UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

(MARK ONE)
  (X)             Annual Report Pursuant to Section 13 or 15(d) of The
                  Securities Exchange Act of 1934 (Fee Required)

                   For the fiscal year ended December 31, 1996

  ( )             Transition Report Pursuant to Section 13 or 15(d) of The
                  Securities Exchange Act of 1934 (No Fee Required)

             For the transition period from _________ to ___________
                           Commission File No. 0-16970

                      CALIFORNIA FINANCIAL HOLDING COMPANY
             (Exact name of registrant as specified in its charter)

                   DELAWARE                                 68-0150457
         (State or other jurisdiction                    (I.R.S. Employer
       of incorporation or organization)                Identification No.)

             501 WEST WEBER AVE.,                              95203
             STOCKTON, CALIFORNIA                           (Zip Code)
        (Address of principal executive
                   offices)

       Registrant's telephone number, including area code: (209) 948-1675
        Securities registered pursuant to Section 12(b) of the Act: None
                 Securities registered pursuant to Section 12(g)
                                  of the Act:

                          COMMON STOCK, $.01 PAR VALUE
                                (Title of Class)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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-K (Section 229.405 of this chapter) is not contained,
herein, and will not be contained to the best of 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.
                                                     [  ]


<PAGE>




         The aggregate market value of voting stock held by nonaffiliates of the
registrant as of March 7, 1997: $123,560,514. The number of shares of Common
Stock outstanding as of March 7, 1997: 4,763,330.

                       DOCUMENTS INCORPORATED BY REFERENCE

PART III: Portions of the Proxy Statement for the 1997 Annual Meeting of
Stockholders.


<PAGE>




                      CALIFORNIA FINANCIAL HOLDING COMPANY

                                    FORM 10-K

                          Year Ended December 31, 1996


                                TABLE OF CONTENTS


Item Number
  In Form
   10-K                                                                Page
-----------                                                            ----

                                     PART I

1.       Business........................................................  1
2.       Properties...................................................... 38
3.       Legal Proceedings............................................... 38
4.       Submission of Matters to a Vote of
                    Security Holders..................................... 38

                                     PART II

5.       Market for Registrant's Common Equity
                    and Related Stockholder Matters...................... 39
6.       Selected Financial Data......................................... 39
7.       Management's Discussion and Analysis of
                    Financial Condition and Results of
                    Operations........................................... 40
8.       Financial Statements and Supplementary
                    Data................................................. 56
9.       Changes in and Disagreements with
                    Accountants on Accounting and
                    Financial Disclosure................................. 97

                                    PART III

10.      Directors and Executive Officers of the
                    Registrant........................................... 98
11.      Executive Compensation.......................................... 98

                                      - i -

<PAGE>



12.      Security Ownership of Certain
                    Beneficial Owners and Management..................... 98
13.      Certain Relationships and Related
                    Transactions......................................... 98

                                     PART IV

14.      Exhibits, Financial Statement Schedules
                    and Reports on Form 8-K.............................. 99

                                     - ii -

<PAGE>



                                     PART I


ITEM 1.  BUSINESS

GENERAL

         California Financial Holding Company ("California Financial" or the
"Company"), a Delaware corporation incorporated on June 1, 1988, is a financial
services holding company engaged primarily in the savings and loan business
through its wholly-owned subsidiary, Stockton Savings Bank (the "Bank" or
"Stockton Savings"). No business activities were conducted by California
Financial during 1996 and very few were conducted in past years aside from
third-party borrowing in 1990, 1991 and 1992; therefore, unless indicated,
discussion of business activities and corresponding results relate primarily to
the Bank.

         The Bank's business consists predominately of attracting savings
deposits from the general public through a network of 24 Northern California
retail branches and two loan centers and originating, for its own portfolio and
for sale to others, loans secured by mortgages on residential and other real
estate. The home office of California Financial and the Bank is located in
Stockton, California. Originally organized as a state mutual association, the
Bank was converted to a federal mutual charter in 1982. In 1983, Stockton
Savings became a federally-chartered stock association with the issuance of
2,760,000 shares of common stock. The Bank converted to a California- chartered
stock association in April 1986. In June 1986, an additional 977,500 shares of
common stock were sold. In 1990, the Bank converted to a federally-chartered
savings bank.

         The Bank's income is derived primarily from interest charged on real
estate and other types of loans. To a lesser extent, additional income is
obtained through interest on investment securities and fees received in
connection with loan and deposit activities. Although not on a consistent basis,
income is also generated through the sale of loans and investments and until
recently, from the sale of real estate held for development. The major expenses
are interest paid on deposits and borrowings and general and administrative
expenses. The general economic and interest rate environments have a material
effect on the financial performance of the Bank. Deposit flows and costs of
funds are influenced by market rates and alternative investments available in
the marketplace. Lending activity levels are also dependent on interest rates,
the demand for mortgage financing, and the overall health of the real estate
market in the Bank's primary lending territory - California's Central Valley. In
addition, regulatory policies and procedures promulgated by the Office of Thrift
Supervision ("OTS"), the Board of Governors of the Federal Reserve System
("FRB"), and the Federal Deposit Insurance Corporation ("FDIC") substantially
impact Stockton Savings. See "Regulation of the Company" and "Regulation of the
Bank" for further discussion of regulatory issues.


                                      - 1 -

<PAGE>



MERGER WITH TEMPLE-INLAND INC.

         On December 9, 1996, California Financial and Temple-Inland Inc. ("TI")
announced the signing of a definitive Agreement and Plan of Merger (the "Merger
Agreement") under which California Financial will merge (the "Merger") with and
into TI. The transaction is expected to close during the second quarter of 1997,
subject to regulatory approval and approval by California Financial
shareholders. Immediately following consummation of the Merger, Stockton Savings
will merge with and into Guaranty Federal Bank, F.S.B., a wholly owned
subsidiary of TI.

         Under the terms of the Merger Agreement, California Financial's
shareholders will receive a combination of TI stock and cash valued at $30 per
share for each share of California Financial stock they hold, for a total
transaction value of approximately $150 million. Subject to certain limitations,
California Financial stockholders will be given the election to have the
consideration for their shares paid in TI stock, cash or a combination of the
two. TI, however, will issue no more than 1,692,000 shares of TI stock in the
transaction. The Merger Agreement permits California Financial to terminate the
transaction if the price of TI stock, as calculated, is below $40 per share,
provided that the number of shares of TI stock issued in the transaction has not
been increased.

         As a condition to the execution and delivery of the Merger Agreement,
California Financial and TI entered into a stock option agreement, dated as of
December 8, 1996 (the "Stock Option Agreement"). Pursuant to the Stock Option
Agreement, California Financial granted TI an option (the "Option") to purchase
up to 940,095 authorized but unissued shares of California Financial stock,
representing up to 19.9% of the outstanding shares of California Financial
stock. The Option is exercisable only upon the occurrence of certain events
described in the Stock Option Agreement, none of which has occurred as of the
date hereof.

         The Merger Agreement and the Stock Option Agreement are incorporated by
reference  herein in their  entirety.  The  foregoing  summaries  of the  Merger
Agreement  and the Stock Option  Agreement do not purport to be complete and are
qualified in their entirety by reference to such exhibits.

LENDING ACTIVITIES

         The lending activities of the Bank are conducted through five regional
loan centers and eight branch facilities concentrated primarily in San Joaquin
and Stanislaus counties. With the 1988 purchase of eight former Citicorp
branches in the Sierra foothills and the Southern Central Valley and the opening
of a new branch in Elk Grove in Sacramento County in the same year, Stockton
Savings substantially expanded its geographical lending as well as deposit
market area to take advantage of projected commuter growth in those regions. The
Bank also increased its potential market for both savings and lending activities
with the opening of a branch in Fresno in September 1994. Expansion of lending
activities to Sacramento occurred in 1995. In 1996, the Bank began offering
Federal Housing Administration ("FHA") loans in most locations through
commissioned loan officers.


                                      - 2 -

<PAGE>



         Stockton Savings generally does not lend on more than 80% of the
appraised value on residential real property without mortgage insurance. In
certain special circumstances, usually due to reappraisals or loan workouts, the
Bank may lend on real estate in excess of 80% of the appraised value without
mortgage insurance. The total of these loans as of December 31, 1996 was $7.3
million. Lending limits on commercial properties do not exceed 75% of appraised
value. The Bank's loan portfolio is mainly composed of single-family residential
loans. Construction loans on residential subdivisions and permanent multi-family
residential and commercial loans represent most of the remaining portfolio. The
Bank also offers secured equity lines of credit and unsecured personal lines of
credit.

         Title insurance is required for all mortgage loans. Fire and casualty
coverage is required for all improved secured properties, and private mortgage
insurance is usually purchased to indemnify Stockton Savings against potential
loss on the portion of any loan in excess of 80% of the appraised value.

         Loan Originations: A majority of loans originated by the Bank are
permanent residential mortgage loans with terms of 10 to 30 years. Most
long-term fixed-rate mortgages are sold in the secondary market with servicing
retained, while adjustable-rate loans ("ARMs") are generally retained in
portfolio. The origination of permanent adjustable mortgages represented 23%,
30% and 37% of total origination volume in 1996, 1995 and 1994 respectively. The
demand for adjustable mortgages declines in a falling rate environment as
borrowers opt for the certainty of fixed rates. Consequently, the volume of
adjustable originations as a percent of the total was lower in 1996, a lower
rate environment.

         The Bank originates a substantial volume of short-term speculative
construction loans, normally written for a three-year period with interest rates
fixed at a spread over Bank prime for the first year and adjusting to a spread
over the Federal Home Loan Bank Eleventh District Cost of Funds Index ("COFI")
for the remaining term. In 1996, 35% of all originations were for short-term
construction loans as compared to 31% in 1995 and 28% in 1994. The increase in
construction lending this year is reflective of the Bank's impression that the
worst of the real estate slowdown is over. Construction loans for owner-occupied
single-family residences also represent a considerable amount of loan
origination volume. A total of 17%, 11% and 10% of total originations in 1996,
1995 and 1994, respectively, consisted of this type of lending.

         Loan origination volume was down significantly in 1996, 1995 and 1994
from 1993 and 1992. Rates in those earlier two years were extremely low relative
to the last three years. Loan origination volume in 1996 and 1995 totalled $327
million and $283 million, respectively, compared to $501 million in 1993 and
$544 million in 1992. Heavy refinance activity beginning in 1992 due to the low
interest rate environment fueled much of the increase in those years. Roughly
32% or $104 million of total originations in the current year was due to
refinancing compared to 54% in 1993. Origination volume excluding refinance
activity remained fairly flat over the past three years.

         Loan Sales: The Bank continues to be active in the secondary market.
Strong underwriting criteria permits the sale of new loan originations in the

                                      - 3 -

<PAGE>



secondary market to both government agencies and private investors. A majority
of loan sales by Stockton Savings has been and will continue to be composed of
long-term, fixed-rate mortgages. The Bank may sell permanent ARMs on an
infrequent basis, usually to meet unanticipated cash requirements. Construction
and commercial loans are also sold on occasion to meet loans-to-one-borrower
regulations.

         Typically, the Bank sells, without recourse, all or a major portion of
a loan balance to an investor and retains servicing. In 1996, $90 million in
loans were sold, primarily to Federal National Mortgage Association ("FNMA") and
Federal Home Loan Mortgage Corporation ("FHLMC") and consisted of long-term,
fixed-rate, single-family mortgage loans. This total compares to 1995 loan sales
of $85 million. Sales in 1994 totalled $64 million and again, were primarily to
the agencies. Loans serviced for others, a primarily off-balance sheet item to
the Bank, totalled $574 million and $549 million at December 31, 1996 and 1995,
respectively.

         Because the Bank sells loans in the secondary market on a regular
basis, a portion of the portfolio is designated as held for sale and, as such,
must be accounted for at the lower of cost or market. The amount of loans that
is held for sale at any point in time depends on such factors as origination
volume and mix, as well as cash flow, capital and growth requirements of the
Bank. Loans available for sale at year-end consisted of single-family,
fixed-rate loans saleable to the FHLMC or the FNMA.

         Gains or losses on the sale of loans are composed of the following:

         .     cash received on loans sold in excess of or less than the
               principal balance;

         .     the present value of expected cash flows if any on the spread
               between the rate paid by the borrower to the Bank and the net
               yield to the investor, excluding normal servicing fees and
               considering prepayments

         .     net unamortized loan fees on loans sold recognized as income at
               the point of sale.

         .     gains and losses on hedging activities and

         .     in 1996, the value of mortgage servicing rights created as a
               result of the implementation of Statement of Financial Accounting
               Standards 122 ("SFAS 122") during the year.

         The amount of gains in a given year is dependent upon the volume of
sales and the interest rate environment. The composition of loan sale gains for
1996, 1995 and 1994 is included in Table IV of Management's Discussion and
Analysis of Financial Condition and Results of Operations, Item 7.

         Loan Purchases: Loan purchases have historically represented a minor
activity for the Bank as origination volume has always been sufficient to meet
growth needs. Generally, purchases consist of ARM products that the Bank has

                                      - 4 -

<PAGE>



been unable to generate in adequate volume internally. Purchase activity
totalled $17.3 million, $481,000 and $15.9 million in 1996, 1995 and 1994,
respectively. In 1996, the Bank purchased a combination of single-family
adjustable-rate mortgages and automobile loans.

         The following table details loan origination, purchase, sale and
prepayment activities during the past five calendar years:

<TABLE>
<CAPTION>

                                                            Lending Activity
                                                             (in thousands)
                                                    For the Years Ended December 31,

                                                         1996            1995            1994            1993            1992
                                                        ------          ------          ------          ------          ------
<S>                                                    <C>             <C>              <C>            <C>            <C>
Loans originated:
 Real estate loans:
 Conventional loans on existing property               $104,187        $103,198         $ 93,980       $ 72,411       $ 85,133
 Construction                                            93,365          71,730          102,514        101,242         80,327
 Construction for owner                                  24,170          31,736           38,956         51,794         53,263
 Loans refinanced                                       101,834          71,372          130,774        272,399        319,539
 Loans for other purposes                                 3,003           5,254            2,641          3,268          5,716
                                                       --------        --------         --------       --------       --------
Total loans originated                                 $326,559        $283,290         $368,865       $501,114       $543,978
                                                       --------        --------         --------       --------       --------
Loans purchased                                        $ 17,271        $    481         $ 15,879       $  5,482       $ 28,803
                                                       --------        --------         --------       --------       --------
Total loans originated and purchased                   $343,830        $283,771         $384,744       $506,596       $572,781
                                                       --------        --------         --------       --------       --------
Principal repayments and payoffs                        220,453         194,011          246,490        280,211        266,039
Whole loans sold                                         85,003          85,199           64,346        175,110        209,415
Loan participations sold                                  4,886              --               --          3,879          7,035
Loans swapped for mortgage-backed
  securities                                                 --              --            8,434             --             --
                                                       --------        --------         --------       --------       --------
Total loans sold and paid off                          $310,342        $279,210         $319,270       $459,200       $482,489
                                                       --------        --------         --------       --------       --------
Net loan activity                                      $ 33,488        $  4,561         $ 65,474       $ 47,396       $ 90,292
                                                       ========        ========         ========       ========       ========

</TABLE>

(Does not include deductions for LIP, discounts, or unamortized loan fees.)


         Loan Maturity and Prepayments: The Bank's permanent residential loans
are amortized by monthly payments over terms ranging from 5 to 30 years;
however, loans normally remain outstanding for a shorter period of time as
borrowers refinance or accelerate the repayment of their loans. The likelihood
of early repayment increases with higher rate or adjustable loans, particularly
in a lower rate environment. Loan repayment activity in 1996 was up $26 million
from the prior year due in great part to the lower-rate environment. The Bank
estimates the life of the average permanent residential mortgage loan to be
between 5 and 7 years.

         The following table summarizes information regarding the term to
maturity of Stockton Savings' loan portfolio at December 31, 1996:

                                     - 5 -
<PAGE>

<TABLE>
<CAPTION>
                                                      Loan Maturity Schedule
                                                          (in thousands)
                                                      As of December 31, 1996

                                                 Real Estate          Construction
                                               Mortgage Loans           Loans (1)             Other loans            Total (2)
                                               --------------         ------------           ------------            ---------
<S>                                               <C>                   <C>                      <C>               <C>
Due in less than 1 year                           $ 39,934              $ 47,948                 $ 2,012           $   89,894
Due in 1-2 years                                    46,130                38,545                     548               85,223
Due in 2-3 years                                    24,786                    60                   2,625               27,471
Due in 3-5 years                                    30,678                     0                   4,120               34,798
Due in 5-10 years                                   96,299                     0                   2,938               99,237
Due in more than 10 years                          666,512                     0                     328              666,840
                                                  --------              --------                --------           ----------
Total Portfolio                                   $904,339              $ 86,553                $ 12,571           $1,003,463
                                                  ========              ========                ========           ==========
</TABLE>

 (1)  All current "construction for owner" loans are classified under real
      estate loans, as they have or will roll over to permanent long-term
      financing. All construction loans are adjustable-rate in nature.
 (2)  Excludes deductions for LIP, discounts and unamortized
      fees.


         At December 31, 1996, the Bank's balance of loans maturing after one
year totalled $914 million; $666 million adjustable in nature and $248 million
fixed rate.

         The following schedule breaks out the loan portfolio by type as of the
dates indicated:

<TABLE>
<CAPTION>
                                                         Loan Composition - By Type
                                                               (in thousands)
                                                             As of December 31,

                                                   1996                            1995                              1994
                                              Amount         %             Amount            %             Amount             %
                                             --------      -----          --------         -----          --------          -----
<S>                                          <C>            <C>             <C>            <C>            <C>               <C>  
By type of Loan:

Residential mortgage loans
 Existing structures
  1-4 unit dwellings                         $748,325       77.0%           $745,793       79.7%          $735,338          79.0%
  5 or more unit dwellings                     45,327        4.7%             38,130        4.1%            37,110           4.0%
 Construction
  1-4 unit dwellings                           55,179        5.7%             57,517        6.2%            59,793           6.4%
  5 or more unit dwellings                         45          --              1,278         .1%             4,853           0.5%
                                             --------      ------           --------       -----          --------          -----
Total residential                            $848,876       87.4%           $842,718       90.1%          $837,094          89.9%
                                             --------      ------           --------       -----          --------          -----
Commercial mortgage loans

  Existing structures                        $ 68,322        7.0%           $ 55,518        5.9%          $ 57,818           6.2%
  Construction                                     --          --                 --          --                --             --
                                             --------      ------           --------        ----          --------           ----
Total commercial                               68,322        7.0%           $ 55,518        5.9%          $ 57,818           6.2%
                                             --------      ------           --------       -----          --------          -----
Land loans                                   $ 42,146         4.3           $ 34,227        3.7%          $ 33,862           3.6%
                                             --------      ------           --------       -----          --------          -----
 Other loans

  Educational loans                          $      1          --           $     29          --          $     80             --
  Savings loans                                 2,058         .2%              2,196        0.2%             1,953           0.2%
  Automobile loans                              7,437         .8%                 --          --                --             --
  Other loans                                   3,074         .3%                477        0.1%               505           0.1%
                                             --------      ------           --------       -----          --------          -----
 Total other loans                           $ 12,570        1.3%           $  2,702        0.3%          $  2,538           0.3%
                                             --------      ------           --------       -----          --------          -----
Total loans                                  $971,914      100.0%           $935,165      100.0%          $931,312         100.0%
                                             --------      ------           --------       -----          --------          -----
Weighted average rate at end of                 7.91%                          7.92%                         7.02%
period                                       ========                       ========                      ========

</TABLE>

                                     - 6 -
<PAGE>

<TABLE>
<CAPTION>

                                 Loan Composition - By Type
                                       (in thousands)
                                     As of December 31,

                                                   1993                         1992
                                             Amount         %           Amount            %
                                           --------        ---         --------          ---
<S>                                        <C>             <C>          <C>             <C>  
By type of Loan:

Residential mortgage loans

 Existing structures
  1-4 unit dwellings                       $642,624        74.4%        $596,651        73.2%
  5 or more unit dwellings                   46,851         5.4%          39,428         4.8%
 Construction
  1-4 unit dwellings                         71,504         8.3%          71,039         8.7%
  5 or more unit dwellings                      821         0.1%           1,449         0.2%
                                           --------         ----        --------         ----
Total residential                          $761,800        88.2%        $708,567        86.9%
                                           --------        -----        --------        -----
Commercial mortgage loans

  Existing structures                      $ 54,969         6.4%        $ 59,774         7.3%
  Construction                                   --           --             998         0.1%
                                           --------         ----        --------         ----
Total commercial                           $ 54,969         6.4%        $ 60,772         7.4%
                                           --------         ----        --------         ----
Land loans                                 $ 43,668         5.1%        $ 41,334         5.1%
                                           --------         ----        --------         ----
 Other loans

  Educational loans                        $    393           --             535         0.1%
  Savings loans                               2,535         0.3%           3,828         0.5%
  Automobile loans                               --           --              --           --
  Other loans                                   385           --             346           --
                                           --------         ----        --------         ----
 Total other loans                         $  3,313         0.3%        $  4,709         0.6%
                                           --------         ----        --------         ----
Total loans                                $863,750       100.0%        $815,382       100.0%
                                           --------       ------        --------       ------
Weighted average rate at end of
period                                        7.38%                        8.67%
                                           ========                     ========

</TABLE>

(Does not include deductions for discounts or unamortized loan fees.)


