against out-of-state depository institutions or their holding companies, and state laws which require that the target bank have been in existence for a minimum period of time, not to exceed five years, before being acquired by an out-of-state bank holding company.

In general, the BHCA prohibits a bank holding company from acquiring direct or indirect ownership or control of more than 5% of the voting securities of a company that is not a bank or a bank holding company. However, with FRB consent, a bank holding company may own subsidiaries engaged in certain businesses that the FRB has determined to be "so closely related to banking as to be a proper incident thereto. " The Company, therefore, is permitted to engage in a variety of banking-related businesses, subject to limitations imposed as a result of regulatory action. See "Memorandum of Understanding With The Federal Reserve Bank." Some of the activities that the FRB has determined, pursuant to its Regulation Y, to be related to banking are:

- making or acquiring loans or other extensions of credit for its own account or for the account of others
- servicing loans and other extensions of credit
- operating a trust company in the manner authorized by federal or state law under certain circumstances
- leasing personal and real property or acting as agent, broker, or adviser in leasing such property in accordance with various restrictions imposed by FRB regulations

- acting as investment or financial advisor
- providing management consulting advice under certain circumstances
- providing support services, including courier services and printing and selling MICR-encoded items
- acting as a principal, agent or broker for insurance under certain circumstances
- making equity and debt investments in corporations or projects designed primarily to promote community welfare or jobs for residents
- providing financial, banking or economic data processing and data transmission services
- owning, controlling or operating a savings association under certain circumstances
- selling money orders, travelers' checks and U.S. Savings Bonds
- providing securities brokerage services, related securities credit activities pursuant to Regulation T and other incidental activities
- underwriting and dealing in obligations of the United States, general obligations of states and their political subdivisions and other obligations authorized for state member banks under federal law

Generally, the BHCA does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank holding companies.

Federal law prohibits a bank holding company and any subsidiary banks from engaging in certain tie-in arrangements in connection with the extension of credit. Thus, for example, Goleta 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:

- the customer must obtain or provide some additional credit, property or services from or to Goleta other than a loan, discount, deposit or trust service
- the customer must obtain or provide some additional credit, property or service from or to the Company or Goleta
- the customer may not obtain some other credit, property or services from competitors, except reasonable requirements to assure soundness of credit extended

In 1999, the Gramm-Leach-Bliley Act ("GLB Act") was enacted. The GLB Act significantly changed the regulatory structure and oversight of the financial services industry. The GLB Act permits banks and bank holding companies to engage in previously prohibited activities under certain conditions. Also, banks and bank holding companies may affiliate with other financial service providers such as insurance companies and securities firms under certain conditions. Consequently, a qualifying bank holding company, called a financial holding company ("FHC"), can engage in a full range of financial activities, including banking, insurance and securities activities, as well as merchant banking and additional activities that are beyond those traditionally permitted for bank holding companies. Moreover, various non-bank financial service providers who were previously prohibited from engaging in banking can now acquire banks while also offering services such as securities underwriting and underwriting and brokering insurance products. The GLB Act also expands passive investment activities by FHCs, permitting them to indirectly invest in any type of company, financial or non-financial, through merchant banking activities and insurance company affiliations. See "- Supervision and Regulation of the Bank Subsidiary - Significant Legislation."

CAPITAL ADEQUACY

Bank holding companies must maintain minimum levels of capital under the FRB's risk based capital adequacy guidelines. If capital falls below minimum guideline levels, a bank holding company, among other things, may be denied approval to acquire or establish additional banks or non-bank businesses.

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 of the Bank Subsidiary - Risk-Based Capital Guidelines"), assign various risk percentages to different categories of assets and capital is measured as a percentage of those risk assets. Under the terms of the guidelines, bank holding companies are expected to meet capital adequacy guidelines based both on total risk assets and on total assets, without regard to risk weights.

The risk-based guidelines are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual organizations. For example, the FRB's capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, the risks posed by concentrations of credit or risks associated with nontraditional banking activities or securities trading

activities. Moreover, any banking organization experiencing or anticipating significant growth or expansion into new activities, particularly under the expanded powers of the GLB Act, may be expected to maintain capital ratios, including tangible capital positions, well above the minimum levels.