         The composition of the loan portfolio remained fairly stable as
compared to the end of the prior year although increases in the balance of
commercial and land loans have been noted. The increases are the result of
management's opinion that the real estate market is beginning to show signs of
strength.

         Loan Fee Income: The Bank generally charges a fee for originating
loans, as well as for committing to specific interest rates. Modification fees,
assumption fees and late charges are also collected on existing loans. Fee
income is considered a less dependable source of income than interest income as
it will vary depending on volume, loan mix, competition, and the overall
economic environment. The following table shows loan origination fees as a
percentage of loans originated for the periods indicated:

                                      - 7 -

<PAGE>







      For the Years Ended             Total Loan Origination Fees as a Percent
          December 31,                           of Loans Originated
      --------------------            ----------------------------------------
              1996                                      1.65%
              1995                                      1.55%
              1994                                      1.55%
              1993                                      1.79%
              1992                                      2.03%

         Higher fees in 1996 relative to 1995 are the result of increases in the
origination of construction and commercial loans, which both carry higher fees
than other loans offered by the Bank.

         The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 91 ("FASB 91"), "Accounting for Nonrefundable Fees and
Costs Associated with Originating and Acquiring Loans and Initial Direct Costs
of Leases"; and the Bank implemented it beginning January 1, 1989. FASB 91
requires that loan origination fees and commitment fees, offset by certain
specific direct costs of origination, are to be deferred and amortized over the
contractual life of the loans as an adjustment to yield. Unamortized fees on
loans sold or prepaid are taken into income immediately. The accelerated
recognition of fees due to loan prepayments is included with regular
amortization in loan interest income. Unamortized fees recognized on the sale of
loans are included as part of "gain on sale of loans". Deferred loan fees
outstanding as of December 31 of the years indicated are shown below:

          At                    Deferred Fees Outstanding (in
     December 31,                         thousands)
     ------------               ------------------------------

         1996                              $ 5,054
         1995                                5,628
         1994                                6,607
         1993                                7,265
         1992                                7,762


         The decline in deferred fees outstanding is due in large part to the
preference by borrowers to pay less of a fee up front on permanent loans in
exchange for a higher rate on the loan for the life of the borrowing.

         The amortization of loan origination fees included in interest income
for 1996 and 1995 totalled $2.8 million, compared to $4.1 million recorded in
1994. General and administrative expense was reduced for specific direct costs
of origination by $2.2 million, $1.4 million and $ 1.9 million in 1996, 1995 and
1994, respectively. Higher fee amortization in 1994 was due to the greater
number of "teaser" adjustable loans in portfolio at that time as well as to
greater paydowns made in that year. Deferred costs of origination increased in
1996 due to an increase in overall loan origination volume compounded by an even
larger increase in the number of loans originated. (i.e.
The average origination amount per loan declined in 1996.)


                                      - 8 -

<PAGE>



         Loan servicing fee income results from sales of loans and loan
participations. Under the sales agreements, the Bank is obligated to service the
sold loans (i.e., to continue to collect payments on the loans as they become
due and to monitor tax and insurance payments) and to pay the purchaser an
agreed upon yield. The differential between the interest paid by the borrower
and the yield paid by the Bank to the purchaser is retained by Stockton Savings.
To the extent that this differential is more or less than the estimated normal
rate of servicing, after adjustment for estimated prepayments using a discount
market rate, it is recognized as gain or loss by the Bank in accordance with
generally accepted accounting principles ("GAAP"). The net yield, on a
contractual basis, to the Bank on its servicing portfolio is indicated below:

                       Weighted Average Yield on Servicing
                            Portfolio for year ending
                                  December 31,
                       -----------------------------------

                                    1996     .27%
                                    1995     .28%
                                    1994     .25%
                                    1993     .23%
                                    1992     .25%



         In 1996, the Bank implemented SFAS 122, which allows the recognition
upon sale of the loan, the value of the servicing asset created. Gains
recognized during the year as a result of SFAS 122 were $1.0 million.

         Loan Commitments: The Bank will generally issue fixed-rate commitments
to originate conventional mortgages on existing residential dwellings for a
30-day period from the receipt of a completed application. Borrowers requesting
extensions on the initial commitment period are charged a fee commensurate with
the extended period. During this commitment period, fixed-rate permanent loans
in the pipeline (which the Bank generally tends to sell) are subject to interest
rate risk. The Bank makes a concerted effort to reduce this exposure by locking
in forward sales of these loans or hedging through the forward sales of
participation certificates.

         Asset Quality: Per Bank policy, a loan is delinquent when a required
payment has not been received within 15 days of its scheduled due date. It is
Bank policy to cease accruing interest on loans that are 90 days or more
delinquent and on restructured troubled debt. At December 31, 1996, $1.7 million
in interest on delinquent and troubled loans was not recorded. Interest income
of $476,000 was recorded on these loans during 1996 and gross interest income
that would have been recorded during the year had the loans been performing was
$782,000. Upon failure of the borrower to make a required payment on a loan, the
Bank attempts to remedy the deficiency through contact with the borrower. Most
defaults are cured promptly; however, if the loan remains delinquent, Stockton
Savings seeks remedy through appropriate legal action, such as foreclosure
proceedings or acceptance from the trustor of a voluntary deed on the secured
property in lieu of foreclosure. If a foreclosure action is instituted and the
loan is not reinstated, paid in full or refinanced, the property is sold in a
proceeding at which the Bank may be the buyer. The acquired property is
subsequently listed as "real estate owned" until it is sold. Real estate
acquired through settlement of loans is recorded at the lower of carrying value
or fair value less estimated selling costs. At the time of foreclosure, any


                                      - 9 -

<PAGE>



excess of the loan  amount over the fair value of the  property is written  off.
Specific  valuation  allowances for estimated losses are provided on real estate
when a further  decline in value occurs  after the  property has been  acquired.
Specific allowances on foreclosed real estate of $1.6 million existed at the end
of 1996  and $3.9  million  at the end of  1995.  The  decline  in  reserves  is
consistent  with the lower  balance of real estate  outstanding  at December 31,
1996.  Stockton  Savings may  finance the sale of real estate  owned with a loan
which may involve more  favorable  terms than  normally  permitted by applicable
regulations  or the Bank's  loan  underwriting  criteria.  If the terms are more
favorable  than what would  normally be offered,  the  differential  in terms is
discounted  and  recorded  as a loss at time of  disposition  of the  foreclosed
asset.  If a loan made to  facilitate  the sale of real  estate  owned  involves
relaxed underwriting  criteria, the loan is classified as a "loan to facilitate"
on the balance  sheet.  No loans to facilitate  existed for any periods  covered
under this filing.

         The level of nonperforming assets declined by 26% in 1996 compared to
the prior year. Improvements were noted in all nonperforming asset categories
with the exception of 1-4 family residential mortgage delinquencies and 1-4
family residential real estate owned.

         Gains and losses on sale and loss provisions on real estate owned
through foreclosure are summarized below for the calendar years indicated:

<TABLE>
<CAPTION>

            Gain or Loss on Sale and Loss Provisions on Real Estate Owned Through Foreclosure
                                              (in thousands)

                                                         For the Years Ended December 31,
                                      1996            1995           1994           1993          1992
                                      -----          -----          -----          -----          -----
<S>                                  <C>           <C>            <C>            <C>            <C>   
Gains on sale                        $  662        $   236        $   385        $   384        $  263
Losses on sale                         (105)          (228)          (221)          (164)          (97)
Provisions for losses                  (430)        (1,630)        (2,385)        (1,245)         (281)
                                       -----        -------        -------        -------        ------
Total impact on income               $  127        $(1,622)       $(2,221)       $(1,025)       $ (115)
                                       -----        -------        -------        -------        ------
                                                   

</TABLE>

         Loss provisions added on foreclosed real estate in 1996, 1995 and 1994
totalled $430,000, $1.6 million and $2.4 million, respectively. Provisions taken
during 1995 and 1994 related primarily to losses inherent in a single property
located in Galt, California collateralizing a construction loan.

         A summary of loan loss experience by loan type is provided in the
following table:

<TABLE>
<CAPTION>
                                     Analysis of Allowance for Loan Losses
                                                (in thousands)

                                                                     For the Years Ended December 31,
                                              1996         1995        1994         1993        1992
                                             ------       ------      ------       ------      ------
<S>                                          <C>          <C>         <C>          <C>         <C>   
Balance at beginning of period               $8,174       $7,726      $9,965       $8,042      $5,047
Charge-offs   
Mortgage Loans  
 1-4 dwelling units                           1,508          338         197           42          --
 Multifamily and commercial                      --           --       1,142          630         380
Construction loans  
 1-4 dwelling units                             217           --         145          220         390
 Land                                           433          847       1,343          170          --
                                             ------       ------      ------       ------      ------

                                     - 10 -

<PAGE>




Total charge-offs                            $2,158       $1,185      $2,827       $1,062      $  770
                                             ------       ------      ------       ------      ------
Recoveries                                       --           --         307           --          --
Net charge-offs                              $2,158       $1,185      $2,520       $1,062      $  770
                                             ------       ------      ------       ------      ------
Additions to allowances                      $1,261       $1,633      $  281       $2,985      $3,765
                                             ------       ------      ------       ------      ------
Balance at end of period                     $7,277       $8,174      $7,726       $9,965      $8,042
                                             ======       ======      ======       ======      ======
Ratio of net charge-offs during the period
to average loans outstanding during the
period                                         .23%         .13%        .29%         .12%        .10%

</TABLE>


         The Bank took $2.2 million in charge-offs in the current year, largely
due to foreclosures on single-family residences. Additions to loan loss
allowances were lower than levels established in 1993 and 1992, reflecting the
improvement in the level of nonperforming assets discussed above.

         Loan Loss Reserves: The Competitive Equality Banking Act of 1987
("CEBA") required that the Federal Home Loan Bank Board ("FHLBB"), now OTS,
establish an asset classification system for savings and loan associations
consistent with asset classification practices of national banks. The subsequent
regulation, effective December 31, 1987, required all institutions to establish
an internal asset review system to evaluate and classify assets on a regular
basis and provide prudent valuation allowances. The regulation calls for the
classification of troubled assets as either "substandard", "doubtful" or "loss".
An asset is considered "substandard" if inadequately protected by the current
net worth and paying capacity of the obligor or by the collateral pledged, if
any. "Substandard" assets include those characterized by the "distinct
possibility" that the institution will sustain "some loss" if the deficiencies
are not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard" with the added characteristic that
the weaknesses present make "collection or liquidation in full", on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable". Assets classified "loss" are those considered "uncollectible" and
of such little value that their continuance as assets without the establishment
of a loss reserve is not warranted. In addition, the Bank designates certain
assets that do not currently expose the Bank to a sufficient degree of risk to
warrant classification but possess credit deficiencies or future potential
weaknesses as "special mention".

         Classified assets reported to OTS as of December 31, 1996, 1995 and
1994 are shown in the following schedule:

                              Classified Assets
                               (in thousands)
                               At December 31,

                                        1996           1995           1994
                                       ------         ------         ------
Substandard assets                    $ 22,579       $ 37,841        $ 47,310
Doubtful assets                             --             --              --
                                      --------       --------        --------
                                      $ 22,579       $ 37,841        $ 47,310
   Total                              ========       ========        ========


         General loan loss reserves are established on a percentage of loans
classified as substandard and doubtful, as well as special mention and


                                     - 11 -

<PAGE>



unclassified assets, according to the type of asset, historical loss experience
and its perceived relative risk. A breakdown of the general allowance for loan
losses is provided below:

<TABLE>
<CAPTION>

                                             Allocation of Allowance for Loan Losses
                                                     (Dollars in thousands)
                                                         At December 31,

                                              1996                              1995                             1994
                                        Amt              %               Amt                %             Amt             %
                                        ---             ---              ---               ---            ---            ---
<S>                                      <C>            <C>                <C>             <C>           <C>              <C> 
Mortgage loans
1-4 dwelling units                       $1,458         20.0               $1,069          13.1          $  818           10.6
Multifamily and Commercial                3,024         41.6                2,426          29.7           2,120           27.4
Construction loans                          450          6.2                1,022          12.5           1,727           22.4
Land loans                                  939         12.9                2,070          25.3           2,144           27.8
Other loans                                 292          4.0                  508           6.2              58             .7
Unallocated                               1,114         15.3                1,079          13.2             859           11.1
                                         ------         ----               ------          ----           -----           ----
                                         $7,277         100%               $8,174          100%          $7,726           100%
                                         ======         ====               ======          ====          ======           ====

                                               1993                             1992
                                               ----                             ----
                                        Amt              %               Amt                %
                                        ---             ---              ---               ---
Mortgage loans
1-4 dwelling units                     $  751           7.5               $1,129          14.0
Multifamily and Commercial              2,639          26.5                2,991          37.3
Construction loans                      1,092          10.9                1,239          15.4
Land loans                              3,804          38.2                2,133          26.5
Other loans                                57            .6                   --            --
Unallocated                             1,622          16.3                  550           6.8
                                       ------          ----               ------          ----
                                       $9,965          100%               $8,042          100%
                                       ======          ====               ======          ====
</TABLE>



         For a more detailed discussion of asset quality, see the "Asset
Quality" section in Management's Discussion and Analysis of Financial Condition
and Results of Operations, Item 7.

INVESTMENT ACTIVITIES

         Stockton Savings' second largest source of income is interest earned on
investments. The Bank is required by federal regulation to maintain a balance of
5% of its average deposits and short-term borrowings in liquid assets with terms
of five years or less. At December 31, 1996, the Bank's liquidity ratio was
5.54%. The Bank's liquidity qualifying investments generally consist of
government-backed obligations and federal funds alternatives. Realistically,
management seeks to maintain a liquidity ratio in the range of 5.5% and 6%.
These levels are generally met only after all short-term borrowings have been
retired.

         In addition to its liquidity qualifying assets, the Bank also has a
large portfolio of mortgage-backed securities and collateralized mortgage
obligations. These investments supplement the Bank's own lending portfolio and
are utilized frequently as collateral for borrowings. In 1996, the Bank
purchased primarily low-risk collateralized mortgage obligations to supplement
loan origination volume.


                                     - 12 -

<PAGE>



         The following table summarizes the Bank's investments at December 31
for the periods indicated:

<TABLE>
<CAPTION>

                        Investment Security Composition
                             (Dollars in thousands)
                                 At December 31,


                                                       1996             1995              1994            1993             1992
                                                      ------           ------            ------          ------           ------
<S>                                                  <C>               <C>             <C>               <C>            <C>    
Securities Available
  for Sale:
Federal funds                                        $  1,545          $    255        $     --          $    --        $    --
Mutual fund investment                                  1,145             4,424              --               --             --
U.S. Government and agency securities                  43,286            48,020          39,249               --             --
Collateralized mortgage obligations                   157,763            95,050          11,190               --             --
Mortgage-backed securities                            103,007           118,265           7,154               --             --
Other                                                      18                22              --               --             --
                                                     --------          --------        --------          -------        -------
Total Available for Sale                             $306,764          $266,036        $ 57,593          $     0        $     0
                                                     --------          --------        --------          -------        -------


Securities Held to Maturity:
Federal funds                                        $     --          $     --        $    350         $ 11,400       $    925
Mutual fund investment                                     --                --           2,901           19,233          9,212
Securities purchased under agreements
  to resell                                                --                --              --               --            700
U.S. Government and agency securities                      --                --           6,335           20,905         24,068
Collateralized mortgage obligations                        --                --          46,414           30,575         33,910
Mortgage-backed securities                                 --                --         159,436           80,405         84,603
Other                                                      --                --              74               10             10
                                                     --------          --------        --------         --------       --------
Total Held to Maturity                               $      0          $      0        $215,510         $162,528       $153,428
                                                     --------          --------        --------         --------       --------


Trading Account
 Securities:
Mutual fund investment                               $     --          $     --        $     --         $  3,244       $    233
U.S. Government and agency securities                      --                --              --           17,858         20,381
                                                     --------          --------        --------         --------       --------
Total Trading Account                                $      0          $      0        $      0         $ 21,102       $ 20,614
                                                     --------          --------        --------         --------       --------
Total Investment Securities                          $306,764          $266,036        $273,103         $183,630       $174,042
                                                     ========          ========        ========         ========       ========
Weighted average rate at end of period                  6.69%             6.66%           6.70%            5.58%          6.75%
                                                     ========          ========        ========         ========       ========
</TABLE>



         Statement of Financial Accounting Standards 115 ("SFAS 115")
"Accounting for Certain Investments in Debt and Equity Securities", adopted on
January 1, 1994, requires the classification of securities as available for sale
or held to maturity.

         The Bank designated its entire investment portfolio as available for
sale in 1995. In 1996, $46.8 million in securities classified as available for
sale were sold and net gains of $716,000 were recorded. During 1995, $52.1
million in securities classified as available for sale were sold with net losses
of $27,000 recorded. The designation made by management in August 1995 was the
result of a decision by management at that point in time to restructure its
balance sheet. See Notes 2 and 3 of the Financial Statements and Supplementary
Data in Item 8.


                                     - 13 -

<PAGE>



         At December 31, 1994, the Bank had classified $52.8 million of
securities and $159.4 million of mortgage-backed securities as held to maturity.
An additional $50.4 million in securities were classified as available for sale.
During the year, $14.2 million in securities classified as available for sale
were sold with net losses of $66,000 recorded.

         The Bank designated $17.9 million in treasury securities at December
31, 1993 as held for trading purposes. These assets were under active management
by portfolio managers and, as such, were marked-to-market value with the
resulting gain or loss shown as an adjustment to pretax income. Net losses
recognized on trading activities during 1994, 1993 and 1992 totalled $416,000,
$15,000 and $471,000, respectively. No investments designated as held for
trading purposes were outstanding at year-end, 1996, 1995 or 1994 as all such
assets were transferred to other portfolios at market value in 1994 as described
in Note 2 of the Financial Statements and Supplementary Data, Item 8.

         The Bank's investment securities and mortgage-backed securities held
for investment purposes totalled $162.5 million at December 31, 1993. The Bank
had the intent and ability to hold investment-designated securities to maturity.
No securities designated as held for investment purposes were sold during 1993.
No securities were classified as held for sale at December 31, 1993.

REAL ESTATE DEVELOPMENT ACTIVITIES

         The Bank has historically been involved in the development of real
estate through its wholly-owned subsidiary, Stockton Service Corporation
("SSC"). All current real estate investments are in residential development,
primarily single-family homes and lots. All real estate is currently owned 100%
by SSC which has traditionally contracted with local developers to build
projects in exchange for a construction fee and a split in profits. SSC is
allowed a preferential return (before any profit splits) that is equivalent to
interest and fees that would normally have been earned on a construction loan.
The breakout of SSC's gross income before reduction for the effect of
capitalized interest relieved is shown in the following table for the periods
indicated:

                                    SSC Profit
                                  (in thousands)
                         For the Years Ended December 31,
                                       1996             1995             1994
                                      ------           ------           ------
Preferential return                    $   -         $    9           $  973
SSC profit split                         167            (39)            (155)
                                      ------          ------           ------
Total gross  profits                  $  167         $  (30)          $  818
                                      ======          ======           ======


         The slow real estate market has led to declining sales, reduced profit
margins and significant loss provisions established on the Bank's remaining real
estate investment inventory.

         SSC recorded minimal loss reserves on real estate in 1996 after
establishing provisions of $4.1 million and $2.7 million in 1995 and 1994,


                                     - 14 -

<PAGE>



respectively. For a more detailed discussion of real estate development
activities see the "Real Estate Investment" section in Management's Discussion
and Analysis of Financial Condition and Results of Operations, Item 7.

         The regulatory section of this text discusses the implications of
current regulatory constraints on real estate investment opportunities for
savings banks. The constraints no longer make investment in real estate through
a subsidiary of Stockton Savings a feasible alternative. The Bank's indirect
investment in real estate through SSC is limited to 2% of assets. In addition,
this investment can no longer be included in capital when calculating the Bank's
regulatory capital. See "Regulation - Leverage Requirement".

         The Bank anticipates selling all projects currently owned by SSC in
1997.


SAVINGS AND CHECKING ACTIVITY

         The Bank's asset base is financed primarily through savings and
checking accounts located throughout its branch system. Accounts offered include
certificates of deposit, NOW/checking accounts, money market accounts, passbook
accounts and Individual Retirement Accounts. Certificate accounts differ as to
rate and term to maturity. Account activity by type is shown in the following
table for the periods indicated:

<TABLE>
<CAPTION>
                                            Savings and Checking Activity
                                               (Dollars in thousands)
                                          For the Years Ended December 31,

                                          1996              1995            1994            1993           1992
                                          ----              ----            ----            ----           ----
<S>                                     <C>              <C>             <C>            <C>            <C>     
Interest credits                        $35,507          $ 39,995        $ 30,584       $ 30,986       $ 39,670
Deposits purchased                        7,503                --              --             --             --
Net (withdrawals) deposits              (45,324)          (80,918)         85,429        (38,429)       (35,839)
                                        -------          --------        --------        --------       --------
Net (decrease) increase                 $(2,314)         $(40,923)       $116,013       $ (7,443)      $  3,831
                                       ========          ========        ========        ========       ========
Cost of savings                           4.53%             4.75%           4.19%           3.67%          4.26%

Number of accounts:
  Savings                               61,251            59,496          56,751          53,357         53,963
  Checking                              42,258            35,778          32,871          29,106         25,288

</TABLE>


         Deposits were down by $2.3 million in 1996 and $40.9 million in 1995.
The declining rate environment during these periods, making these investments a
less attractive alternative, as well as the decline of $56.7 million in brokered
funds, were responsible for the decrease. Conversely, deposits increased by $116
million in 1994, the result of a higher, more favorable rate environment as well
as the acquisition of $61 million in brokered funds.

         Net deposit balances are shown below for the dates indicated:


                                     - 15 -

<PAGE>


<TABLE>
<CAPTION>
                                           Deposits by Type and Interest Rate
                                                 (Dollars in thousands)
                                                     At December 31,

                                                      % of                           % of                           % of
                                       1996           Total           1995           Total           1994           Total
                                       ----           -----           ----           -----           ----           -----
<S>                                  <C>              <C>           <C>              <C>           <C>              <C>  
Passbook accounts                    $ 47,059         4.91%         $ 47,423         4.94%         $ 53,376         5.33%
Checking accounts:
  Interest-bearing                     97,096         10.14           91,231          9.50           98,250          9.81
  Noninterest-bearing                  18,627          1.94           17,381          1.81           11,967          1.20
  Money Market accounts                56,749          5.93           66,066          6.88           85,844          8.58
Certificate Accounts:
  2.00% to 2.99%                          354           .04              509           .05            5,820           .58
  3.00% to 3.99%                        5,405           .56            9,819          1.02          119,104         11.90
  4.00% to 4.99%                      187,906         19.62          132,274         13.78          263,036         26.27
  5.00% to 5.99%                      500,505         52.25          372,310         38.78          222,917         22.27
  6.00% to 6.99%                       37,582          3.92          213,362         22.22          131,620         13.15
  7.00% to 7.99%                        6,394           .67            9,360           .97            7,069           .71
  8.00% to 8.99%                          157           .02              272           .03            1,246           .12
  9.00% to 9.99%                           --            --              141           .02              592           .06
 10.00% to 10.99%                          --            --               --            --              229           .02
                                     --------        ------         --------        ------       ----------        ------
Total Deposits                       $957,834       100.00%         $960,148       100.00%       $1,001,070       100.00%
                                     ========        ======         ========        ======       ==========        ======
</TABLE>

         The maturities of Stockton Savings' certificate accounts are an
indication of the relative stability of the supply of lendable funds. Every
effort is made to extend the maturities of accounts to simulate the maturities
and rate adjustments of the Bank's loan portfolio. The following schedule
illustrates the Bank's certificate accounts by maturity as of December 31, 1996:

<TABLE>
<CAPTION>

                                               Savings Certificates by Maturity
                                                        (in thousands)
                                                     At December 31, 1996

  Interest Rate                        1997               1998               1999              After 1999               Total
                                      ------             ------             ------             ----------              -------
<S>                                  <C>                <C>                <C>                   <C>                   <C>     
 2.00% to  2.99%                     $    143           $    212           $     --              $     20              $    375
 3.00% to  3.99%                        5,399                 --                  1                     4                 5,404
 4.00% to  4.99%                      184,078              2,032                551                 1,245               187,906
 5.00% to  5.99%                      398,322             82,522             12,352                 7,289               500,485
 6.00% to  6.99%                       14,611             11,930              3,617                 7,425                37,583
 7.00% to  7.99%                        2,772              1,117                594                 1,910                 6,393
 8.00% to  8.99%                          150                  3                  4                    --                   157
                                     --------           --------           --------              --------              --------
                                     $605,475           $ 97,816           $ 17,119              $ 17,893              $738,303
                                     ========           ========           ========              ========              ========
</TABLE>


         The Bank's deposit maturity structure was shortened during 1996,
reflecting the depositor's bias towards decreasing interest rates and their
corresponding desire not to want to lock in current interest rates long term.

         Average balances and rates for deposits are shown below for the periods
indicated:

                                     - 16 -
<PAGE>



<TABLE>
<CAPTION>
                                             Average Deposits by Type and Interest Rate
                                                       (Dollars in thousands)

                                                                    For Years Ended December 31,
                                           1996                              1995                             1994
                                   Balance           Rate           Balance           Rate           Balance           Rate
                                   -------           ----           -------           ----           -------           ----
<S>                                <C>              <C>             <C>              <C>            <C>               <C>  
Checking Accounts
  Interest-bearing                 $ 94,930         1.34%           $ 92,701         1.56%          $102,925          1.58%
  Non interest-bearing               17,476            --             14,858            --             7,984             --
Savings Accounts                    102,035         2.77%            123,228         2.72%           150,134          2.35%
Certificate Accounts                735,947         5.32%            758,778         5.54%           672,957          4.43%
                                   --------         -----           --------          ----          --------           ----
Total                              $950,388         4.55%           $989,565         4.85%          $934,000          3.75%
                                   ========         =====           ========          ====          ========           ====

</TABLE>

Does not include impact of interest rate swaps or interest forfeitures.


         The Bank's balance of less rate-sensitive checking and savings account
balances declined by $16 million in 1996 as funds were attracted out of money
market accounts into higher-yielding 3- month certificates. The actual number of
checking accounts, a product the Bank is emphasizing, grew by 6,480, even though
net balances remained fairly flat. The difference in yield between these
accounts and current interest rates became too great, causing depositors to
invest excess funds in higher-yielding certificates.

         The Bank held "jumbo" certificates of deposit (deposits of $100,000 or
more) of $166 million at December 31, 1996. Certificate maturities as of that
date were as follows:

                      Jumbo Maturities
                       (in thousands)
                    At December 31, 1996
3 months or less                                     $ 45,510
3 to 6 months                                          21,816
6 to 12 months                                         56,390
More than 12 months                                    41,835
                                                     --------
Total                                                $165,551
                                                     ========



         At December 31, 1996, savings of out-of-state account holders amounted
to $12.1 million, less than 1.3% of total savings.

BORROWING ACTIVITY

         Reverse Repurchase Agreements: Periodically, the Bank uses its
investments in U.S. Government and agency securities, mortgage-backed securities
and mortgage derivative securities as collateral to borrow funds on a short-term
basis through reverse repurchase agreements. Reverse repurchase agreements
consist of sales of securities to securities dealers with the commitment by the
Bank to repurchase such securities for a predetermined price at a specified date
in the future, usually 1 to 90 days. If the Bank decides to replace a maturing
repurchase agreement with another agreement, the amount of the new borrowing
will be based on the market value of the underlying collateral at the date of
refinancing. Statistical information regarding these borrowing arrangements is
detailed in Note 10 of the Financial Statements and Supplementary Data, Item 8.


                                     - 17 -

<PAGE>



Reverse repurchase agreements declined somewhat in 1996 as short-term borrowings
were replaced with Federal Home Loan Bank advances.

         Collateralized Mortgage Obligations: The Bank's finance subsidiary,
Stockton Securities Corporation, exists primarily to issue debt as securities.
In March 1985, a $50 million CMO was issued (Series A), secured by $57 million
in fixed-rate mortgage loans converted to FHLMC participation certificates. In
December 1987, an additional $57 million CMO was issued (Series B),
collateralized by $57 million in FHLMC certificates. The debt service on the
CMOs corresponds with the cash flow on the participation certificates and,
therefore, provides a close matching of the underlying asset and liability
maturities, reducing exposure to interest rate risk. The Series A bonds were
paid off in total during 1992 and the Series B bonds were repaid in 1996.

         Federal Home Loan Bank Advances: As a member of the Federal Home Loan
Bank ("FHLB") System, the Bank is entitled to borrow funds from the FHLB of San
Francisco on the security of capital stock of FHLB owned by Stockton Savings,
certain mortgage loans and other specified securities. Funds are advanced to an
association based on its creditworthiness and ability to pay. There are
currently no restrictions on the Bank's ability to borrow from the FHLB. The
weighted average rate on advances at December 31, 1996 and 1995 was 5.97% and
5.98%, respectively. The following table identifies FHLB advances by type of
borrowing for each period indicated:

<TABLE>
<CAPTION>
                                            Federal Home Loan Bank Advances By Type
                                                         (In thousands)
                                                        At December 31,

                                                               1996                       1995                        1994
                                       Reprice             %                        %                           %
                                        Freq.            Rate       Balance        Rate       Balance         Rate       Balance
                                        -----            ----       -------        ----       -------         ----       -------

<S>                                 <C>                  <C>        <C>            <C>        <C>             <C>       <C>     
Long-term fixed rate                     --              6.09       $200,000       6.06       $110,000        5.80      $ 65,000
Adjustable-rate credit              Mtly/SemiAnn         5.61         35,000       5.63         25,000        5.04        45,000
Short-term collateralized             Wkly/Mtly          5.56         28,500       5.95         27,500          --            --
                                                         ----       --------       ----       --------        ----      --------
Total FHLB advances                                      5.97       $263,500       5.98       $162,500        5.49      $110,000
                                                         ====       ========       ====       ========        ====      ========
</TABLE>


         The advances added in the current year were used to purchase
medium-term fixed-rate collateralized mortgage obligations. The weighted average
remaining maturity on the advances added in 1996 was 1.5 years.

         The following table summarizes consolidated borrowings as of December
31 for the years indicated:

                                     - 18 -

<PAGE>

<TABLE>
<CAPTION>
                                                 Borrowings By Type
                                               (Dollars in thousands)
                                                  At December 31,

                                                  1996           1995           1994           1993           1992
                                                  ----           ----           ----           ----           ----
<S>                                             <C>            <C>            <C>            <C>            <C>     
Federal Home Loan Bank advances                 $263,500       $162,500       $110,000       $110,800       $ 52,800
Collateralized mortgage obligations                   --          6,463          7,898         14,147         28,873
Reverse repurchase agreements                     19,550         35,408         64,978            396            544
                                                --------       --------       --------       --------       --------
Weighted average cost of borrowings             $283,050       $204,371       $182,876       $125,343       $ 82,217
                                                ========       ========       ========       ========       ========
                                                   5.93%          6.02%          5.92%          5.64%          7.12%
                                                ========       ========       ========       ========       ========
</TABLE>


NET INTEREST INCOME

         Net interest income is affected primarily by three factors:

         1)   the weighted average yield on interest-earning assets less the
              weighted average cost of interest-bearing liabilities,

         2)   the balance of interest-earning assets, and

         3)   the balance of interest-earning assets relative to
              interest-bearing liabilities.

         The impact of the first two factors on net interest income is
illustrated on Table II of Management's Discussion and Analysis of Financial
Condition and Results of Operations, Item 7. Discussion of changes in the
components of net interest income in 1996, 1995 and 1994 is reflected under "Net
Interest Income" of Management's Discussion and Analysis of Financial Condition
and Results of Operations, Item 7.

         Net interest income before capitalized interest decreased by $1.8
million in 1994 relative to 1993. A 59 basis point decline in spread more than
offset the benefit received from a $124 million increase in average
interest-earning assets.

         Asset yields declined much more significantly than funding costs in
1994 as the large increase in rates during the year began to negatively impact
funding costs while asset yields had still not received any benefits from the
rising rate environment.

         A 91-basis point drop in the loan portfolio yield in 1994 relative to
1993 was partially offset by a 36 basis point increase in investment yields and
a 14 basis point decline in funding costs. The drop in loan yields was due to
the continued prepayment of higher yielding loans, the lower initial start rate
on adjustable-rate product as well as to the decline in COFI.

         The downward repricing of higher-costing long-term deposits as well as
the drop in rates on transaction accounts led to the decline in deposit costs in
1994. The addition of short-term higher cost borrowings partially offset the
benefit from lower deposit costs.

         As indicated above, changes in the balance of interest-earning assets
relative to interest-bearing liabilities also impact net interest income. The
table below reflects the composition of the Bank's average balance sheet for the
three periods indicated and highlights these changes:


                                     - 19 -

<PAGE>



<TABLE>
<CAPTION>
                                               Average Balance Sheet
                                                   (In thousands)
                                          For the Years Ended December 31,

                                                             1996                    1995                    1994
                                                             ----                    ----                    ----
<S>                                                        <C>                    <C>                     <C>       
ASSETS
  Interest-earning assets:
Federal funds sold and securities
  purchased under agreements to resell                     $      677             $      513              $    7,863
U.S. Government and agency securities                          45,346                 44,463                  39,719
Mortgage Derivative securities                                141,530                 68,303                  50,389
Mutual fund investments                                         3,974                  4,002                   8,067
Other investment securities including
 FHLB stock                                                    12,275                 10,072                  12,646
Mortgage-backed securities (net)                              108,307                153,618                 130,324
Loans receivable (net)                                        941,031                927,151                 879,293
                                                           ----------             ----------              ----------
  Total interest-earning assets                            $1,253,140             $1,208,122              $1,128,301
  All other assets                                             51,932                 65,931                  73,756
                                                           ----------             ----------              ----------
  Total average assets                                     $1,305,072             $1,274,053              $1,202,057
                                                           ==========             ==========              ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
  Interest-bearing liabilities:
Deposits                                                   $  950,388             $  989,565              $  934,000
Federal Home Loan Bank advances                               225,949                120,715                 118,113
Securities sold under agreements to
 repurchase                                                    26,090                 59,120                  37,506
Mortgage-backed bonds                                           3,770                  7,235                   9,378
Other borrowings                                                   --                     --                      49
                                                           ----------             ----------              ----------
  Total interest-bearing liabilities                       $1,206,197             $1,176,635              $1,099,046
  All other liabilities                                        11,392                 13,331                  20,022
  Stockholders' equity                                         87,483                 84,087                  82,989
                                                           ----------             ----------              ----------
Total average liabilities and equity                       $1,305,072             $1,274,053              $1,202,057
                                                           ==========             ==========              ==========
</TABLE>

Averages are calculated on a daily basis.


         Net interest income has benefitted over the past two years from a
decline in the level of real estate outstanding. As the level of problem assets
and real estate investments continues to decline, net interest income will
continue to benefit.


ASSET/LIABILITY MANAGEMENT

         The ability of the Bank to maintain consistent earnings under varying
interest rate environments is largely dependent on how successfully it manages
interest rate risk. One of management's major objectives is to match the
repricing and maturity characteristics of its interest-earning assets and
interest-bearing liabilities to reduce earnings volatility in fluctuating
interest rate environments.

         The primary methods utilized by the Bank to control interest rate risk
include:

         .    the origination and purchase of permanent ARMs for portfolio
              purposes,

         .    the sale of originated fixed-rate product,

                                     - 20 -

<PAGE>




         .    forward commitments for sale of originated fixed-rate product,

         .    the origination of short-term, adjustable-rate construction loans,

         .    obtaining longer-term, fixed-rate borrowings or otherwise
              extending the repricing terms on liabilities through the use of
              fixed-pay interest rate swaps, and

         .    emphasizing passbook and checking accounts as these deposit types
              are less sensitive to changes in interest rates.

         Most of the Bank's permanent ARMs are indexed to a spread over the 11th
District COFI. These loans assist in reducing interest rate exposure and
maintaining spreads, particularly when the Bank is able to keep its average cost
of funds below that of the Eleventh District. The Bank's cost of funds was equal
to or less than the Eleventh District during 1996 as well as 1995. Although ARMs
are effective in reducing risk in less volatile interest rate environments,
periodic and lifetime interest rate adjustment "caps" contained in all permanent
ARM product, the average repricing period as well as the lagging nature of the
COFI index, limit the ability of these loans to reduce rate vulnerability in
volatile rate environments. As a result, the benefits derived from the rising
rate environment in 1994 on asset yields did not really begin to occur until
1995. Alternatively, falling rates in the second half of 1996 have not yet had a
negative impact on asset yields.

         Although the Bank makes every effort to originate adjustable-rate
product, certain market conditions may make it difficult to do so. In a low-rate
environment, the difference between the start rate on an adjustable-rate
mortgage and the rate on a fixed-rate mortgage is much less than the difference
in a higher interest rate environment, making the adjustable-rate loan less
attractive to the borrower. In addition, adjustable loans tend to prepay faster
in lower-rate environments further reducing the balance of these loans
outstanding.

         The average repricing period on deposits has declined steadily over the
past few years as depositors have been reluctant to lock in lower rates for a
long period of time.

         During 1996, the Bank continued to restructure its balance sheet to
reduce vulnerability to rising rates. Specifically, although long-term
fixed-rate assets remained fairly flat during the period, long-term fixed-rate
advances increased by $63 million. In addition, although total adjustable-rate
mortgages increased only minimally during the year, less rate-sensitive 1-month
COFI product and 6-month Treasury product increased by $44 million while 6-month
COFI loans declined by $35 million.