LIMITATIONS ON DIVIDEND PAYMENTS

The Company is entitled to receive dividends when and as declared by Goleta's Board of Directors, out of funds legally available for dividends, as specified and limited by the OCC's regulations. Pursuant to the OCC's regulations, funds available for a national bank's dividends are restricted to the lesser of the bank's: (i) retained earnings; or (ii) net income for the current and past two fiscal years (less any dividends paid during that period), unless approved by the OCC. Furthermore, if the OCC determines that a dividend would cause a bank's capital to be impaired or that payment would cause it to be undercapitalized, the OCC can prohibit payment of a dividend notwithstanding that funds are legally available. Moreover, Goleta is subject to a Consent Order with the OCC that prohibits the payment of dividends unless Goleta is in compliance with the capital plan and the applicable provisions of the National Bank Act and has received the approval of the OCC. See "Supervision and Regulation of the Bank Subsidiary - Consent Order with the OCC."

Since Goleta is an FDIC insured institution, it is also possible, depending upon its financial condition and other factors, that the FDIC could assert that the payment of dividends or other payments might, under some circumstances, constitute an unsafe or unsound practice and, thus, prohibit those payments.

As a California corporation, the Company's ability to pay dividends is subject to the dividend limitations of the California Corporations Code ("CCC").
Section 500 of the CCC allows the Company to pay a dividend to its shareholders only to the extent that the Company has retained earnings and, after the dividend, the Company meets the following criteria:

- its assets (exclusive of goodwill and other intangible assets) would be 1.25 times its liabilities (exclusive of deferred taxes, deferred income and other deferred credits); and
- its current assets would be at least equal to its current liabilities.

The Company is currently prohibited form paying dividends without the prior approval of the FRB. See "Supervision and Regulations of the Bank Subsidiary - Memorandum of Understanding with the Federal Reserve Bank."

GENERAL

Banking is a complex, highly regulated industry. The primary goals of the regulatory scheme are to maintain a safe and sound banking system, protect depositors and the FDIC's insurance fund and facilitate to conduct of sound monetary policy. In furtherance of these goals, Congress and the states have created several largely autonomous regulatory agencies and enacted numerous laws that govern banks, bank holding companies and financial services industry. Consequently, Goleta's growth and earnings performance can be affected not only by management decisions and general economic conditions, but also by the requirements of applicable state and federal statutes, regulations and the policies of various governmental regulatory authorities, including:the FRB;the OCC and the FDIC.

The system of supervision and regulation applicable to Goleta governs most aspects of Goleta's business, including:

- the scope of permissible business
- investments
- reserves that must be maintained against deposits
- capital levels that must be maintained
- the nature and amount of collateral that may be taken to secure loans
- the establishment of new branches
- mergers and consolidations with other financial institutions
- the payment of dividends

Goleta, as a national banking association member, is also a member of the Federal Reserve System, is subject to regulation, supervision and regular examination by the OCC, the FDIC and the FRB. Goleta's deposits are insured by the FDIC up to the maximum extent provided by law. The regulations of these agencies govern most aspects of the Goleta's business. California law exempts all banks from usury limitations on interest rates.

The following summarizes the material elements of the regulatory framework that applies to Goleta. It does not describe all of the statutes, regulations and regulatory policies that are applicable. Also, it does not restate all of the requirements of the statutes, regulations and regulatory policies that are described. Consequently, the following summary is qualified in its entirety by reference to the applicable statutes, regulations and regulatory policies may have material effect on Goleta's business.

SIGNIFICANT LEGISLATION

In 1999, the GLB Act was signed into law, significantly changing the regulatory structure and oversight of the financial services industry. The GLB Act repealed the provisions of the Glass-Steagall Act that restricted banks and securities firms from affiliating. It also revised the BHCA to permit an FHC to engage in a full range of financial activities, including banking, insurance, securities and merchant banking activities. It also permits FHCs to acquire many types of financial firms without the FRB's prior approval.

The GLB Act thus provides expanded financial affiliation opportunities for existing bank holding companies and permits other financial service providers to acquire banks and become bank holding companies without ceasing any existing financial activities. Previously, a bank holding company could only engage in activities that were "closely related to banking." This limitation no longer applies to bank holding companies that qualify to be treated as FHCs. To qualify as an FHC, a bank holding company's subsidiary depository institutions must be "well-capitalized," "well-managed" and have at least a "satisfactory" Community Reinvestment Act, herein referred to as "CRA," examination rating. "Non-qualifying" bank holding companies are limited to activities that were permissible under the BHCA as of November 11, 1999.