         In an effort to reduce balance sheet vulnerability to rising interest
rates in 1995, the Bank reduced its level of long-term fixed-rate assets by $84
million, increased its level of current-index floating-rate assets by $40
million and COFI product by $33 million. The level of long-term fixed-rate
borrowings increased by $45 million while the maturity structure of deposits
remained fairly constant. The Bank took advantage of a higher capital position
in 1994 by growing assets 15.5% or $171.5 million from the prior year. The


                                     - 21 -

<PAGE>



purchase of $88.3 million in 15-year, fixed-rate mortgage-backed securities as
well as a $91.3 million increase in the balance of loans receivable, provided
most of the growth. The increase in loans receivable came primarily through
growth in the balance of COFI mortgages held. Asset growth was funded through an
increase in retail deposits, long-term fixed-rate borrowings and short-term
debt. The increase in the balance of short-term funds made the Bank more
vulnerable to declining spreads in rising rate environments.

LIQUIDITY

         The Bank's primary source of liquidity to fund new loan originations
comes from repayments of loans already in the portfolio and sales of loans in
the secondary market. Desired asset growth may be funded through deposit growth
by pricing deposits more competitively or through deposit acquisitions. FHLB
advances are also an alternative to fund growth. For short-term liquidity needs,
the Bank's portfolio of mortgage-backed securities and other security
investments totaling $144 million as of December 31, 1996, can be utilized as
collateral to borrow under reverse repurchase agreements. A significant portion
of the Bank's single-family loan portfolio is also available as collateral for
FHLB advances. The Bank can also use brokered deposits as a short-term funding
vehicle in place of reverse repurchase agreements.

         Excess liquidity is usually utilized to pay off short-term borrowings
and, in some cases, absorb deposit runoff, particularly when taking advantage of
a reduction in the cost of funds. Excess funds may also be used to purchase
loans, particularly if management is attempting to maintain or increase asset
size.

         The Bank experienced moderate asset growth of 6% in 1996 after no
growth in 1995. An improved regulatory capital position as a result of good
earnings and a reduced level of real estate investments outstanding provided for
the opportunity.

         Short-term liquidity is not expected to increase in 1997, particularly
if rates remain stable and the level of prepayment and sale activity is weak.

SUBSIDIARIES AND AFFILIATES

         Stockton Service Corporation is a wholly-owned subsidiary of Stockton
Savings, formed primarily for the purpose of investing in real estate. See "Real
Estate Development Activities". The Bank's loans to and investments in this
subsidiary totalled $1.7 million at December 31, 1996. The Subsidiary is
incorporated in the State of California.

         Stockton Securities Corporation is a wholly-owned finance subsidiary of
the Bank, organized to issue collateralized mortgage obligations. The subsidiary
recorded net income of $8,000 for 1996 compared to losses of $41,000 and
$203,000 in 1995 and 1994, respectively. See "Borrowing Activity -
Collateralized Mortgage Obligations" for a further discussion of this
subsidiary's activities. The Bank's investment in this subsidiary totalled
$47,000 at December 31, 1996. The Subsidiary is incorporated in the State of
California.


                                     - 22 -

<PAGE>



         Stockton Financial Corporation was formed to act as the trustee for the
deeds of trust that secure the loans made by the Bank. Stockton Financial
Corporation also operates as a life and disability insurance agent, collecting
premiums on policies sold to Bank borrowers. In 1988, Stockton Financial
contracted with Marketing One, a licensed insurance and securities brokerage
firm, to offer single-premium deferred annuities and securities products to Bank
depositors. Stockton Financial Corporation receives a commission on all products
sold. During 1996, commissions earned from Marketing One sales totalled $680,000
compared to commissions of $573,000 and $724,000 recorded in 1995 and 1994,
respectively. The 1996 net income of Stockton Financial was $424,000, compared
to $374,000 and $471,000 in 1995 and 1994, respectively. This year's increase in
net income was due entirely to the higher level of Marketing One commissions
earned. The Bank's investment in this subsidiary totalled $149,000 at December
31, 1996. The Subsidiary is incorporated in the State of California.

COMPETITION AND ECONOMIC CONDITIONS

         The Bank's principal competitive market is in San Joaquin and
Stanislaus counties in the northern part of California's Central Valley. The
Bank competes for real estate loans against other savings and loan associations,
mortgage companies, banks, insurance companies, government agencies and real
estate investment trusts. Interest rates, loan fee charges, types of mortgages
and quality of services rendered are the primary competitive factors. The Bank
is the largest real estate lender in San Joaquin County and one of the largest
in Stanislaus County. Competition has increased substantially as many major
California savings and loan associations, banks and mortgage brokers have come
to the Northern Central Valley looking for lending opportunities. In order to
continue to grow, the Bank continued to focus in 1996 on expanding lending
activities to surrounding areas such as greater Sacramento and Fresno as well as
to offer new loan products such as FHA loans.

         The Bank competes for deposits against other savings and loan
associations, commercial banks, brokerage firms, money market funds and credit
unions. Primary competitive factors include convenience of office location and
hours, available services and rates of return on invested funds. The Bank's
offices held $557.0 million in deposits in San Joaquin County, $199.7 million in
Stanislaus County and an additional $201.2 million in other counties in Northern
Central California at December 31, 1996. In terms of market share of deposits,
the Bank is among the largest in both San Joaquin and Stanislaus counties.


EMPLOYEES

         The Bank had 353 full-time equivalent employees, including executive
personnel on December 31, 1996. Employees are not represented by any collective
bargaining agent. The Bank provides employees with health, major medical and
life insurance benefits and maintains a 401(k) plan.

                                     - 23 -

<PAGE>



REGULATION OF THE COMPANY

         HOME OWNERS' LOAN ACT. The Company is subject to regulation as a
savings and loan holding company under the Home Owners' Loan Act ("HOLA"). As
such, the Company is subject to regulations of the OTS, as well as examinations
and reporting requirements relating to savings and loan holding companies. In
addition, the OTS has enforcement authority over the Company and the Bank. Among
other things, this authority permits the OTS to restrict or prohibit activities
that are determined to be a serious risk to the Bank. See "Regulation of the
Bank -- Enforcement Authority."

         The Company is a nondiversified unitary savings and loan holding
company. As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions, as long as the Bank remains a qualified
thrift lender ("QTL"). If the Bank fails the QTL test, the Company may not
engage in or continue after such failure, directly or through its other
subsidiaries, any business activities not permitted to multiple savings and loan
holding companies or their subsidiaries. In addition, the Company would have to
register as and be subject to limits on a bank holding company if the Bank
ceased to be a QTL. The Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA") and the Economic Growth and Regulatory Paperwork Reduction Act
of 1996 made certain changes to the QTL test. See "Regulation of the Bank --
Qualified Thrift Lender Test" and "FDICIA."

         RESTRICTIONS ON ACQUISITIONS BY THE COMPANY. If the Company acquires
control of another savings institution as a separate subsidiary, the Company
would become a multiple savings and loan holding company, and the activities of
the Company and any of its subsidiaries (other than the Bank or any other
savings association) would become subject to restrictions under HOLA. No
multiple savings and loan holding company or subsidiary thereof that is not a
savings association may commence, or continue for more than two years after
becoming a multiple savings and loan holding company or subsidiary thereof, any
business activity other than (i) furnishing or performing management services
for a subsidiary savings association; (ii) conducting an insurance agency or an
escrow business; (iii) holding, managing or liquidating assets owned or acquired
from a savings association subsidiary; (iv) holding or managing properties used
or occupied by a subsidiary savings association; or (v) acting as a trustee
under deeds of trust. In addition, unless prohibited or limited by the OTS, a
multiple savings and loan holding company may engage in nonbanking activities
permissible for bank holding companies, including, but not limited to,
investment advice, leasing, underwriting credit insurance, management consulting
services, and securities brokerage activities, as the Federal Reserve Board
("FRB") determines under Section 4(c)(8) of the Bank Holding Company Act of 1956
("Bank Holding Company Act"), and may engage in those activities authorized by
the FHLBB, the predecessor to the OTS, for multiple savings and loan holding
companies as of March 5, 1987. A multiple savings and loan holding company must
obtain prior OTS approval before it may engage in any particular activity
permissible for bank holding companies under Section 4(c)(8) of the Bank Holding
Company Act. Moreover, the insured depository institution subsidiaries of a
multiple savings and loan holding company are subject to the provisions of the
Federal Deposit Insurance Act ("FDI Act") added by the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), which imposes
liability for losses incurred by the FDIC in connection with the default of, or
assistance provided to, a commonly controlled insured depository institution.

                                     - 24 -

<PAGE>




         The Company must obtain approval from the OTS before acquiring control
of any other FDIC-insured Savings Association Insurance Fund ("SAIF") member
savings association or a savings and loan holding company. Such acquisitions are
generally prohibited if they result in a multiple savings and loan holding
company controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.

         The Company and any nonsavings association subsidiary thereof may
acquire up to 5%, in the aggregate, of the voting stock of any nonsubsidiary
savings association or savings association holding company without being deemed
to acquire "control" of the association or holding company. In addition, a
savings and loan holding company may hold shares of a savings association or a
savings and loan holding company for certain purposes, including as a bona fide
fiduciary, as an underwriter or in an account solely for trading purposes.

         The OTS has adopted a regulation that requires persons or companies
that control a savings association and are subject to capital maintenance
agreements with respect thereto to provide the OTS with notice prior to
divesting control of the association. A divestiture may be completed only upon
providing such notice and paying or agreeing to pay any amount then due under
the capital maintenance obligation. The OTS may conduct an examination of the
association to determine whether any capital deficiency exists.

         The Company entered into a capital maintenance agreement with the OTS
in connection with the holding company reorganization of the Bank. Accordingly,
this regulation would apply to the Company if it ever sought to divest control
of the Bank. On December 9, 1996, the Company announced the signing of a
definitive agreement, pursuant to which the Company will be acquired by TI. See
"Merger with Temple-Inland Inc." for further discussion regarding the
transaction. Any appropriate notice will be filed with the OTS before the
acquisition by TI is consummated.

         RESTRICTIONS ON ACQUISITION OF THE COMPANY. Under the Bank Holding
Company Act, the approval of the FRB would be required before any company that
controlled a "bank" as defined in the Bank Holding Company Act (e.g., a
commercial bank) could acquire and operate a savings association, such as the
Bank. The Change in Bank Control Act and the savings and loan holding company
provisions of the Home Owners' Loan Act, together with the regulations of the
OTS under those Acts, require that the consent or nondisapproval of the OTS be
obtained prior to any person or company acquiring "control" of a savings
association or a savings and loan holding company. Under the OTS regulations,
control is conclusively presumed to exist if an individual or company acquires
more than 25% of any class of voting stock of the association. Control is
rebuttably presumed to exist if a person acquires more than 10% of any class of
voting stock (or more than 25% of any class of nonvoting stock) and is subject
to any of several "control factors." The control factors relate, among other
matters, to the relative ownership position of a person, the percentage of debt
and/or equity of the association controlled by the person, agreements giving the
person influence over a material aspect of the operations of the association and
the number of seats on the board of directors of the association held by the
person or his designees. The regulations provide a procedure for challenge of


                                     - 25 -

<PAGE>



the rebuttable control presumption. Restrictions applicable to the operations of
savings and loan holding companies and conditions imposed by the OTS in
connection with its approval of companies to become savings and loan holding
companies may deter companies from seeking to obtain control of the Company. TI,
which is a savings and loan holding company, will obtain required approval prior
to the acquisition of the Company. See "Merger with Temple-Inland Inc."

         TRANSACTIONS WITH AFFILIATES. The Bank's authority to engage in
transactions with related parties or "affiliates," including the Company and any
nonsavings association subsidiaries of the Company, is limited by certain
provisions of law and regulations. Savings associations are prohibited from
making extensions of credit to any affiliate that engages in an activity not
permissible under the regulations of the FRB for a bank holding company. In
addition, savings associations, such as the Bank, are subject to substantially
similar restrictions regarding affiliate transactions to those imposed upon
member banks under Section 23A and 23B of the Federal Reserve Act. The
affiliates of the Bank include persons who directly or indirectly own, control
or vote more than 25% of any class of stock of the Bank, any other persons who
exercise a controlling influence over the management of the Bank, any company
controlled by controlling stockholders of the Bank or with a majority of
interlocking directors with the Bank, any company sponsored and advised on a
contractual basis by the Bank and any company (other than a subsidiary) under
common control with the Bank, as "control" is defined in the regulations of OTS
relating to changes in control. See "Restrictions on Acquisition." Transactions
between the Bank and its affiliates are subject to certain requirements and
limitations. Among other things, these provisions limit the amounts of such
transactions that may be undertaken with any one affiliate and with all
affiliates in the aggregate and require that transactions with affiliates be on
terms and conditions comparable to those for similar transactions with
unaffiliated parties. The Director of the OTS may further restrict such
transactions in the interest of safety and soundness.

         FEDERAL SECURITIES LAWS. The Company is subject to the reporting
requirements of the Securities Exchange Act of 1934 and, accordingly, is
required to file periodic and other reports with the Securities and Exchange
Commission ("SEC").

         PAYMENT OF DIVIDENDS. Under Delaware law, dividends generally may be
paid in cash or in property owned by the Company only from the profits and
earned surplus of the Company and only when the Company does not have, and the
payment of a dividend would not create, a capital deficit.

         The Company's principal source of income, however, is dividends to the
extent declared and paid by the Bank. Existing restrictions on the Bank's
ability to pay dividends to the Company may impact the Company's ability to pay
dividends to stockholders. Current OTS regulations require the Bank to give the
OTS 30 days advance notice of any proposed declaration of dividends to the
Company, as its holding company. Furthermore, the right of the Company to
receive dividends from the Bank will be subject to the right of the OTS to
object to such dividends under certain circumstances. See "Regulation of the
Bank -- Capital Distributions."


                                     - 26 -

<PAGE>



REGULATION OF THE BANK

         GENERAL. The Bank is a federally-chartered stock savings bank, the
deposits of which are insured by the FDIC through the SAIF. The Bank converted
from a California-chartered savings and loan association to a federally-
chartered savings bank on June 29, 1990. The Bank is subject to broad federal
regulation and oversight extending to all aspects of its operations. The OTS has
extensive authority over the operations of the Bank. As part of this authority,
the Bank is required to file periodic reports with the OTS and is subject to
periodic examinations by the OTS. The Bank is also a member of the FHLB of San
Francisco and is subject to certain limited regulation by the FRB.

         The investment and lending authority of the Bank is prescribed by
federal laws and regulations, and the Bank is prohibited from engaging in any
activities not permitted by such laws and regulations. These laws and
regulations generally prohibit the Bank's investment in real estate (other than
that acquired through, or in lieu of, foreclosure or used by the Bank for
offices and related facilities) and equity securities of companies that are not
subsidiaries, and limit to a specified percentage of assets the Bank's
investment in service corporations, consumer loans, tangible personal property,
commercial loans, corporate debt securities, and nonresidential real estate
loans.

         FIRREA acts as a deterrent to investment by savings associations in
subsidiaries such as SSC that engage in activities that are not permissible for
national banks by imposing higher capital requirements on such investments. See
"Capital Requirements."

         A savings association seeking to establish or acquire a new subsidiary,
or conduct any new activity through a subsidiary, must provide 30 days' prior
notice to the FDIC and the OTS and conduct the activities of the subsidiary in
accordance with OTS orders and regulations. The Director of the OTS has the
power to force divestiture of any subsidiary or termination of any activity the
Director determines to be a serious threat to the safety, soundness or stability
of such savings association or otherwise to be inconsistent with sound banking
principles. Additionally, the FDIC is authorized to determine whether any
specific activity poses a threat to the SAIF and to prohibit any SAIF member
from engaging directly in such activity, even if it is an activity that is
permissible for a federally-chartered savings association.

         CAPITAL REQUIREMENTS. General. The Bank must meet three primary capital
requirements: a leverage requirement, a tangible capital requirement, and a
risk-based capital requirement. As of December 31, 1996, the Bank was in
compliance with all three requirements, as described in the following
paragraphs:

         LEVERAGE REQUIREMENT.  The leverage requirement mandates that a savings
association maintain "core capital" of at least 3% of its adjusted total assets.
For purposes of this requirement, total assets are adjusted to exclude
intangible assets and investments in certain subsidiaries and to include the
assets of certain other subsidiaries, certain intangibles arising from prior
period supervisory transactions, and permissible mortgage servicing rights.
"Core capital" includes (i) common stockholders' equity and retained earnings,


                                     - 27 -

<PAGE>



noncumulative preferred stock and related earnings and minority interests in the
equity accounts of consolidated subsidiaries, minus (ii) the sum of those
intangibles (including goodwill) and investments in subsidiaries not permitted
as capital for national banks and those mortgage servicing rights not includable
in core capital.

         Intangible assets such as core deposit premiums are generally deducted
from core capital. FIRREA also requires deductions from core capital for certain
investments in service corporations and other subsidiaries. In determining core
capital, all investments in and loans to subsidiaries engaged in activities not
permissible for national banks (which are generally more limited than activities
permissible for savings associations and their subsidiaries) must generally be
deducted in calculating a savings association's core capital. Except for
subsidiaries that are insured depository institutions, all subsidiaries engaged
in permissible activities are required to be consolidated for purposes of
calculating capital compliance by the parent.

         SSC, the wholly-owned subsidiary service corporation of the Bank, is
engaged in real estate development, an activity impermissible for the Bank.
Accordingly, all loans to and investments in SSC by the Bank must be deducted
from the Bank's capital. As of December 31, 1996, all loans to and investments
in SSC or $1.7 million were deducted from the Bank's capital.

         TANGIBLE CAPITAL REQUIREMENT. The tangible capital requirement mandates
that a savings association maintain tangible capital of at least 1.5% of
adjusted total assets. For purposes of this requirement, adjusted total assets
are calculated on the same basis as for the leverage limit. Tangible capital is
defined in the same manner as core capital, except that all formerly includable
goodwill must be deducted. Because the Bank has no goodwill, its tangible
capital is equal to its core capital.

         RISK-BASED CAPITAL REQUIREMENT. The risk-based requirement promulgated
by the OTS is required by FIRREA to track the standard applicable to national
banks, except as the OTS may determine to reflect interest rate and other risks
not specifically included in that standard. However, such deviations from the
national bank standard may not result in a materially lower risk- based
requirement for savings associations than for national banks. The risk-based
standard adopted by the OTS is similar to the standard prescribed by the Office
of the Controller of the Currency ("OCC") for national banks. Although the OTS
has adopted regulations that require associations with significantly more than
normal interest rate risk to meet higher risk-based capital requirements, the
effective date for these regulations has been deferred indefinitely.

         The risk-based standards of the OTS require maintenance of core capital
equal to at least 4% of risk-weighted assets and total capital equal to at least
8% of risk-weighted assets. Total capital includes core capital plus
supplementary capital (except that includable supplementary capital may not
exceed core capital). Supplementary capital includes: cumulative perpetual
preferred stock; mutual capital, income capital and net worth certificates;
nonwithdrawable accounts and pledged deposits to the extent not included in core
capital; perpetual and mandatory convertible subordinated debt and maturing
capital instruments meeting specified requirements; and general loan loss
allowances, up to a maximum of 1.25% of risk-weighted assets.


                                     - 28 -

<PAGE>



         In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk factor
ranging from 0% to 100%, as assigned by the OTS based on the risks it believes
are inherent in the type of asset. Comparable weights are assigned to
off-balance sheet activities.

         See Management's Discussion and Analysis of Financial Condition and
Results of Operations, Item 7, and Note 12 of the Financial Statements and
Supplementary Data, Item 8, for a more detailed discussion of the Bank's
regulatory capital position.

         FAILURE TO MEET REQUIREMENTS. Any savings association that fails to
meet its regulatory capital requirements is subject to enforcement actions by
the OTS or the FDIC. A savings association that fails to meet its capital
requirements may not increase its liabilities during any two consecutive
calendar quarters at a rate in excess of 12.5% or make any capital distributions
without regulatory approval. See "Capital Distributions." The OTS must limit the
asset growth of any undercapitalized association and issue a capital directive
against the association. Associations may seek exemptions from the various
sanctions or penalties for failure to meet their capital requirements (other
than appointment of a conservator or receiver); however, exemptions are not
allowed with respect to mandatory growth restrictions.

         The FDICIA authorizes and, under certain circumstances, requires the
OTS to take certain actions against associations that fail to meet certain new
capital-based requirements. See "FDICIA".

         CAPITAL DISTRIBUTIONS. Limitations are imposed by OTS regulation upon
all "capital distributions" by savings associations, including cash dividends,
payments by institutions in a cash- out merger and other distributions charged
against capital. A three-tiered system of regulation is established, with the
greatest flexibility afforded to well capitalized institutions. Under the
capital distribution regulation, an association that immediately prior to a
proposed capital distribution, and on a pro forma basis after giving effect to a
proposed capital distribution, has capital that is equal to or greater than the
amount of its fully phased-in capital requirement is a Tier 1 association ("Tier
1 Association").

         An association that immediately prior to a proposed capital
distribution, and on a pro forma basis after giving effect to a proposed capital
distribution, has capital that is equal to or in excess of its minimum capital
requirement is a Tier 2 association ("Tier 2 Association").

         An association that immediately prior to a proposed capital
distribution, and on a pro forma basis after giving effect to a proposed capital
distribution, has capital that is less than its minimum regulatory capital
requirement is a Tier 3 association ("Tier 3 Association").

         The Bank currently qualifies as a Tier 1 Association and, as such, is
authorized to make capital distributions during a calendar year up to the higher
of: A) 100 percent of net income to date during the calendar year plus the
amount that would reduce by one-half its surplus capital ratio at the beginning
of the calendar year; or B) 75% of its net income over the most recent
four-quarter period.

                                     - 29 -

<PAGE>




         QUALIFIED THRIFT LENDER TEST. Under the QTL test, an association must
have invested at least 65% of its portfolio tangible assets in qualifying
investments and must maintain this level of qualifying investments, measured on
a monthly average basis, in 9 out of every 12 months.

         Portfolio tangible assets are defined as total assets less intangibles,
properties used to conduct business and liquid assets (up to 20% of total
assets). The following assets may be included as qualifying investments without
limit: domestic residential housing or manufactured housing loans; home equity
loans and mortgage-backed securities backed by residential housing or
manufactured housing loans; FHLB stock; and certain obligations of the FDIC and
certain other related entities. Other qualifying assets, which may be included
up to an aggregate of 20% of portfolio assets, are: (i) 50% of originated
residential mortgage loans sold within 90 days of origination; (ii) investments
in debt or equity of service corporations that derive 80% of their gross
revenues from housing-related activities; (iii) 200% of certain loans to and
investments in low cost, one-to-four family housing; (iv) 200% of loans for
residential real property, churches, nursing homes, schools and small businesses
in areas where the credit needs of low to moderate income families are not met;
(v) other loans for churches, schools, nursing homes and hospitals; (vi)
consumer and education loans up to 10% of total portfolio assets; and (vii)
stock of the FHLMC or Federal National Mortgage Association.

         Pursuant to a provision enacted as part of the Economic Growth and
Regulatory Paperwork Reduction Act of 1996, an association alternatively may be
a qualified thrift lender if it qualifies as a domestic building and loan
association, as such term is defined in Section 7701(a)(19) of the Internal
Revenue Code of 1986, as amended. As of December 31, 1996, the Bank was in full
compliance with the QTL test.

         Any savings association that fails to meet the QTL test must convert to
a commercial bank charter, unless it requalifies as a QTL on an average basis in
at least three out of every four quarters for two out of three years and
thereafter remains a QTL. If an institution that fails the QTL test has not yet
requalified and has not converted to a commercial bank, its new investments and
activities are limited to those permissible for a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
institution is immediately ineligible to receive any new FHLB advances and is
subject to national bank limits for payment of dividends. If such associate has
not requalified or converted to a commercial bank charter three years after the
failure, it must divest all investments and cease all activities not permissible
for a national bank. In addition, it must repay promptly any outstanding FHLB
advances. If any institution that fails the QTL test and is subject to these
restrictions on activities is controlled by a holding company, then, within one
year after the failure, the holding company must register as a bank holding
company and would be subject to all restrictions on bank holding companies.
These restrictions would limit the activities of the holding company to those
activities that the FRB has determined are closely related to banking. Certain
temporary and limited exceptions from meeting the QTL test may be granted by the
OTS.

         LIQUIDITY. All savings associations, including the Bank, are required
to maintain an average daily balance of liquid assets equal to a certain


                                     - 30 -

<PAGE>



percentage of the sum of average daily balances of net withdrawable deposit
accounts and borrowings payable in one year or less. The liquidity requirement
may vary from time to time (between 4% and 10%) depending upon economic
conditions and savings flows of all savings associations. At the present time,
the required liquid asset ratio is 5%. Short-term liquid assets currently must
constitute at least 1% of the institution's average daily balance of net
withdrawable deposit accounts and current borrowings.

         Liquid assets for purposes of this ratio include specified short-term
assets (e.g., cash, certain time deposits, certain bankers acceptances and
short-term U.S. treasury obligations) and long-term assets (e.g., U.S. treasury
obligations of more than one and less than five years and certain federal and
state agency obligations). The regulations governing liquidity requirements
include as liquid assets debt securities hedged with forward commitments
obtained from, or debt securities subject to repurchase agreements with, members
of the Association of Primary Dealers in U.S. Government securities or banks
whose accounts are insured by the FDIC, debt securities directly hedged with a
short financial futures position, and debt securities that provide the holder
with a right to redeem the security at par value, regardless of the stated
maturities of such securities. The OTS may designate as liquid assets certain
mortgage related securities and certain mortgage loans qualifying as backing for
certain mortgage-backed securities with less than one year to maturity.
Penalties may be imposed upon associations for violations of liquidity
requirements. At December 31, 1996, the Bank was in compliance with these
requirements, with an overall liquidity ratio of 5.57% and a short-term
liquidity ratio of 1.48%.

         TRANSACTIONS WITH RELATED PARTIES. Transactions involving a savings
association and its affiliates are subject to Sections 23A and 23B of the
Federal Reserve Act. See "Regulation of the Company -- Transactions with
Affiliates."

         In addition, the Bank is subject to various limitations and
requirements with respect to extensions of credit to insiders as set forth in
Sections 22(g) and (h) of the Federal Reserve Act and as implemented by
Regulation O of the FRB. Pursuant to Section 22(g) and relevant regulations, the
Bank may not extend credit to an individual executive officer in an amount in
excess of $100,000, subject to certain limited exceptions for first mortgage or
educational loans. Section 22(h) requires that all extensions of credit to
insiders, who include executive officers, directors, and principal shareholders,
be on nonpreferential terms and be made consistent with specified procedural
requirements. Section 22(h) also limits extensions of credit to any one insider
and his or her related interests generally to 15% of unimpaired capital and
unimpaired surplus, subject to certain exceptions, and limits the aggregate
level of extensions of credit by a depository institution to all of its insiders
and their related interests to 100% of the institution's capital.

         The Bank believes that it is in compliance with all relevant
limitations on transactions with affiliates and insiders.

         BRANCHING AND MERGERS. As a federal savings bank, the Bank may
establish branch offices and merge only in accordance with OTS regulations and
with OTS approval. Pursuant to these regulations, a federal savings bank is
authorized to branch nationwide except in certain limited circumstances,
provided that the association satisfies certain tests relating to its asset


                                     - 31 -

<PAGE>



composition based upon criteria set forth in the Internal Revenue Code of 1986,
(the "Code") as amended (see "Federal and State Taxation"), and OTS approval for
the branch is obtained.

         LENDING LIMITATIONS. FIRREA reduced the amount a savings association is
permitted to lend to one borrower to the greater of $500,000 or 15% of an
association's unimpaired capital and unimpaired surplus (subject to certain
exceptions, including higher limits for loans fully secured by certain readily
marketable collateral and for loans to develop domestic residential housing
units if certain requirements are met and OTS approval is obtained).

         This limitation is applicable on a prospective basis only. At December
31, 1996, the maximum amount that the Bank could lend to one borrower (and
related entities) under the limit imposed by FIRREA was approximately $13.2
million. At that date, the largest amount of loans that the Bank had outstanding
to any one borrower was approximately $12.4 million.

         ENFORCEMENT AUTHORITY. The OTS has extensive enforcement authority over
all savings associations, including the Bank and the Company. This enforcement
authority includes, among other things, the ability to assess civil money
penalties, to issue cease and desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the OTS. FIRREA significantly
increased the amount of and grounds for civil money penalties.

         The grounds for appointment of a conservator or receiver for a savings
association include: insolvency in that the assets of the association are less
than its liabilities to depositors and others, substantial dissipation of assets
or earnings through violations of law or unsafe or unsound practices, existence
of an unsafe or unsound condition to transact business, likelihood that the
association will be unable to meet the demands of its depositors or to pay its
obligations in the normal course of business, and insufficient capital or the
incurring or likely incurring of losses that will deplete substantially all of
the institution's capital with no reasonable prospect for replenishment of
capital without federal assistance.

         INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC. The Bank's deposits
are insured up to $100,000 per insured depositor (as defined by law and
regulation) by the FDIC through the SAIF. The SAIF is administered and managed
by the FDIC. As insurer, the FDIC is authorized to conduct examinations of and
to require reporting by SAIF member institutions. The FDIC may prohibit any SAIF
member institution from engaging in any activity the FDIC determines by
regulation or order poses a serious threat to the SAIF. The FDIC also has the
authority to initiate enforcement actions against savings associations, after
first giving the OTS an opportunity to take such action.

         On September 30, 1996, the President signed into law the Deposit
Insurance Funds Act of 1996 ("Funds Act") which, among other things, imposed a
special one-time assessment on SAIF member institutions, including the Bank, to
recapitalize the SAIF. As required by the Funds Act, the FDIC imposed a special
assessment of 65.7 basis points on SAIF assessable deposits held as of

                                     - 32 -

<PAGE>



March 31, 1995, payable November 27, 1996 ("SAIF Special Assessment"). The SAIF
Special Assessment was recognized by the Bank as an expense in the quarter ended
September 30, 1996 and was tax deductible. The SAIF Special Assessment recorded
by the Bank amounted to approximately $6.6 million on a pre-tax basis and
approximately $3.9 million on an after-tax basis.

         The Funds Act also spreads the obligations for payment of the Financing
Corporation ("FICO") bonds across all SAIF and Bank Insurance Fund ("BIF")
members. Beginning on January 1, 1997, BIF deposits are assessed for FICO
payments at a rate of 20% of the rate assessed on SAIF deposits. BIF deposits
will be assessed an annual FICO payment of approximately 1.3 basis points, while
SAIF deposits will be assessed a payment of approximately 6.5 basis points. Full
pro rata sharing of the FICO payments between BIF and SAIF members will occur on
the earlier of January 1, 2000, or the date the BIF and SAIF are merged. The
Funds Act specifies that the BIF and SAIF will be merged on January 1, 1999,
provided no savings associations remain as of that time.

         As a result of the Funds Act, SAIF assessments have been lowered to a
range between 0 and 27 basis points effective January 1, 1997, a range
comparable to that paid by BIF members. However, SAIF members will continue to
make the higher FICO payments described above.

         The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines, after a hearing, that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, order or any condition imposed in writing by the
FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance if the institution has no
tangible capital. If deposit insurance is terminated, the deposits at the
institution at the time of the termination, less subsequent withdrawals,
continue to be insured for a period of six months or two years, as determined by
the FDIC.

         FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of San
Francisco, which is 1 of 12 regional FHLBs which are subject to oversight by the
Federal Housing Finance Board ("FHFB"). As a member of the FHLB system, the Bank
is required to purchase and maintain stock in the FHLB of San Francisco in an
amount equal to the greater of 1% of its aggregate unpaid residential mortgage
loans, home purchase contracts or similar obligations at the beginning of each
year, 0.3% of its assets, or 5% (or such greater fraction as established by the
FHLB) of outstanding FHLB advances. At December 31, 1996, the Bank had $13.7
million in FHLB stock, which was in compliance with this requirement. At
December 31, 1996, the Bank had $263.5 million in FHLB advances outstanding.

         Each FHLB serves as a reserve or central bank for its members within
its assigned region. It is funded primarily from proceeds derived from the sale
of consolidated obligations of the FHLB System. It makes advances to members
(i.e., loans) in accordance with policies and procedures established by the
board of directors of the FHLB. These policies and procedures are subject to the
regulation and oversight of the FHFB.


                                     - 33 -

<PAGE>



         FIRREA established collateral requirements for FHLB advances. All
long-term advances are required to provide funds for residential home financing,
and members must meet standards of community service to maintain access to
long-term advances.

         In past years, the Bank has received substantial dividends on its FHLB
stock. During the past 5 years, such dividends have averaged 4.33% and were
6.09% or $727,000 for fiscal year 1996. Certain provisions of FIRREA require all
12 FHLBs to contribute funds to REFCO. In addition, pursuant to FIRREA, each
FHLB is required to establish programs for affordable housing that involve
interest subsidies from the FHLBs on advances to members engaged in lending at
subsidized interest rates for low and moderate income, owner-occupied housing
and affordable rental housing, and certain have adversely affected other
community purposes. These contributions affect the level of FHLB dividends paid
and the value of FHLB stock, as well as interest rates payable on FHLB advances.

         FEDERAL RESERVE SYSTEM. The FRB requires all depository institutions to
maintain reserves against their transaction accounts (primarily NOW and Super
NOW checking accounts) and nonpersonal time deposits. At December 31, 1996, the
Bank was in compliance with these reserve requirements. The balances maintained
to meet the reserve requirements imposed by the FRB may be used to satisfy
liquidity requirements that may be imposed by the OTS. See "Liquidity."

         Savings associations are authorized to borrow from the FRB "discount
window"; but FRB regulations require associations to exhaust other reasonable
alternative sources of funds, including FHLB advances, before borrowing from the
FRB.

         FDICIA. On December 19, 1991, FDICIA was enacted to recapitalize the
Bank Insurance Fund and impose certain supervisory and regulatory reforms on
insured depository institutions.

         FDICIA required the federal banking agencies, including the OTS, to
establish the levels at which insured depository institutions are well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, or critically undercapitalized. As a result, the federal
banking agencies established the following applicable capital levels for
institutions within their jurisdictions: well capitalized institutions have a
total risk-based capital ratio of 10.0% or greater, a Tier 1 risk- based capital
ratio of 6.0% or greater and a leverage ratio of 5.0% or greater; adequately
capitalized institutions have a total risk-based capital ratio of 8.0% or
greater, a Tier 1 risk-based capital ratio and leverage ratio of 4.0% or
greater; undercapitalized institutions have a total risk-based capital ratio
below 8.0% or a Tier 1 risk-based capital ratio or leverage ratio below 4.0%;
significantly undercapitalized institutions have a total risk-based capital
ratio below 6.0% or a Tier 1 risk-based capital ratio or leverage ratio below
3.0%; and critically undercapitalized institutions have a ratio of tangible
equity to total assets equal to or below 2.0%. The Bank was considered well
capitalized under the above definition as of December 31, 1996 as its total
risk-based, Tier 1 risk-based and leverage ratios were 12.69%, 11.82% and 6.43%,
respectively.

         Undercapitalized institutions are required to submit capital
restoration plans to the appropriate federal banking regulator and are subject


                                     - 34 -

<PAGE>



to certain operational restrictions. Moreover, companies controlling an
undercapitalized institution are required to guarantee the subsidiary
institution's compliance with the capital restoration plan subject to an
aggregate limitation of the lesser of 5% of the institution's assets or the
amount of the capital deficiency when the institution first failed to meet the
plan.

         Significantly or critically undercapitalized institutions and
undercapitalized institutions that do not submit or comply with acceptable
capital restoration plans are subject to one or more of an enumerated group of
more stringent sanctions than those applied to undercapitalized institutions. A
forced sale of shares or merger, restrictions on affiliate transactions and
restrictions on rates paid on deposits must be imposed by the regulator unless
the regulator determines that they would not resolve problems of insured
depository institutions at the least possible long-term loss to the deposit
insurance fund.

         A critically undercapitalized institution is prohibited from making
payments on subordinated debt and engaging in certain other corporate
transactions without regulatory approval. FDICIA generally requires the
appointment of a conservator or receiver within 90 days after an institution
becomes critically undercapitalized.

         On July 10, 1995, the federal bank regulatory agencies published
minimum operational standards, including standards with respect to internal
controls, loan documentation, credit underwriting and compensation arrangements.
Institutions failing to meet one or more of the operational standards may be
required to submit corrective plans and may be subject to sanctions for failure
to submit or comply with a plan. The acceptance and renewal of brokered deposits
is limited generally to well capitalized institutions.

         FDICIA provides for certain consumer and low and moderate income
lending and deposit programs and increases the aggregate authority of federal
savings associations to invest in consumer loans, corporate debt securities and
commercial paper from 30% to 35% of assets.

         ACCOUNTING. FIRREA requires the OTS to establish accounting standards
to be applicable to all savings associations for purposes of complying with
regulations, except to the extent otherwise specified in the capital standards.
Such standards must incorporate GAAP to the same degree as is prescribed by the
federal banking agencies for banks or may be more stringent than such
requirements.

         Under FDICIA, the federal bank regulatory agencies are required to
adopt uniform capital and accounting rules with respect to reports filed with
those agencies. The accounting rules require the disclosure of the market value
of assets and liabilities and the disclosure of contingent liabilities in the
regulatory reports of a depository institution. The investment activities of a
savings association must be in compliance with approved and documented
investment policies and strategies and must be accounted for in accordance with
GAAP. Management must support its classification of and, to the extent feasible,
accounting for loans and securities (i.e., whether held for investment, sale or
trading) with appropriate documentation. Management of the Bank believes that it
is in compliance with these requirements. At December 31, 1996, the Bank had


                                     - 35 -

<PAGE>



designated approximately $7.1 million of loans as held for sale and
approximately $304.1 million of investments and mortgage-backed securities as
available for sale. The effect of these requirements may be to reduce the
ability of the Bank to respond in a timely manner to changes in the market for
its investments without resulting in a change in the valuation of such
investments from cost basis to market value.


DELAWARE TAXATION

         As a Delaware holding company, the Company is exempted from Delaware
corporate income tax but is required to file an annual report with and pay an
annual fee to the State of Delaware. The Company is also subject to an annual
franchise tax imposed by the State of Delaware.

FEDERAL AND STATE TAXATION

         Historically, thrift institutions such as the Bank which met certain
definitional tests primarily related to their assets and the nature of their
business ("qualifying thrifts") were permitted to establish a reserve for bad
debts and to make annual additions thereto, which may have been deducted in
arriving at their taxable income. The Bank's deductions with respect "qualifying
real property loans," which were generally loans secured by certain interests in
real property, were computed using an amount based on the Bank's actual loss
experience, or a percentage equal to 8% of the Bank's taxable income, computed
with certain modifications and reduced by the amount of any permitted addition
to the non-qualifying reserve.