The GLB Act changed the powers of national banks and their subsidiaries and made similar changes in the powers of state-chartered banks and their subsidiaries. National banks may now underwrite, deal in and purchase state and local revenue bonds. Subsidiaries of national banks may now engage in financial activities that the bank cannot itself engage in, except for general insurance underwriting and real estate development and investment. For a subsidiary of a national bank to engage in these new financial activities, the national bank and its depository institution affiliates must be "well capitalized," have at least "satisfactory" general, managerial and CRA examination ratings, and meet other qualification requirements relating to total assets, subordinated debt, capital, risk management and affiliate transactions. Subsidiaries of state-chartered banks can exercise the same powers as national bank subsidiaries if they satisfy the same qualifying rules that apply to national banks, except that state-chartered banks do not have to satisfy the managerial and debt rating requirements applicable to national banks.

The GLB Act also reformed the overall regulatory framework of the financial services industry. To implement its underlying purposes, the GLB Act preempted conflicting state laws that would restrict the types of financial affiliations that are authorized or permitted under the GLB Act, subject to specified exceptions for state insurance laws and regulations. With regard to securities laws, effective May 12, 2001, the GLB Act removed the current blanket exemption for banks from being considered brokers or dealers under the Securities Exchange Act of 1934 and replaced it with a number of more limited exemptions. Thus, previously exempted banks may become subject to the broker-dealer registration and supervision requirements of the Securities Exchange Act of 1934. The exemption that prevented bank holding companies and banks that advised mutual funds from being considered investment advisers under the Investment Advisers Act of 1940 was also eliminated.

Separately, the GLB Act imposes customer privacy requirements on any company engaged in financial activities. Under these requirements, a financial company is required to protect the security and confidentiality of customer nonpublic personal information. Also, for customers that obtain a financial product such as a loan for personal, family or household purposes, a financial company is required to disclose its privacy policy to the customer at the time the relationship is established and annually thereafter, including its policies concerning the sharing of the customer's nonpublic personal information with affiliates and third parties. If an exemption is not available, a financial company must provide consumers with a notice of its information sharing practices that allows the consumer to reject the disclosure of its nonpublic personal information to third parties. Third parties that receive such information are subject to the same restrictions as the financial company on the reuse of the information. A financial company is prohibited from disclosing an account number or similar item to a third party for use in telemarketing, direct mail marketing or other marketing through electronic mail.

RISK-BASED CAPITAL GUIDELINES

to provide a measure of capital that reflects the degree of risk associated with a bank's operations. The risk-based capital guidelines include both a new definition of capital and a framework for calculating the amount of capital that must be maintained against a bank's assets and off-balance sheet items. The amount of capital required to be maintained is based upon the credit risks associated with the various types of a bank's assets and off-balance sheet items. A bank's assets and off-balance sheet items are classified under several risk categories, with each category assigned a particular risk weighting from 0% to 100%. The bank's risk-based capital ratio is calculated by dividing its qualifying capital, which is the numerator of the ratio, by the combined risk weights of its assets and off-balance sheet items, which is the denominator of the ratio. Qualifying Capital. A bank's total qualifying capital consists of two types of capital components: "core capital elements," known as Tier 1 capital, and "supplementary capital elements," known as Tier 2 capital. The Tier 1 component of a bank's qualifying capital must represent at least 50% of total qualifying capital and may consist of the following items that are defined as core capital elements:

- common stockholders' equity; qualifying non-cumulative perpetual preferred stock (including related surplus)
- minority interests in the equity accounts of consolidated subsidiaries

The Tier 2 component of a bank's total qualifying capital may consist of the following items:

- a portion of the allowance for loan and lease losses
- certain types of perpetual preferred stock and related surplus
- certain types of hybrid capital instruments and mandatory convertible debt securities
- a portion of term subordinated debt and intermediate-term preferred stock, including related surplus

A two-step process determines risk weights for off-balance sheet items, such as unfunded loan commitments, letters of credit and recourse arrangements. First, the "credit equivalent amount" of the off-balance sheet items 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 is assigned to the appropriate risk category according to the obligor or, if relevant, the guarantor or the nature of the collateral. This result is added to the bank's risk-weighted assets and comprises the denominator of the risk-based capital ratio.