         In August 1996, the provisions repealing the special thrift
institutions bad debt reserve rules were enacted as part of The Small Business
Job Protection Act of 1996. The new rules eliminate the 8% of taxable income
method for deducting additions to the tax bad debt reserves for all thrifts for
tax years beginning after December 31, 1995. These rules also require that all
thrift institutions recapture all or a portion of their bad debt reserves added
since the base year (the last taxable year beginning before January 1, 1988).
The Bank has previously recorded a deferred tax liability equal to the bad debt
recapture and, as a result, the new rules will have no effect on net income or
federal income tax expense. For taxable years beginning after December 31, 1995,
the Bank's bad debt deduction will be equal to its net specific charge-offs.
Because the Bank's bad debt reserve as of December 31, 1995 is equal to its base
year reserves, the Bank has no excess reserves to recapture. However, these bad
debt reserves continues to be subject to the provision of present law referred
to immediately below that requires recapture in the case of certain excess
distributions to shareholders.

         To the extent that the Bank makes non-dividend distributions to the
Company that are considered as made (i) from the reserve for losses on
qualifying real property loans, to the extent the reserve for such losses
exceeds the amount that would have been allowed under the experience method, or
(ii) from the supplemental reserve for losses on loans, then an amount based on
the amount distributed will be included in the Bank's taxable income.
Non-dividend distributions include distributions in excess of the Bank's current
and accumulated earnings and profits, distributions in redemption of stock, and


                                     - 36 -

<PAGE>



distributions in partial or complete liquidation. However, dividends paid out of
the Bank's current or accumulated earnings and profits, as calculated for
federal income tax purposes, will not be considered to result in a distribution
from the Bank's bad debt reserve. Thus, any dividends to the Company that would
reduce amounts appropriated to the Bank's bad debt reserve and deducted for
federal income tax purposes would create a tax liability for the Bank. The Bank
does not expect to make any distributions out of its bad debt reserves.

         In addition to the regular income tax, corporations, including thrift
institutions such as the Bank, generally are subject to the corporate minimum
tax. For taxable years beginning after 1986, the alternative minimum tax is
imposed at a minimum tax rate of 20% on the sum of a corporation's regular
taxable income (with certain adjustments) and tax preference items, less any
available exemption. For any taxable year beginning after 1986, the alternative
minimum taxable income that may be offset by alternative minimum net operating
losses is limited to 90%. The alternative minimum tax is imposed to the extent
it exceeds the corporation's regular income tax. Payments of alternative minimum
tax may be used as credits against regular tax liabilities in future years.

         In 1994, the Internal Revenue Service concluded its examination of the
tax returns for tax years 1989 through 1992. One of the issues raised by the IRS
was the amortization of deposit base intangibles. The issue was resolved under
the IRS' Global Intangibles Settlement Offer. Under this offer, taxpayers have
the following options for amortization of certain intangibles: a basis
adjustment of the amortizable intangible or the extension of the assets' useful
life. The Company accepted the useful life extension option. The IRS did not
make any other adjustments to the taxable income for the years under
examination.

         The California franchise tax applicable to the Bank is a variable-rate
tax. This rate is computed under a formula that results in a rate higher than
the rate applicable to nonfinancial corporations, because it reflects an amount
"in lieu" of local personal property and business license taxes paid by such
corporations (but not generally paid by banks or financial corporations such as
the Bank). The total tax rate was 11.3% in 1996, 11.3% in 1995 and 11.5% in
1994. Under California regulations, bad debt deductions are available in
computing California franchise taxes using a maximum reserve balance limitation
computed based on a six or a three-year moving average. The Bank and its
subsidiaries file California state franchise tax returns on a combined reporting
basis.

         The Company changed its method of accounting for income taxes as of
January 1, 1992. See Note 11 of the Financial Statements and Supplementary Data,
Item 8, for further discussion of the implementation of SFAS 109.







                                     - 37 -

<PAGE>



ITEM 2.   PROPERTIES

The Bank owned or leased the following offices at December 31, 1996:

STOCKTON:                   501 W. Weber Ave. (Corporate Offices)
                            131 N. San Joaquin St. (Main Branch)
                            209 E. Channel St. (Parking Lot)
                            1782 W. Hammer Ln. (Branch)
                            2562 Pacific Ave. (Branch)
                            2287 W. March Ln. (Branch)
                            8135 N. West Ln. (Branch)
LODI:                       200 N. Church St. (Branch)
                            1150 W. Kettleman Ln. (Branch)
MANTECA:                    201 N. Main St. (Branch)
TRACY:                      1070 N. Tracy Blvd. (Branch)
MODESTO:                    3013 McHenry Ave. (Branch)
                            2601 T Oakdale Rd. (Branch)
                            1101 J St. (Branch)
                            3801 Yosemite Blvd (Branch)
TURLOCK:                    2846 Geer Rd. (Branch)
                            501 E. Olive St. (Branch)
ELK GROVE:                  9150 Elk Grove-Florin Road (Branch)
ANGELS CAMP:                479 S. Main St. (Branch)
SONORA:                     13755 A Mono Way (Branch)
ATWATER:                    1329 Broadway Ave. (Branch)
MERCED:                     3065 "G" St. (Branch)
JACKSON:                    P.O. Box 636 (11992 Hwy. 88 - Martell) (Branch)
ESCALON:                    1701 Main St. (Branch)
FRESNO:                     1015 W. Shaw Avenue (Branch)
SACRAMENTO:                 640 Watt Avenue, Suite 200 (Loan Center)
HANFORD:                    113 Court St. (Loan Center)
OAKDALE:                    1449 E. "F" St. (Branch)

The total net book value of the offices at December 31, 1996 was $15.6 million.

ITEM 3.   LEGAL PROCEEDINGS

         California Financial and its subsidiary are involved in various routine
legal actions incidental to the business, none of which is believed to be
material to the Company on an overall basis.

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

         None.


                                     - 38 -

<PAGE>



                                     PART II


ITEM 5.   MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
          STOCKHOLDER MATTERS

         California Financial stock is traded on the Nasdaq Stock Market. The
following table sets forth the high ask and low bid prices of California
Financial stock for the periods indicated as reported by the Nasdaq Stock Market
and the distributions paid by California Financial with respect to each such
period. In addition to the distributions set forth below, California Financial
also paid a 10% stock dividend on December 15, 1993.

<TABLE>
<CAPTION>

                                                                High/Ask           Low/Bid           Distributions
                                                                --------           -------           -------------
<S>                                                              <C>                <C>                  <C>
1995
   First Quarter..............................................   $ 15               $ 12                 $0.11
   Second Quarter.............................................   17 1/2               14                  0.11
   Third Quarter..............................................   20 1/4             15 3/8                0.11
   Fourth Quarter.............................................   22                 18 3/8                0.11
1996
   First Quarter..............................................   21 3/8               19                  0.11
   Second Quarter.............................................   22 1/4               20                  0.11
   Third Quarter..............................................   24 1/4             21 3/4                0.11
   Fourth Quarter.............................................   29 3/4             22 5/8                0.11
1997
   First Quarter (through March 14, 1997).....................   29 1/4             28 3/4                0.11

</TABLE>

   The Company had 1,097 stockholders as of December 31, 1996.

ITEM 6.   SELECTED FINANCIAL AND OTHER DATA

   The following schedule shows selected financial information for a five-year
period not included elsewhere herein. Per share calculations for 1992 have been
adjusted for a 10% stock dividend in 1993.






                                     - 39 -

<PAGE>


<TABLE>
<CAPTION>
                                                           Statistical Ratios
                                                              December 31,
                                                  1996               1995              1994              1993             1992
                                                  -----              -----             -----            -----             -----
<S>                                                <C>               <C>               <C>             <C>               <C>   
Net income/average stockholders'
equity                                             7.89%             2.26%             5.42%           12.07%            11.96%

General and administrative
expenses/gross income                             30.99%            26.51%            30.43%           25.44%            24.30%

Dividend payout ratio                             29.92%           107.72%            45.06%           21.60%            19.44%

</TABLE>


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


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

   California Financial Holding Company ("the Company" or "California
Financial") is the holding company for its principal subsidiary, Stockton
Savings Bank ("Stockton Savings" or "the Bank"). Virtually all financial
activity of the holding company is conducted through the Bank.

   The financial results of the Company are impacted primarily by the interest
rate environment and the health of the real estate market in the Bank's lending
territory.

   On December 9, 1996, the Company announced its intention to merge with
Temple-Inland, Inc., subject to the approval of the Company's shareholders and
primary regulator. See "Business-Merger with Temple-Inland Inc.," Item 1.

   Earnings for the Company increased substantially in 1996 relative to 1995 and
1994, despite incurring a one-time $6.6 million charge to recapitalize the
SAIF.

         A widening net interest margin, due primarily to increases in the yield
on the Bank's loan portfolio as a result of the upward  repricing of adjustable-
rate  mortgages  indexed  to the  COFI,  as well  as a  decline  in the  cost of
deposits,  corresponding  to a decline in short-term  interest  rates,  led to a
strong increase in the Bank's average spread in 1996.

   Aggressive write-downs taken on real estate in 1994 and 1995, coupled with
significant declines in the level of troubled assets and a somewhat improved
real estate environment, reduced the amount of write-downs taken during 1996.

   The balance of nonperforming assets and nonearning real estate investments
continued to decline as the level of nonperforming assets was $16.9 million at
year-end 1996, compared to $22.7 million a year earlier. The balance of real
estate held for development purposes, which is not considered a nonperforming
asset, totalled $1.0 million compared to $6.5 million a year earlier. The lower

                                     - 40 -

<PAGE>



balance of nonearning assets should continue to have a positive impact on the
Bank's margin in 1997 as well as on overall earnings.

                              RESULTS OF OPERATIONS

   The Company reported earnings of $6.9 million or $1.44 per share in 1996
compared to earnings of $1.9 million or $.40 per share in 1995 and $4.5 million
or $.96 per share in 1994. Earnings trends over the three year period are
highlighted as follows:

   - Net interest income, the major component of income for the Bank, increased
     substantially in 1996 relative to 1995, after declining in 1995 from 1994.
     Declining short-term rates in the later part of 1995 and early in 1996 had
     a positive impact on spread this year. Alternatively, gradually rising
     interest rates in 1994 had a negative impact on earnings in 1995.

   - Loss provisions established on the loan portfolio remained fairly flat over
     the past two years, reflective of the decline in the Bank's nonperforming
     asset ratio.

   - Operating expenses increased significantly in 1996 relative to 1995, due
     primarily to the $6.6 million SAIF recapitalization discussed above.
     Acquisition costs of $600,000 were also incurred in the current year
     relating to the proposed merger. Operating expenses in 1995 were somewhat
     understated due to a change in employee benefit plans which allowed the
     reversal of $1.5 million in pension expenses that had been previously
     incurred.

   - Noninterest income, nonexistent over the past two years, totalled $7.1
     million in 1996. The lack of losses taken on real estate, increasing fee
     income and larger loan sale gains accounted for the tremendous improvement.
     Noninterest losses of $1.9 million were recorded in 1995 and 1994.
     Servicing and fee income recorded during these two periods was more than
     offset by real estate losses.

                               NET INTEREST INCOME

   Net interest income is impacted by the yield on interest-earning assets, the
cost of interest-bearing liabilities, the amount and type of interest-earning
assets and the level of interest-earning assets relative to interest-bearing
liabilities. Net interest income totalled $39.8 million in 1996, up from $31.8
million in 1995 and $34.3 million in 1994. Table I breaks out the components of
interest-earning assets and interest-bearing liabilities for the three years
ending December 31, 1996.






                                     - 41 -

<PAGE>


<TABLE>
<CAPTION>
                                                          TABLE I
                                           AVERAGE BALANCES (1) / AVERAGE RATES
--------------------------------------------------------------------------------------------------------
                                                                               (DOLLARS IN THOUSANDS)
----------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31                                             1996                   1995                  1994
----------------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>                    <C>                    <C>        
LOANS:  (2)
   AVERAGE BALANCES                                               $   941,031            $   927,151            $   879,293
   INTEREST INCOME                                                     77,946                 72,589                 65,923
   WEIGHTED AVERAGE YIELD                                               8.28%                  7.83%                  7.50%
INVESTMENT AND MORTGAGE-BACKED SECURITIES: (3)
   AVERAGE BALANCES                                                   312,109                280,971                249,008
   INTEREST INCOME                                                     20,817                 18,540                 15,204
   WEIGHTED AVERAGE YIELD                                               6.67%                  6.60%                  6.11%
----------------------------------------------------------------------------------------------------------------------------
TOTAL AVERAGE INTEREST-EARNING ASSETS                             $ 1,253,140            $ 1,208,122            $ 1,128,301
TOTAL INTEREST INCOME                                                  98,763                 91,129                 81,127
WEIGHTED AVERAGE YIELD ON ALL
   INTEREST-EARNING ASSETS                                              7.88%                  7.54%                  7.19%
----------------------------------------------------------------------------------------------------------------------------
DEPOSITS:
   AVERAGE BALANCES                                               $   950,388            $   989,565            $   934,000
   INTEREST EXPENSE                                                    43,722                 48,030                 38,220
   WEIGHTED AVERAGE RATE                                                4.60%                  4.85%                  4.09%
BORROWINGS:
   AVERAGE BALANCES                                                   255,809                187,070                165,046
   INTEREST EXPENSE                                                    15,233                 11,506                  9,163
   WEIGHTED AVERAGE RATE                                                5.95%                  6.15%                  5.55%
----------------------------------------------------------------------------------------------------------------------------
TOTAL AVERAGE INTEREST-BEARING LIABILITIES                        $ 1,206,197            $ 1,176,635            $ 1,099,046
TOTAL INTEREST EXPENSE                                                 58,955                 59,536                 47,383
WEIGHTED AVERAGE RATE ON ALL
   INTEREST-BEARING LIABILITIES                                         4.89%                  5.06%                  4.31%
   INTEREST EXPENSE (NET OF CAPITALIZED
     INTEREST)                                                         58,944                 59,373                 46,851
NET WEIGHTED AVERAGE RATE ON ALL
   INTEREST-BEARING LIABILITIES                                         4.89%                  5.05%                  4.26%
----------------------------------------------------------------------------------------------------------------------------
AVERAGE INTEREST-EARNING ASSETS IN EXCESS
   OF AVERAGE INTEREST-BEARING LIABILITIES                        $    46,943            $    31,487            $    29,255
NET INTEREST INCOME                                                    39,819                 31,756                 34,276
INTEREST RATE SPREAD                                                    2.99%                  2.49%                  2.93%
NET INTEREST MARGIN                                                     3.18%                  2.63%                  3.04%
----------------------------------------------------------------------------------------------------------------------------
</TABLE>


(1)  Average balances were calculated on a daily basis.
(2)  Nonaccruing loans were included in the average loan amounts outstanding.
(3)  Investment and mortgage-backed securities are based on amortized cost.

   The Bank's average spread or the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities increased to 2.99% in 1996 from 2.49% in 1995 and
2.93% in 1994. Asset yields increased in 1996, largely the result of increases
in yields on adjustable mortgage loans due to increases in COFI during 1995.
Since most of the Bank's adjustable-rate assets reprice on a semi-annual basis,
the impact of the higher index was not completely felt until 1996. In addition
to higher asset yields, funding costs also declined during 1996, due largely to
lower short-term rates during the current year. Unlike assets, the Bank's
deposit base reprices on a much more frequent basis, thereby following the
direction of interest rates more closely. The Bank's average net interest spread
in 1995 was 50 basis points lower than in the current year. Although asset
yields increased in 1995, largely the result of increases in yields on


                                     - 42 -

<PAGE>



adjustables due to increases in COFI, the cost of funds was significantly higher
than in the current year. Higher short-term interest rates during 1995 had a
much more direct impact on liability costs than on asset yields due to the
significantly shorter repricing period. The average spread in 1994 was higher
than in 1995 as the lagging effect of the lower rate environment in late 1993
carried over into 1994 and had a more immediate positive impact on the more
rate-sensitive liabilities.

   Table II shows the relative combination of changes in average volume and
average interest rates to changes in net interest income for the periods
indicated.

<TABLE>
<CAPTION>
                                                         TABLE II

                                                  RATE / VOLUME VARIANCES

                                                                              (DOLLARS IN THOUSANDS)
----------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31                                                TOTAL               VOLUME                    RATE
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>                    <C>                     <C>      
1996 COMPARED TO 1995
   LOANS                                                           $   5,358              $   1,033               $   4,325
   INVESTMENTS AND MORTGAGE-BACKED SECURITIES                          2,276                  2,077                     199
   DEPOSITS                                                            4,308                  1,871                   2,437
----------------------------------------------------------------------------------------------------------------------------
   BORROWINGS                                                         (3,728)                (4,112)                    384
----------------------------------------------------------------------------------------------------------------------------
CHANGE IN NET INTEREST INCOME                                      $   8,214              $     869               $   7,345
-----------------------------------------------------------------------------------------------------------------------------
1995 COMPARED TO 1994
   LOANS                                                           $   6,666              $   4,519               $   2,147
   INVESTMENTS AND MORTGAGE-BACKED SECURITIES                          3,336                  2,053                   1,283
   DEPOSITS                                                           (9,810)                (2,379)                 (7,431)
----------------------------------------------------------------------------------------------------------------------------
   BORROWINGS                                                         (2,342)                (1,906)                   (436)
----------------------------------------------------------------------------------------------------------------------------
CHANGE IN NET INTEREST INCOME                                      $  (2,150)             $   2,287               $  (4,437)
----------------------------------------------------------------------------------------------------------------------------
1994 COMPARED TO 1993
   LOANS                                                           $  (3,134)             $   4,731               $  (7,865)
   INVESTMENTS AND MORTGAGE-BACKED SECURITIES                          4,660                  3,965                     695
   DEPOSITS                                                             (379)                (1,989)                  1,610
----------------------------------------------------------------------------------------------------------------------------
   BORROWINGS                                                         (2,913)                (3,876)                    963
----------------------------------------------------------------------------------------------------------------------------
CHANGE IN NET INTEREST INCOME                                      $  (1,766)             $   2,831               $  (4,597)
----------------------------------------------------------------------------------------------------------------------------

</TABLE>

         Interest income on loans increased by $5.4 million in 1996 as compared
to 1995. The increase was the result of both increases in asset yields and
increases in the average balance of interest-earning assets. An increase in the
average balance of interest-earning assets outstanding of $45.0 million added
roughly $3.1 million to interest income while a 34 basis point increase in the
average yield on interest-earning assets added an additional $4.5 million to
interest income. Average asset growth in 1996 occurred in the investment
portfolio as the Bank purchased $129.0 million in primarily collateralized
mortgage obligations to supplement loan growth.

         Interest income increased by $10.0 million in 1995 relative to 1994.
The increase was the result of both increases in asset yields and increases in
the average balance of interest-earning assets. An increase in the average
balance of assets outstanding of $79.8 million added roughly $6.6 million to
interest income while a 35 basis point increase in the average yield on
interest-earning assets added an additional $3.3 million to interest income.

                                     - 43 -

<PAGE>



Average asset growth in 1995 occurred in both the loan and investment portfolios
although by year-end, both asset types had declined from year- end 1994 as the
Bank took advantage of the lower rate environment later in the year to sell some
lower-yielding fixed-rate investments. In addition, less loan product was added
to portfolio as the decline in interest rates reduced the volume of adjustable
mortgages originated. At the same time, prepayment speeds by year-end began to
increase.

         The increase in asset yields this year was primarily due to last year's
upward repricing of the Bank's adjustable-rate loan portfolio indexed to the
Eleventh District Cost of Funds. The index is a composite average of the cost of
funds of savings institutions in the Eleventh District of the Federal Home Loan
Bank. Like the Bank's own cost of funds, COFI increased in 1995 as a direct
result of the rise in interest rates in 1994 and the minimal change in
short-term rates in 1995. The Index dropped somewhat in early 1996 and has
stabilized since.