All banks are required to meet a minimum ratio of qualifying total capital to risk weighted assets of 8%. At least 4% must be in the form of Tier 1 capital, net of goodwill. 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 term subordinated debt and intermediate-term preferred stock that qualifies as Tier 2 capital for risk-based capital purposes 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. The 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.

The federal banking agencies also 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%. These uniform risk-based capital guidelines and leverage ratios apply across the industry. Regulators, however, have the discretion to set minimum capital requirements for individual institutions, which may be significantly above the minimum guidelines and ratios.

In October 2002, Goleta entered into a Consent Order with the OCC that requires Goleta to maintain a 12% risk based capital and a 7% Tier I capital ratio. See "- Consent Order With the OCC."

OTHER FACTORS AFFECTING MINIMUM CAPITAL STANDARDS

The federal banking agencies have established certain benchmark ratios of loan loss reserves to be held against classified assets. The benchmark by federal banking agencies is the sum of:

- 100% of assets classified loss
- 50% of assets classified doubtful
- 15% of assets classified substandard and
- estimated credit losses on other assets over the upcoming 12 months

The federal risk-based capital rules adopted by banking agencies take into account bank's concentrations of credit and the risks of engaging in non-traditional activities. Concentrations of credit refers to situations where a lender has a relatively large proportion of loans involving a single borrower, industry, geographic location, collateral or loan type. Non-traditional activities are considered those that have not customarily been part of the banking business, but are conducted by a bank as a result of developments in, for example, technology, financial markets or other additional activities permitted by law or regulation. 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.

The federal banking agencies also limit the amount of deferred tax assets that are allowable in computing a bank's regulatory capital. 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. However, deferred tax assets that can only be realized through future taxable earnings are limited for regulatory capital purposes to the lesser of:

- the amount that can be realized within one year of the quarter-end report date or
- 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.

The federal banking agencies have also adopted a joint agency policy statement which provides that the adequacy and effectiveness of a bank's interest rate risk management process and the level of its interest rate exposure is a critical factor in the evaluation of the bank's capital adequacy. A bank with material weaknesses in its interest rate risk management process or high levels of interest rate exposure relative to its capital will be directed by the federal banking agencies to take corrective actions. Financial institutions which have significant amounts of their assets concentrated in high risk loans or nontraditional banking activities, and who fail to adequately manage these risks, may be required to set aside capital in excess of the regulatory minimums.

PROMPT CORRECTIVE ACTION

The federal banking agencies possess broad powers to take prompt corrective action to resolve the problems of insured banks. Each federal banking agency has issued regulations defining five capital categories: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized." Under the regulations, a bank shall be deemed to be:

- "well capitalized" if it has a total risk-based capital ratio of 10% or more, has a Tier 1 risk-based capital ratio of 6% or more, has a leverage capital ratio of 5% or more and is not subject to specified requirements to meet and maintain a specific capital level for any capital measure
- "adequately capitalized" if it has a total risk-based capital ratio of 8% or more, a Tier 1 risk-based capital ratio of 4% or more and a leverage capital ratio of 4% or more (3.0% under certain circumstances) and does not meet the definition of "well capitalized"
- "undercapitalized" if it has a total risk-based capital ratio that is less than 8%, a Tier 1 risk-based capital ratio that is less than 4%, or a leverage capital ratio that is less than 4% (3% under certain circumstances)
- "significantly undercapitalized" if it has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 3% or a leverage capital ratio that is less than 3%; and
- "critically undercapitalized" if it has a ratio of tangible equity to total assets that is equal to or less than 2%

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. Banks classified as "undercapitalized" 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%. Restrictions for these banks include the appointment of a receiver or conservator after 90 days, even if the bank is still solvent. All of the federal banking agencies have promulgated substantially similar regulations to implement this system of prompt corrective action.

A bank, based upon its capital levels, that is classified as "well capitalized," "adequately capitalized" or "undercapitalized" may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment. At each successive lower capital category, an insured bank is subject to more restrictions. The federal banking agencies, however, may not treat an institution as "critically undercapitalized" unless its capital ratios actually warrant such treatment.