         Interest expense in 1996 totalled $58.9 million, down slightly from
$59.4 million reported in 1995. Although interest expense on deposits was down
significantly from the previous year, due in part to a $39.2 million decline in
the average balance of deposits outstanding and in part to a 25 basis point
reduction in deposit costs, a $68.7 million increase in the average level of
borrowings significantly offset the benefit received from the lower level of
deposit expense recorded.

         Deposit costs in the current year were down due to the lower short-term
interest rate environment as well as to an effort by the Bank to become less
competitive in the pricing of its certificates of deposit. A combination of less
competitive pricing and the decline of $27.8 million in average brokered
deposits also reduced the average balance of deposits out-standing this year.

         Interest expense of $59.4 million was recorded in 1995, up $12.5
million from $46.9 million recorded in 1994. The increase can be attributed to
$77.6 million in average liability growth and, to a larger extent, increases in
the weighted average cost of funds. A $55.6 million increase in the average
balance of deposits outstanding, created mostly through the addition of $61.0
million in brokered funds during the latter part of 1994, added $2.4 million to
interest expense in 1995. The Bank funded a portion of its asset growth in 1994
through the use of wholesale deposits. Average borrowings also increased by
$22.0 million during the year, adding $1.9 million to interest expense. The
growth in borrowings consisted primarily of short-term borrowings which was used
to fund asset growth.

         Interest expense was influenced the most in 1995 by the rapid increase
in interest rates in 1994. The weighted average cost of deposits increased by 76
basis points in 1995 relative to 1994, adding $7.4 million to interest expense
during the period. Most of the decline in interest rates that occurred in 1995
was in the long end of the yield curve, having very little impact on the Bank's
shorter-maturity deposit base. A 60 basis point increase in the average cost of
borrowings, again the result of higher short-term rates and the heavier use of
short-term borrowings, added $436,000 to interest expense in 1995.

         Included in interest expense is the cost of off-balance sheet interest
rate swaps which are designed to protect the Bank's cost of funds in rising rate
environments. The cost of these hedges totalled $430,000 in 1996, and $1.2

                                     - 44 -

<PAGE>


million and $3.4 million in 1995 and 1994, respectively. Swaps added 4 basis
points to the Bank's overall cost of funds in 1996, 10 basis points in 1995 and
31 basis points in 1994. The impact of swaps on the Bank's cost of funds is
largely dependent on movements in COFI as a large percentage of the swaps are
tied to this index. If rates increase significantly, the Bank receives a benefit
from the swaps which serves to offset the increase in the overall cost of funds.
Swap costs declined in 1996 and 1995 relative to 1994, due to the continued
reduction in the overall balance of swaps outstanding.

         The Bank's spread is expected to remain fairly stable in 1997 given the
relatively stable rate environment.

         Interest rate spread does not take into consideration the impact that
the relationship between the level of interest-earning assets and
interest-bearing liabilities has on net interest income. Net interest margin or
net interest income as a percentage of average interest-earning assets does
consider the relationship and as a result is a better measure of current and
future net interest income. By comparing the difference between net margin and
net spread between two periods, the impact of this additional factor on net
interest income can be explained. The Bank's net margin was 3.18%, 2.63% and
3.04% in 1996, 1995 and 1994, respectively. Net margin exceeded net spread by
19, 14 and 11 basis points for each of the three periods, respectively. The
improvement noted from 1994 to 1996 is indicative of a reduced level of
nonperforming assets and real estate held for investment purposes, as well as
the continued increase in the average balance of equity outstanding. Average
noninterest-bearing liabilities and equity exceeded average noninterest-earning
assets by $46.9 million, $32.3 million and $30.1 million in 1996, 1995 and 1994,
respectively. Margin relative to spread is expected to continue to improve as
the level of nonperforming assets and real estate held for development purposes
declined by year-end 1996 from the average for the year.
Table III highlights the improvements discussed above.

<TABLE>
<CAPTION>
                                                         TABLE III

                                                    ANALYSIS OF AVERAGE
                                                NONINTEREST-EARNING ASSETS
                                                 AND AVERAGE NONINTEREST-
                                                    BEARING LIABILITIES

                                                                              (DOLLARS IN THOUSANDS)
----------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31                                             1996                  1995                    1994
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>                    <C>                     <C>      
NONINTEREST-EARNING ASSETS:
         REAL ESTATE HELD FOR DEVELOPMENT                          $   3,337              $  11,660               $  17,501
         REAL ESTATE ACQUIRED THROUGH                                  5,564                  8,226                   7,330
         FORECLOSURE
         OFFICE PROPERTY AND EQUIPMENT                                20,863                 20,933                  21,285
         DEPOSIT BASE PREMIUM                                            567                  1,672                   3,184
         OTHER                                                        21,601                 22,592                  23,599
-----------------------------------------------------------------------------------------------------------------------------
TOTAL                                                               $ 51,932              $  65,083               $  72,899
-----------------------------------------------------------------------------------------------------------------------------
NONINTEREST-BEARING LIABILITIES AND EQUITY:
         MISCELLANEOUS LIABILITIES                                  $ 11,392               $ 13,331                $ 20,022
         CAPITAL STOCK                                                27,017                 26,415                  26,095
         RETAINED EARNINGS                                            60,466                 57,672                  56,894
----------------------------------------------------------------------------------------------------------------------------
TOTAL                                                              $  98,975              $  97,418                $103,011
----------------------------------------------------------------------------------------------------------------------------
NONINTEREST-EARNING ASSETS LESS THAN
         NONINTEREST-EARNING LIABILITIES AND                       $ (46,943)              $(32,335)               $(30,112)
         EQUITY

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

Average balances are calculated on a daily basis.

                                     - 45 -

<PAGE>



                               NONINTEREST INCOME

         Unlike prior years, the Company benefitted significantly in 1996 from
noninterest income. Noninterest income recorded in 1996 totalled $7.1 million
compared to net noninterest losses of $1.9 million recorded in both 1995 and
1994.

         A deteriorating real estate environment can explain most of the
noninterest losses recorded during 1995 and 1994 as total loss provisions,
operating losses and write-downs taken on real estate (net of any gains) were
$7.3 million and $5.9 million, respectively. Similar losses taken in 1996 only
totalled $627,000. Noninterest income in 1996 also benefitted from the
implementation of SFAS 122 "Accounting for Mortgage Servicing Rights". SFAS 122
requires that the rights to servicing mortgage loans for others be recognized as
a separate asset, however those servicing assets are acquired. In 1996,
additional loan sale gains of $1.0 million were recorded in recognition of the
servicing asset.

         Gains recognized on the sale of loans were virtually nonexistent in
1995 and 1994 (prior to the implementation of SFAS 122) although sales totalled
$85.2 million and $64.3 million, respectively. The lack of sale margins during
these two years was due to the increasing and volatile interest rate environment
experienced and the corresponding increase in hedge protection taken on by the
Bank. Table IV provides a detailed breakdown of loan sale gains during the
three-year period.

<TABLE>
<CAPTION>

                                                         TABLE IV

                                                      LOAN SALE GAINS

                                                                              (DOLLARS IN THOUSANDS)
----------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31                                               1996                  1995                    1994
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>                    <C>                     <C>   
NET CASH LOSSES                                                      $  (809)               $(1,178)                $(610)
FEES RECOGNIZED ON SALE                                                1,246                  1,389                   673
MORTGAGE SERVICING RIGHTS                                              1,041                      -                     -
----------------------------------------------------------------------------------------------------------------------------
NET GAINS ON SALE                                                    $ 1,478                $   211                 $  63
----------------------------------------------------------------------------------------------------------------------------
TOTAL GAINS AS A PERCENTAGE OF SALES                                    1.64%                  0.17%                 0.10%
----------------------------------------------------------------------------------------------------------------------------
</TABLE>


         For many years, the Bank was an active investor in real estate. Due to
changes in regulation, such investments were no longer allowed, and as a result,
the Bank spent several years divesting of real estate purchased in the late


                                     - 46 -

<PAGE>



1980's. Loss provisions of $4.1 million and $2.6 million were taken on the
divestiture of these assets in 1995 and 1994, respectively. Losses taken in 1996
were minimal, corresponding to the small remaining investment in real estate.

         Provisions on real estate owned through the foreclosure process
totalled $430,000 in 1996. Provisions of $1.6 million and $2.4 million were
established in 1995 and 1994, respectively, and related primarily to real estate
owned in downtown Stockton.

         Miscellaneous fee and servicing revenues continue to provide a stable
source of income to the Bank. Fee and servicing income of $5.9 million, $5.4
million and $5.0 million was recorded in 1996, 1995 and 1994, respectively. Fee
income increased in the current year relative to 1995 as a result of a
significant increase in fees collected on checking accounts due to the Bank's
success in generating new accounts. Regardless of the direction of interest
rates, fee income is anticipated to continue to grow in the future, given the
Bank's current emphasis on increasing the level of fee- generating transaction
accounts.

                               NONINTEREST EXPENSE

         Noninterest expense totalled $33.6 million in 1996, compared to $24.8
million and $25.3 million reported in 1995 and 1994, respectively. Excluding the
$6.6 million one-time assessment made in September of this year to recapitalize
SAIF, noninterest expense totalled $27.0 million. Non-interest expense increased
$2.2 million between 1996 and 1995. Costs of $600,000 incurred in 1996 relative
to the announced acquisition of the Company, and a $1.5 million benefit to
expense recorded in 1995 as a result of the Bank's change from a defined
contribution pension plan to a less expensive 401(K) plan explain the increase.
Noninterest expense decreased in 1995 relative to 1994 primarily due to the $1.5
million benefit. The benefits achieved through the change in plan were somewhat
mitigated by a $372,000 decline in deferred loan origination expense as a result
of the decline in loan origination volume. The Bank's earnings are negatively
impacted when loan volume declines as all loan officers are on a salary rather
than commissioned and in-house appraisers are utilized on most appraisals.

                              INCOME TAX PROVISION

         The Company recorded income tax provisions of $5.1 million, $1.5
million and $2.3 million in 1996, 1995 and 1994, respectively. The Company's
effective tax rate was 42.5%, 44.6% and 34.0% in 1996, 1995 and 1994,
respectively. The effective tax rate decreased in 1994 due primarily to a
$500,000 one-time tax benefit taken as a result of a settlement with the IRS
regarding the tax treatment for amortization of core deposit intangibles.

                                    LIQUIDITY

         The Bank derives its liquidity primarily from the payment, payoff or
sale of loans, the acquisition of new deposits, both retail and wholesale,
Federal Home Loan Bank advances and borrowings securitized by investments. Total
assets increased by $79.8 million or by 6.3%. Increases occurred primarily in
the balance of investments and loans outstanding. In order to more

                                     - 47 -

<PAGE>



fully utilize capital and somewhat reduce the Bank's volatility to rising
interest rates, the Bank undertook an asset acquisition strategy early in the
year. Roughly $49 million in fixed-rate collateralized mortgage obligations with
short estimated average lives were purchased. An additional $33 million in
current-index adjustable-rate collateralized mortgage obligations were also
purchased early in the year. The growth in investments achieved through these
purchases was partially offset by the sale of $20 million in 15-year fixed-rate
mortgage-backed securities. In addition to growth in investments, loans also
grew by $31 million in 1996. An increase in the origination of commercial and
multifamily mortgage loans was responsible for the growth in loans receivable
between the two periods.

         The asset growth discussed above was funded with a combination of
long-term, fixed-rate advances from the Federal Home Loan Bank and short-term,
reverse repurchase agreements. Deposits remained fairly flat between December
31, 1995 and 1996 as the Bank followed through on its strategy of pricing less
competitively on deposits in order to lower funding costs.

                           ASSET/LIABILITY MANAGEMENT

         The level of net interest income, the primary source of revenue to the
Bank, is largely dependent on the level of interest rates and how key rates
interact in that environment. The repricing and maturity structures of both
assets and liabilities also impact the volatility in net interest income.
Historically, the Bank's level of net interest income has been negatively
impacted in rising rate environments as most of its assets adjust to an index
that lags the general interest rate environment while most of its liabilities
tend to reprice on a much more frequent basis, responding more quickly to
changes in rates. The decline in general interest rates that occurred in 1995
and the further decline in short-term rates this year had a very positive impact
on net interest margins this year.

         The Bank undertook some balance sheet restructuring in 1996 in an
effort to reduce its susceptibility to rising rates. More specifically:

         -    The level of long-term, fixed-rate mortgages and mortgage-backed
              securities was reduced by $35 million due to sale and prepayment
              activity.

         -    Adjustable-rate loans and mortgage-backed securities increased by
              $25 million as all adjustable mortgages originated during 1996
              were retained in the portfolio. The type of adjustable-rate
              mortgages also changed as the Bank's traditional 6-month COFI
              product was replaced with the less rate sensitive 6-month Treasury
              and 1-month COFI product.

         -    Current-index adjustable-rate securities of $65 million were added
              to the portfolio in late 1995 and early 1996.




                                     - 48 -

<PAGE>



              LOAN ORIGINATION VOLUME AND MORTGAGE BANKING ACTIVITY

         The amount and type of loans originated are largely dependent on the
interest rate environment as well as the overall health of the Bank's real
estate lending market. A continued weak real estate market was partially offset
by the reduced interest rate environment, leading to a 15.3% increase in the
volume of loans originated in 1996 compared to 1995.

         Originations totalled $326.6 million in 1996, $283.3 million in 1995
and $368.9 million in 1994. Refinance activity represented 31.8% of total loan
volume in 1996, up from 25.0% in 1995 and down slightly from 35.5% in 1994. The
primary increase in originations this year occurred with commercial and
multifamily residential, a lending market which the Bank has de-emphasized over
the past several years due to the weak real estate market. With the apparent
stabilization in the market, the Bank began originating these loans again this
year. Construction lending also increased this year, again primarily due to the
improved climate for real estate. Table V provides a breakout of loan volume by
type of loan for the three years.

                                     TABLE V

                                 LENDING VOLUME

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

                                          (DOLLARS IN THOUSANDS)

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

YEARS ENDED DECEMBER 31          1996            1995               1994

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

SHORT-TERM CONSTRUCTION        $ 114,386       $  88,299          $ 102,014

LONG-TERM FIXED-RATE             122,274          90,060            111,522

LONG-TERM ADJUSTABLE-RATE         74,781          85,073            136,631

OTHER                             15,118          19,858             18,698

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

      TOTAL ORIGINATIONS       $ 326,559       $ 283,290          $ 368,865

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



         Loan origination volume is expected to increase in 1997 due to the
offering of Federal Housing Administration (FHA) loans which represent roughly
30% of total loans originated in the Bank's current market area. The Bank began
the FHA program in late 1996.

         The Bank has traditionally sold a majority of fixed-rate mortgages
originated in an effort to reduce its balance sheet susceptibility to rising
interest rates. The level of interest rates tends to have a major impact on the
type of loan originated and thus, on the level of mortgage banking activities
undertaken. In periods of falling interest rates, the rate differential between
a fixed and adjustable-rate mortgage is usually not significant enough to draw a
consumer to the uncertainty of an adjustable-rate mortgage so the level of
fixed-rate mortgage originations increases. Volume is further impacted by
increased refinance activity in low rate environments. The reverse holds true in

                                     - 49 -

<PAGE>



a rising rate environment and the consumer tends to move to adjustable-rate
mortgages. At the same time, total originations decline due to a reduction in
refinance activity. This phenomenon can create a large amount of volatility in
mortgage loan sale activity for the Bank depending on the level of rates. Loan
sale volume totalled $89.9 million, $85.2 million and $64.3 million for 1996,
1995 and 1994, respectively. In 1996 and 1995, both moderate rate environments,
sales represented 27.5% and 30.1% of total origination volume, respectively.
Alternatively, in the higher rate environment of 1994, sales volume only
represented 17.4% of total originations, indicating an increase in volume of
adjustable-rate originations in that period.

         Consistent with the volatility in sales over the past three years,
gains recognized on loans sales also fluctuated significantly. Gains of $1.5
million, $211,000 and $63,000 were recognized in 1996, 1995 and 1994,
respectively. Loan sale gains for 1994 and 1995 were in direct proportion to
loan sale activity for these two periods. Roughly $1.0 million of the total gain
in 1996 was due to the implementation in 1996 of SFAS 122 which requires the
up-front recognition of loan servicing rights.

         The Bank has made it a practice to retain servicing on all loans sold
in order to provide good service to the customer, generate consistent servicing
revenues and provide an opportunity to cross- sell the servicing customer other
Bank products. Servicing income totalled $1.4 million, $1.5 million and $1.3
million in 1996, 1995 and 1994, respectively. The Bank's portfolio of loans
serviced for others totalled $573.9 million, $548.5 million and $509.1 million
as of December 31, 1996, 1995 and 1994, respectively. With the implementation in
the current year of SFAS 122, the Bank is not only recognizing the rights to
service mortgage loans as a separate asset but is also regularly evaluating the
servicing asset for impairment. Implementation of this standard not only
increases the level of loan sale gains recognized but also has the effect of
reducing future servicing income as the asset is amortized. Income volatility
may also increase due to the potential impairment and corresponding write-down
of the servicing asset. Write-downs caused by impairment were minimal in 1996
due to the relatively small servicing asset balance outstanding.

                                  ASSET QUALITY

         The Bank's level of nonperforming assets, which consists of nonaccruing
loans, restructured troubled debt and real estate owned through foreclosure,
declined significantly over the past year. Table VI breaks out nonperforming
assets by type for the three periods indicated. Gross nonperforming assets
totalled $16.9 million, $22.7 million and $35.2 million at December 31, 1996,
1995 and 1994, respectively.


                                     - 50 -

<PAGE>


<TABLE>
<CAPTION>


                                                          TABLE VI

                                                         SUMMARY OF
                                                    NONPERFORMING ASSETS

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

                                                                         (DOLLARS IN THOUSANDS)

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

AT DECEMBER 31                                  1996            1995             1994             1993             1992

----------------------------------------------------------------------------------------------------------------------------
<S>                                             <C>             <C>              <C>              <C>               <C>    
NON-ACCRUAL LOANS:

  1-4 FAMILY RESIDENTIAL MORTGAGES              $ 6,457         $ 4,606          $ 3,734          $ 3,894           $ 4,242

  COMMERCIAL REAL ESTATE MORTGAGES                  897             555              450            2,510             3,066

  CONSTRUCTION AND LAND                               -              18            2,180            5,198             4,034

TROUBLED DEBT RESTRUCTURES:

  1-4 FAMILY RESIDENTIAL MORTGAGES                    -           2,382            1,718              681               681

  COMMERCIAL REAL ESTATE MORTGAGES                    -               -            4,529            4,531             5,202

  CONSTRUCTION AND LAND                           1,922           5,338            8,948           10,914             5,159

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

GROSS NONPERFORMING LOANS                       $ 9,276         $12,899          $21,559          $27,728           $22,384

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

REAL ESTATE OWNED:

  1-4 FAMILY RESIDENTIAL PROPERTY               $ 4,991         $ 2,722          $ 3,929          $   885           $ 2,005

  COMMERCIAL REAL ESTATE PROPERTY                     -           3,743            8,039            6,392             8,366

  CONSTRUCTION AND LAND                           2,598           3,365            1,717            2,881             5,181

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

GROSS REAL ESTATE OWNED                         $ 7,589         $ 9,830          $13,685          $10,158           $15,552

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

GROSS NONPERFORMING ASSETS                      $16,865         $22,729          $35,244          $37,886           $37,936

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

  LOAN LOSS RESERVES                            $ 7,277         $ 8,174          $ 7,726          $ 9,965           $ 8,042

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

REAL ESTATE OWNED LOSS RESERVES                 $ 1,595         $ 3,853          $ 3,142          $ 1,675           $   702

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

LOAN LOSS RESERVES/
  NONPERFORMING LOANS                             78.45%          63.37%           35.84%           35.94%            35.93%

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

         Generally, loans are considered nonaccruing once they become 90 days or
more delinquent or have been restructured. The delinquency of a loan is
generally the first sign that a loan is in trouble. In many circumstances, once
a loan becomes severely delinquent to this extent, it is either

                                     - 51 -

<PAGE>



restructured or goes into foreclosure. Deferred interest income on delinquent
loans totalled $377,000, $263,000 and $371,000 at December 31, 1996, 1995 and
1994, respectively.