DEPOSIT INSURANCE ASSESSMENTS

The FDIC has implemented a risk-based assessment system in which the deposit insurance premium relates to the probability that the deposit insurance fund will incur a loss. The FDIC sets semi-annual assessments in an amount necessary to maintain or increase the reserve ratio of the insurance fund to at least 1.25% of insured deposits or a higher percentage as determined to be justified by the FDIC.

Under the risk-based assessment system adopted by the FDIC, banks are categorized into one of three capital categories, "well capitalized," "adequately capitalized," and "undercapitalized." Assignment of a bank into a particular capital category is based on supervisory evaluations by its primary federal regulator. After being assigned to a particular capital category, a bank is classified into one of three supervisory categories. The three supervisory categories are:

- Group A - financially sound with only a few minor weaknesses
- Group B - demonstrates weaknesses that could result in significant deterioration
- Group C - poses a substantial probability of loss.

The capital ratios used by the FDIC to define "well-capitalized," "adequately capitalized" and "undercapitalized" are the same as in the prompt corrective action regulations.

The assessment rates are summarized below, expressed in terms of cents per $100 in insured deposits:

                          Assessment Rates Supervisory Group
                          -------------------------------------
Capital Group               Group A      Group B      Group C
------------------------  -----------  -----------  -----------
1-Well Capitalized                  0            3           17
2-Adequately Capitalized            3           10           24
3-Undercapitalized                 10           24           27

The bank is currently risk rated a 1B, which translates to well-capitalized, group B and is assessed a rate of 3 basis points.

INTERSTATE BANKING AND BRANCHING

Bank holding companies from any state may generally acquire banks and bank holding companies located in any other state, subject in some cases to nationwide and state-imposed deposit concentration limits and limits on the acquisition of recently established banks. Banks also have the ability, subject to specific restrictions, to acquire by acquisition or merger branches located outside their home state. The establishment of new interstate branches is also possible in those states with laws that expressly permit it. Interstate branches are subject to many of the laws of the states in which they are located.

California law authorizes 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 five years, unless the California bank is in danger of failing or in certain other emergency situations. Interstate branching into California is, however, limited to the acquisition of an existing bank.

ENFORCEMENT POWERS

In addition to measures taken under the prompt corrective action provisions, insured banks may be subject to potential enforcement actions by the federal regulators for unsafe or unsound practices in conducting their businesses, or for violation of any law, rule, regulation or condition imposed in writing by the regulatory agency or term of a written agreement with the regulatory agency. Enforcement actions may include:

- the appointment of a conservator or receiver for the bank
- the issuance of a cease and desist order that can be judicially enforced
- the termination of the bank's deposit insurance
- the imposition of civil monetary penalties;
- the issuance of directives to increase capital;
- the issuance of formal and informal agreements
- the issuance of removal and prohibition orders against officers, directors and other institution-affiliated parties
- the enforcement of such actions through injunctions or restraining orders based upon a judicial determination that the deposit insurance fund or the bank would be harmed if such equitable relief was not granted

FDIC RECEIVERSHIP

The FDIC may be appointed as conservator or receiver of any insured bank or savings association. In addition, the FDIC may appoint itself as sole conservator or receiver of any insured state bank or savings association for any, among others, of the following reasons:

- insolvency - substantial dissipation of assets or earnings due to any violation of law or regulation or any unsafe or unsound practice
- an unsafe or unsound condition to transact business, including substantially insufficient capital or otherwise
- any willful violation of a cease and desist order which has become final
- any concealment of books, papers, records or assets of the institution
- 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
- 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
- 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 interests of its depositors.

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

SAFETY AND SOUNDNESS GUIDELINES

The federal banking agencies have adopted guidelines to assist in identifying and addressing potential safety and soundness concerns before capital becomes impaired. These guidelines establish operational and managerial standards relating to:

- internal controls, information systems and internal audit systems
- loan documentation - credit underwriting
- asset growth
- compensation, fees and benefits

Additionally, the federal banking agencies have adopted safety and soundness guidelines for asset quality and for evaluating and monitoring earnings to ensure that earnings are sufficient for the maintenance of adequate capital and reserves. 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 a formal enforcement action.

The federal banking agencies have 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.

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 carefully monitor compliance with various consumer protection laws and their implementing regulations. Banks are subject to many federal consumer protection laws and their regulations, including:

- the Community Reinvestment Act, or the CRA
- the Truth in Lending Act or the TILA
- the Fair Housing Act, or the FH Act
- the Equal Credit Opportunity Act or the ECOA
- the Home Mortgage Disclosure Act, or the HMDA
- the Real Estate Settlement Procedures Act or the RESPA
- the Gramm-Leach-Bliley Act, or the GLB Act

The CRA 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 redit 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 a high of "outstanding" to a low of "substantial noncompliance."

The ECOA 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. 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
- evidence of disparate impact

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 regulates many practices, including making it unlawful for any lender to discriminate against any person in its housing-related lending activities 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
- racial steering or deliberately guiding potential purchasers to or away from certain areas because of race

The TILA 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 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 real estate loans, home improvement loans and multifamily loans, as well as information concerning originations and purchases of those types of loans. Federal bank regulators rely, in part, upon data provided under HMDA to determine whether depository institutions engage in discriminatory lending practices.

RESPA 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.

The GLB Act required disclosure of the bank's privacy policy at the time the customer relationship is established and annually thereafter. Under the provisions of the GLB Act financial institutions must put systems in place to safeguard the non-public personal information of its customers.

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.

OTHER ASPECTS OF BANKING LAW

Goleta is also subject to federal and state statutory and regulatory provisions covering, among other things, security procedures, currency and foreign transactions reporting, insider and affiliated party transactions, management interlocks, electronic funds transfers, funds availability and truth-in-savings. There are also a variety of federal statutes which regulate acquisitions of control and the formation of bank holding companies.

IMPACT OF MONETARY POLICIES

Banking is a business that depends on rate differentials. In general, the difference between the interest rate paid by a bank on its deposits and its other borrowings and the interest rate earned on its loans, securities and other interest-earning assets comprises the major source of Goleta's earnings. These rates are highly sensitive to many factors which are beyond Goleta's control and, accordingly, the earnings and growth of Goleta are subject to the influence of economic conditions generally, both domestic and foreign, including inflation, recession and unemployment and also to the influence of monetary and fiscal policies of the United States and its agencies, particularly the FRB. The FRB implements national monetary policy, such as seeking to curb inflation and combat recession, by:

- Open-market dealings in United States government securities
- Adjusting the required level of reserves for financial institutions subject to reserve requirements
- Placing limitations upon savings and time deposit interest rates
- Adjusting the discount rate applicable to borrowings by banks which are members of the Federal Reserve System

The actions of the FRB in these areas influence the growth of bank loans, investments, and deposits and also affect interest rates. Since January 2001, the FRB has decreased interest rates numerous times. The nature and timing of any future changes in the FRB's policies and their impact on the Company and Goleta cannot be predicted; however, depending on the degree to which our interest-earning assets and interest-bearing liabilities are rate sensitive, increases in rates would have a temporary effect of increasing our net interest margin, while decreases in interest rates would have the opposite effect. In addition, adverse economic conditions could make a higher provision for loan losses a prudent course and could cause higher loan charge-offs, thus adversely affecting our net income or other operating costs. See Interest Rate Risk page 29.

CONSENT ORDER WITH THE OCC

On October 28, 2002, Goleta entered into a Consent Order with its principal regulator, the OCC. As of this date, the Consent Order replaces the Formal Agreement with the OCC. The Consent Order requires that Goleta maintain certain capital levels, adhere to certain operational and reporting requirements and take certain actions, including the following:

- Goleta will submit monthly progress reports to the OCC.
- On or before December 31, 2002, Goleta will cease all actions related to the origination, renewal or rollover of short-term consumer loans, and on or before November 1, 2002, ACE will assume, indemnify and hold Goleta harmless for 100% of the costs, expenses, legal fees, damages and related liabilities from third-party claims in certain circumstances as specified in and in accordance with the terms of Goleta's agreement with ACE.
- Goleta will provide written notice to 641 short-term consumer loan applicants whose files are missing from one ACE store. No later than February 15, 2003, Goleta will begin a loan file audit, first randomly sampling 5% of the loan files at each ACE store (except those already reviewed by Goleta's Quality Assurance Department) to verify the physical presence of applicants' loan files. If sampling reveals more than one file missing at a store, Goleta will physically verify the presence of all of the files generated at that store since June 30, 2002. If any applicant files are not located, Goleta will notify the applicant in writing of the missing documents and provide them with information regarding steps that they may take to determine whether identity theft may have occurred.
- Without admitting or denying any wrongdoing, Goleta will pay a civil money penalty of $75,000 to the OCC within ten days of the Consent Order.
- Within 90 days of the Consent Order, Goleta will adopt a written strategic plan covering at least a three-year period.
- Goleta will maintain total capital at least equal to 12% of risk-weighted assets and Tier 1 capital at least equal to 7% of adjusted total assets; develop a three-year capital program to maintain adequate capital; and refrain from paying dividends without the approval of the OCC.
- Goleta will develop a written profit plan and submit quarterly performance reports.
- Goleta will develop and implement a written risk management program and adopt general procedures addressing compliance management, internal control systems and education of employees regarding laws, rules and regulations.
- Goleta will document the information it has relied on to value loans held on its books, servicing rights, deferred tax assets and liabilities and interest-only assets and submit the documentation to the OCC on a quarterly basis.
- Goleta will correct each violation of law, rule or regulation cited in any report of examination where possible and implement corrective action to avoid the reoccurrence of any such violations.
- Goleta will obtain the approval of the OCC before it initiates any new product or service or significantly expands any of its existing products or services.

Compliance with the provisions of the Order could limit Goleta's business activity and increase expense. Management believes it is in substantive compliance with the preceding provisions.

On March 8, 2002, the Company made a $750,000 capital contribution to Goleta and, as a result Goleta achieved and has maintained the required 12% total capital ratio and 7% Tier 1 capital ratio. The Company made a $500,000 capital contribution to Goleta on August 27, 2002. Goleta's total risk based capital ratio was 13.31% as of December 31, 2002. Management believes that it continues to comply with all material provisions of the Order regarding capital requirements.

MEMORANDUM OF UNDERSTANDING WITH THE FEDERAL RESERVE BANK

In March 2000, the Company entered into an MOU with the Reserve Bank. The MOU requires that the Company maintain certain capital levels and adhere to certain operational and reporting requirements, including the following:

- refrain from declaring any dividends or redeeming any of its stock without the approval of the Reserve Bank

- adopting a written plan to maintain a sufficient capital position for the consolidated organization
- refrain from increasing its borrowings or incurring or renewing any debt without the approval of the Reserve Bank
- correcting any violations of applicable laws, rules or regulations and developing a written program to ensure compliance in the future
- developing written policies and procedures to strengthen the Company's records, systems and internal controls
- developing a written plan to enhance management information systems and the Board of Director's supervision of operations; - developing a written consolidated strategic plan
- developing a written plan to address weaknesses in the Company's audit program
- complying with applicable laws with respect to the appointment of any new directors or the hiring of any senior executive officers
- submitting quarterly progress report.

The Company believes that it is in compliance with the provisions of the MOU.

SIGNIFICANT ACCOUNTING POLICIES

INTEREST ONLY STRIPS AND SERVICING ASSETS - The Company originates certain loans for the purpose of selling either a portion of, or the entire loan, into the secondary market. FHA Title 1 loans and the guaranteed portion of SBA loans are sold into the secondary market. Servicing assets are recognized as separate assets when loans are sold with servicing retained. Servicing assets are amortized in proportion to, and over the period of, estimated future net servicing income. Also, at the time of the loan sale, it is the Company's policy to recognize the related gain on the loan sale in accordance with generally accepted accounting principles. The Company uses industry prepayment statistics and its own prepayment experience in estimating the expected life of the loans. Quarterly, management evaluates servicing assets for impairment. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost on a loan by loan basis. Fair value is determined using discounted future cash flows calculated on a loan by loan basis and aggregated to the total asset level. Impairment to the asset is recorded if the aggregate fair value calculation drops below net book value of the asset.

Additionally, on some SBA loan sales, the Company has retained interest only ("I/O") strips, which represent the present value of excess net cash flows generated by 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 and (ii) contractual servicing fees. The Company determined the present value of this estimated cash flow at the time each loan sale transaction closed, utilizing valuation assumptions as to discount rate, prepayment rate and default rate appropriate for each particular transaction. Periodically, the Company verifies the reasonableness of its valuation estimates by comparison to the results of an independent third party valuation analysis.

The I/O strips are accounted for like investments in debt securities classified as trading securities. Accordingly, the Company records the I/O's at fair value with the resulting increase or decrease in fair value being recorded through operations in the current period. For the years ended December 31, 2002, 2001 and 2000, net decreases in fair value of $3,385,000, $2,694,000 and $858,000, respectively, are included in results of operations as reductions to loan servicing income.

SECURITIZED LOANS AND BONDS PAYABLE - In 1999 and 1998, respectively, the Company transferred $122 million and $81 million in loans to special purpose trusts ("Trusts"). The transfers have been accounted for as secured borrowings with a pledge of collateral and, accordingly, the mortgage loans and related bonds issued are included in the Company's balance sheet. Such loans are accounted for in the same manner as loans held to maturity. Deferred debt issuance costs and bond discount related to the bonds are amortized on a method which approximates the level yield basis over the estimated life of the bonds.

NEW ACCOUNTING PRONOUNCEMENTS - The Financial Accounting Standards Board ("FASB") finalized accounting standards covering business combinations, goodwill and intangible assets. These new rules published in July 2001 consist of SFAS No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets." In conjunction with these new accounting standards, the FASB issued "Transition Provisions for New Business Combination Accounting Rules" that required companies to cease amortization of goodwill and adopt the new impairment approach as of January 1, 2002. The adoption of SFAS Nos. 141 and 142 did not have a material effect on the Bank's financial position or results of operations.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which supersedes SFAS No. 121. SFAS No. 144, which governs accounting for the impairment of long-lived assets, is effective for financial statements issued for fiscal years beginning after December 15, 2002. The adoption of SFAS No. 144 is not expected to have a significant impact on the Company's financial position or results of operations.

In June 2002, the FASB issued SFAS No.146, "Accounting for Costs Associated with Exit or Disposal Activities" which nullifies Emerging Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and is effective for exit and disposal activities after December 31, 2002. Under Issue 94-3, a liability for exit cost as defined in Issue 94-3 was recognized at the date of the entity's commitment to an exit plan. The FASB has concluded that an entity's commitment to a plan, by itself, does not create a present obligation to others that meet the definition of a liability. Therefore, this Statement eliminates the definition and requirements for recognition of exit costs in Issue 94-3. This Statement also establishes that fair value is the objective for initial measurement of the liability. The Company did not elect to early adopt SFAS No. 146. The Company recognized $650,000 of costs related to exit and disposal activities in 2002. At December 31, 2002, the Company had $405,000 in liabilities related to its exit and disposal activities. Refer to Note 7 for the components of the exit and disposal related items.

In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain Financial Institutions" which amends statements SFAS No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions" and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This Statement removes acquisitions of financial institutions from the scope of both Statement 72 and Interpretation 9 and requires those transactions be accounted for in accordance with SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". In addition, SFAS No. 147 amends SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", to include in its scope long-term customer relationship intangible assets of financial institutions such as credit cardholder intangible assets. SFAS applies to acquisitions completed on or after October 1, 2002. The adoption of SFAS No. 147 is not expected to have a significant impact on the Company's financial position or results of operations.

In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," to clarify accounting and disclosure requirements relating to a guarantor's issuance of certain types of guarantees. FIN 45 requires entities to disclose additional information about certain guarantees, or groups of similar guarantees, even if the likelihood of the guarantor's having to make any payments under the guarantee is remote. The disclosure provisions are effective for financial statements for fiscal years ended after December 15, 2002. For certain guarantees, the interpretation also requires that guarantors recognize a liability equal to the fair value of the guarantee upon its issuance. This initial recognition and measurement provision is to be applied only on a prospective basis to guarantees issued or modified after December 31, 2002.

In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock Based Compensation -Transition and Disclosure-an amendment of FASB No.123" This Statement amends SFAS No.123 "Accounting for Stock-Based Compensation" to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, the Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. This Statement is effective for fiscal years beginning after December 15, 2002. The Company plans to continue to account for stock-based employee compensation under the intrinsic value based method and to provide disclosure of the impact of the fair value based method on reported income. Employee stock options have characteristics that are significantly different from those of traded options, including vesting provisions and trading limitations that impact their liquidity. Therefore, the existing option pricing models, such as Black-Scholes, do not necessarily provide a reliable measure of the fair value of employee stock options. Refer to Note 10 of the Notes to Consolidated Financial Statements for proforma disclosure of the impact of stock options utilizing the Black-Scholes valuation method