         Restructured debt is usually considered troubled and then placed on
nonaccrual status when the terms or conditions of the restructure are more
advantageous to the borrower than what would normally be offered. It is
generally the Bank's position when restructuring debt that it is in the Bank's
best interest to allow the borrower to continue the financing under revised
terms rather than to take the property back through the foreclosure process. The
level of troubled restructured debt decreased to $1.9 million at December 31,
1996 from $7.7 million at the end of 1995 and $15.2 million at the end of 1994.
Most debt is restructured by lowering the interest rate or advancing funds for
taxes, insurance or interest. Interest income on troubled debt is normally
deferred by the Bank and recognized on a cash basis only. The amount of interest
deferred by the Bank on troubled debt totalled $1.4 million, $1.7 million and
$1.8 million at December 31, 1996, 1995 and 1994, respectively. Of the balance
of troubled debt outstanding, $813,000, $2.8 million and $1.1 million were more
than 90-days delinquent at year-end 1996, 1995 and 1994, respectively.

         The level of provisions established on loans has remained fairly
constant over the past two years, an indication of declining troubled loans and
man-agreement's opinion that the quality of the Bank's loan portfolio is not
experiencing further deterioration. Loan loss provisions totalled $1.3 million
in 1996 and $1.6 million in 1995.

         During 1994, the Company adopted Statement of Financial Accounting
Standards No. 114 (SFAS 114), "Accounting by Creditors for Impairment of a
Loan", as amended by SFAS 118 (collectively referred to as SFAS 114). The
adoption of SFAS 114 has not affected the Company's policy for placing loans on
nonaccrual status. The Company generally identifies loans to be evaluated for
impairment when such loans are delinquent or have been restructured. However,
not all nonaccrual loans are impaired. Under SFAS 114, loans are considered
impaired when it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the loan agreement. Certain
nonaccrual loans may not be impaired because they are included in large groups
of smaller-balance homogeneous loans that by definition are excluded from SFAS
114 (unless they have been restructured). For a further discussion of SFAS 114,
refer to Note 4 of the Financial Statements.

         The Bank's level of real estate owned totalled $7.6 million at the end
of 1996, compared to $9.8 million and $13.7 million at the end of 1995 and 1994,
respectively. Real estate outstanding as of year-end consisted of single-family
residences and commercial and residential lots in separate locations.

         In connection with foreclosures during the year, the Bank's loan
charge-offs totalled $2.1 million compared to charge-offs taken of $1.2 million
and $2.5 million in 1995 and 1994, respectively. Subsequent to foreclosure,
valuation concerns resulted in loss provisions that were established on real
estate owned totaling $430,000 for 1996, $1.6 million for 1995 and $2.4 million
in 1994. Charge-offs taken on the sale of real estate owned totalled $2.7
million in 1996, $920,000 in 1995 and $917,000 in 1994.

                                     - 52 -

<PAGE>




         Loan charge-offs taken in 1996 related to construction loans, FHA Title
1 loans and mortgages on single family residences. Although reserves established
on real estate owned in 1996 were minimal compared to prior years, charge-offs
were significantly higher. The sales of two buildings in Downtown Stockton which
had experienced significant declines in value subsequent to foreclosure were
responsible for most of the charge-off activity in the current year.

         The Bank uses an asset classification process to identify troubled
loans in its portfolio. Paying capacity of the borrower as well as the adequacy
of collateral value are evaluated. Assets identified through this process as
possessing some weakness are classified by the Bank and are monitored on an
ongoing basis. By definition, all nonperforming assets are immediately
classified. The level and type of nonperforming and classified assets,
historical experience, current economic conditions and trends, as well as the
lending mix are all reviewed when determining the level and adequacy of general
loan loss reserves. The balance of classified assets totalled $26.2 million,
$47.0 million and $63.1 million at December 31, 1996, 1995 and 1994,
respectively. Alternatively, loan loss reserves totalled $7.3 million, $8.2
million, and $7.7 million at year-end, 1996, 1995 and 1994, respectively. The
decrease in loan loss reserves in 1996 can be primarily attributed to the
decline in nonperforming and classified loans over the past year.

                             REAL ESTATE INVESTMENT

         The Bank has, for many years, invested in real estate for development
purposes through a wholly-owned subsidiary, Stockton Service Corporation,
("SSC"). SSC would generally acquire land and then contract with a developer to
build out and manage the project in exchange for a share in profits after SSC
received a preferential return equivalent to interest and fees earned on a
construction loan. All profits earned in excess of the preferential return are
then split between the two parties in an agreed-upon manner. All projects
currently outstanding involve the build out of single family subdivisions.

         All income, including the preferential return, is reported as gain on
the sale of real estate in the Bank's financial statements. Gains over the past
three years (as noted on Table VII) have been minimal. Loss provisions of
$38,000, $4.1 million and $2.7 million were recorded in 1996, 1995 and 1994,
respectively. Loss reserves on real estate investments totalled $715,000 at
December 31, 1996, $3.1 million at year-end 1995 and $3.7 million at December
31, 1994. The significant amount of losses taken on the Bank's real estate
development activities over the past several years is due to the significant
amount of purchases that occurred in 1989, a period when real estate values were
at their peak, and the decline in values that has occurred subsequently. The
decision by the Bank in 1995 to accelerate the disposition of real estate
through bulk sales also increased the level of reserves necessary. As of
December 31, 1996, the balance invested in real estate totalled $1.0 million and
consisted of four completed homes in two subdivisions as well as finished lots
in one subdivision.


                                     - 53 -

<PAGE>


<TABLE>
<CAPTION>
                                                         TABLE VII

                                                     SALES AND PROFITS
                                                    ON REAL ESTATE HELD
                                                      FOR DEVELOPMENT

-----------------------------------------------------------------------------------------------------------
                                                                        (DOLLARS IN THOUSANDS)
-----------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31                                    1996                1995                1994
-----------------------------------------------------------------------------------------------------------
<S>                                                      <C>                 <C>                 <C>    
GROSS SALES OF REAL ESTATE                               $ 4,909             $10,514             $11,858

PROFITS CONSISTING OF PREFERENTIAL RETURNS                   -                     9                 973

ADDITIONAL GAINS (LOSSES)                                    167                 (39)               (155)
-----------------------------------------------------------------------------------------------------------
TOTAL GAINS (LOSSES) BEFORE CAPITALIZED INTEREST         $   167             $   (30)            $   818

CAPATILIZED INTEREST RELIEVED                                -                     5                 374
-----------------------------------------------------------------------------------------------------------
NET PROFITS (LOSSES)                                     $   167             $   (35)            $   444
-----------------------------------------------------------------------------------------------------------
PROFIT MARGINS                                              3.40%              (.33%)               3.74%
-----------------------------------------------------------------------------------------------------------
</TABLE>


         The enactment of FIRREA in 1989 required the divestiture of all real
estate held for development purposes by financial institutions in excess of 2%
of assets. Consequently, no new projects have been taken on by SSC since then.
The balance of real estate currently outstanding represents the remaining
build-out of older projects which SSC is attempting to divest itself of as
expeditiously as possible. As a result, the balance of real estate investments
outstanding has steadily declined over the past several years; from $14.7
million at the end of 1994 to $1.0 million at the end of 1996. Even though the
balance currently outstanding is less than the 2% permissible limit of $26.9
million, the full balance of this investment must be deducted from regulatory
capital. Further discussion of the impact of this investment on regulatory
capital can be found under the "Capital Resources and Regulatory Compliance"
section of this discussion.

                   CAPITAL RESOURCES AND REGULATORY COMPLIANCE

         The Company's capital position increased by $4.3 million or roughly 5%
from the previous year. Income recorded of $6.9 million and the exercise of
67,000 options adding $703,000 to net worth were partially offset by net
dividends paid of $1.8 million and a negative $1.5 million mark to market
adjustment for the Bank's investment portfolio classified as available for sale.
Dividends paid during the year of $.44 per share represented 30% of total income
earned for 1996.

         Total capital increased by $2.4 million or roughly 3% in 1995 compared
to 1994. Earnings of $1.9 million and a positive mark to market of the Bank's
investment portfolio designated as available for sale of $2.3 million were
partially offset by dividends paid of $2.0 million. Dividends paid during the
year of $.44 per share represented 108% of total income earned in 1995.

         The Bank is under the regulatory guidance of both the OTS and the FDIC.

         Three minimum capital requirements were mandated by FIRREA, requiring
that financial institutions must maintain minimum risk-based capital of at least
8% of risk-weighted assets, core capital of at least 3% of adjusted total assets


                                     - 54 -

<PAGE>



and tangible capital of at least 1.5% of adjusted total assets. Under FIRREA's
risk-based capital guidelines, the Bank is required to maintain higher levels of
capital against assets deemed to involve higher degrees of credit risk. In
addition, the Bank must deduct from regulatory capital its investments and loans
to subsidiaries engaged in nonpermissible activities such as real estate
development. The Bank's capital ratios and net requirements as of December 31,
1996 are detailed on Table VIII. At December 31, 1996, the Bank exceeded all
minimum regulatory capital requirements mandated by FIRREA with risk-based and
core/tangible capital of 12.69% and 6.43%, respectively.

<TABLE>
<CAPTION>
                                                         TABLE VIII

                                                    CAPITAL REQUIREMENTS

-------------------------------------------------------------------------------------------------------
                                                                (DOLLARS IN THOUSANDS)
-------------------------------------------------------------------------------------------------------
AT DECEMBER 31                                      1996                                1995
-------------------------------------------------------------------------------------------------------
                                         $                 %                     $                 %
-------------------------------------------------------------------------------------------------------
<S>                                  <C>                <C>                  <C>                <C>   
CURRENT CAPITAL:

  RISK-BASED CAPITAL                 $92,723            12.69%               $83,083            12.12%

  EXCESS OVER MINIMUM                 34,248                                  28,264

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

  CORE CAPITAL                       $86,409             6.43%               $76,440            6.07%

  EXCESS OVER MINIMUM                 46,115                                  38,634

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

  TANGIBLE CAPITAL                   $86,409             6.43%               $76,440            6.07%

  EXCESS OVER MINIMUM                 66,262                                  57,537

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

FULLY PHASED-IN CAPITAL:

  RISK-BASED CAPITAL                 $92,723            12.69%               $79,967            11.67%

  CORE CAPITAL                        86,409             6.43%                71,958            5.71%

  TANGIBLE CAPITAL                    86,409             6.43%                71,958            5.71%

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

</TABLE>

         The FDICIA provided for increased funding for FDIC deposit insurance
and for expanded regulation of the banking industry. Among other things, FDICIA
requires that the federal banking regulators take prompt corrective action with
respect to institutions failing to meet minimum capital standards. Specific
categories defined in the act include "well capitalized," "adequately
capitalized," "undercapitalized "significantly undercapitalized," and
"critically undercapitalized." Various restrictions are to be applied on
institutions characterized as undercapitalized.


                                     - 55 -

<PAGE>



         To be considered "well capitalized," an institution must generally have
a leverage ratio of at least 5%, a tier-one, risk-based capital ratio of at
least 6%, and a total risk-based capital ratio of at least 10%. The Bank was in
the awell capitalized" category as of December 31, 1996. As the Bank meets its
regulatory capital requirements, it is allowed to make capital distributions
(primarily dividends) to the Company upon 30 days notice to the OTS, up to an
amount that would reduce its surplus capital ratio by one-half of the surplus
outstanding at the beginning of the year, plus all of its income for the year,
as long as it still meets its capital requirements after the proposed capital
distribution. Regulatory capital increased in 1996 compared to the prior year.
The reduced level of investment in subsidiaries with impermissible activities
and lower balance of core deposit premium, which are both deducted from
regulatory capital, are responsible for the improvement in capital position. The
adjustment to capital for marking to market the investment portfolio is not
includable in the calculation of regulatory capital and thus has no impact on
the Bank's regulatory capital position.

                         RECENT ACCOUNTING DEVELOPMENTS

         In March 1996, the Financial Accounting Standards Board issued SFAS
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." This statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is applied
prospectively. It is management's opinion that applying the provisions of this
statement will not have a significant effect on the Company's financial
position.


ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<CAPTION>

                    SELECTED FIVE-YEAR FINANCIAL INFORMATION

---------------------------------------------------------------------------------------------------------------------------------
                                                                       (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

AT OR FOR THE YEARS ENDED DECEMBER 31                 1996              1995               1994          1993            1992
---------------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL CONDITION INFORMATION
---------------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>                <C>                <C>            <C>             <C>       
TOTAL ASSETS                                      $1,337,379         $1,257,585         $1,275,127     $1,103,648      $1,058,409

LOANS RECEIVABLE, NET                                959,409            921,070            916,757        846,489         799,622

MORTGAGE-BACKED SECURITIES                           103,007            117,200            166,591         80,405          84,603

SAVINGS DEPOSITS                                     957,834            960,148          1,001,070        885,058         892,501

BORROWINGS                                           283,050            204,371            182,876        125,343          82,217

STOCKHOLDERS' EQUITY                                  89,877             85,602             83,217         81,462          72,939

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

SELECTED OPERATIONS INFORMATION


                                     - 56 -

<PAGE>





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

INTEREST INCOME                                   $   98,763         $   91,128         $   81,127     $   79,600      $   85,569

INTEREST EXPENSE                                      58,944             59,373             46,851         43,331          50,134

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

NET INTEREST INCOME                               $   39,819         $   31,755         $   34,276     $   36,269      $   35,435

PROVISION FOR LOAN LOSSES                              1,261              1,634                281          2,985           3,765

FEE INCOME                                             5,911              5,407              5,004          5,345           4,718

OTHER INCOME (LOSS)                                    1,185             (7,282)            (6,910)         1,560            (838)

SAIF INSURANCE RECAPITALIZATION                        6,614                  -                  -              -               -

OTHER EXPENSES                                        27,033             24,818             25,271         23,325          22,895

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

INCOME BEFORE TAXES AND ACCOUNTING CHANGE         $   12,007         $    3,428         $    6,818     $   16,864       $  12,655

INCOME TAX PROVISION                                   5,102              1,530              2,316          7,465           5,318

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

INCOME BEFORE ACCOUNTING CHANGE                   $    6,905         $    1,898         $    4,502     $    9,399       $   7,337

ACCOUNTING CHANGE                                          -                  -                  -              -           1,000

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

NET INCOME                                        $    6,905         $    1,898         $    4,502     $    9,399      $    8,337

=================================================================================================================================

EARNINGS PER SHARE                                 $    1.44          $    0.40          $    0.96      $    2.04       $    1.84

=================================================================================================================================

DIVIDENDS PER SHARE                                $     .44          $    0.44          $    0.44      $    0.44       $    0.40

=================================================================================================================================

SELECTED OTHER INFORMATION

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

RATIO OF NET INCOME TO AVERAGE ASSETS                  0.53%              0.15%              0.37%          0.87%           0.80%

RATIO OF NET INCOME TO AVERAGE SHAREHOLDERS'           7.89%              2.26%              5.42%         12.07%          11.96%
EQUITY

RATIO OF GENERAL AND ADMINISTRATIVE EXPENSES           2.51%              1.86%              2.01%          2.05%           2.08%
TO AVERAGE ASSETS

INTEREST RATE SPREAD - END OF YEAR                     2.72%              2.62%              2.23%          2.82%           3.23%

BRANCH OFFICES                                            26                 22                 23             22              22

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

</TABLE>

                                     - 57 -

<PAGE>


<TABLE>
<CAPTION>

                                     CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

---------------------------------------------------------------------------------------------------------------
AT DECEMBER 31                                                               1996                     1995
===============================================================================================================
ASSETS
---------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>                     <C>           
CASH, INCLUDING NONINTEREST-BEARING DEPOSITS                            $   14,280,370          $   13,162,431

INTEREST-BEARING DEPOSITS (NOTE 2)                                           2,697,244               4,691,615

INVESTMENT SECURITIES (NOTES 2 AND 10) AVAILABLE FOR SALE,                 201,059,141             143,079,344
  AT MARKET

MORTGAGE-BACKED SECURITIES (NOTE 3) AVAILABLE FOR SALE, AT MARKET          103,007,268             118,265,386

LOANS HELD FOR SALE (NOTE 4) (MARKET VALUE: 1996 - $7,099,156;               7,057,252              13,153,264
  1995 - $13,620,317)

LOANS RECEIVABLE, NET (NOTES 4 AND 8)

  (ALLOWANCE FOR LOAN LOSSES: 1996 - $7,276,710;                           952,351,455             907,917,036
    1995 -$8,173,807)

REAL ESTATE HELD FOR DEVELOPMENT OR SALE, NET (NOTE 5)

  (ALLOWANCE FOR LOSSES: 1996 - $2,310,488; 1995 - $6,958,757)               6,982,976              12,480,183

OFFICE PROPERTY AND EQUIPMENT, AT COST, LESS ACCUMULATED
  DEPRECIATION: 1996 - $15,550,486; 1995 - $14,721,731                      20,261,053              20,769,858

FEDERAL HOME LOAN BANK STOCK, AT COST, AND FHLMC PREFERRED STOCK            13,682,300              10,395,200
  (NOTE 8)

ACCRUED INTEREST AND DIVIDENDS RECEIVABLE (NOTE 6)                           7,117,645               6,092,335

DEPOSIT BASE PREMIUM                                                           424,515               1,058,444

MORTGAGE SERVICING RIGHTS (NOTE 4)                                             829,621                       -

OTHER ASSETS (NOTE 12)                                                       7,628,460               6,519,971

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

TOTAL ASSETS                                                            $1,337,379,300          $1,257,585,067

===============================================================================================================

---------------------------------------------------------------------------------------------------------------
AT DECEMBER 31                                                              1996                   1995
---------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
---------------------------------------------------------------------------------------------------------------

LIABILITIES:

  SAVINGS AND CHECKING ACCOUNTS (NOTE 7)                                $  957,834,294          $  960,147,775

  ADVANCES FROM FEDERAL HOME LOAN BANK (NOTE 8)                            263,500,000             162,500,000

  COLLATERALIZED MORTGAGE OBLIGATIONS (NOTE 9)                                       -               6,462,509

  SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (NOTE 10)                  19,550,000              35,408,000

  ADVANCES BY BORROWERS FOR TAXES AND INSURANCE                                521,389                 782,113


                                     - 58 -

<PAGE>





  ACCRUED INTEREST PAYABLE                                                   1,849,992               1,181,068

  OTHER LIABILITIES                                                          4,246,873               5,501,381

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

TOTAL LIABILITIES                                                       $1,247,502,548          $1,171,982,846

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

STOCKHOLDERS' EQUITY: (NOTE 12 AND 14)

  SERIAL PREFERRED STOCK (PAR VALUE $.01 PER SHARE;

    4,000,000 SHARES AUTHORIZED; NONE ISSUED AND OUTSTANDING)           $            -           $           -

COMMON STOCK (PAR VALUE $.01 PER SHARE; 12,000,000 SHARES
  AUTHORIZED; 4,740,914 AND 4,662,779 ISSUED AND OUTSTANDING ON
  DECEMBER 31,1996 AND 1995)                                                    47,409                  46,628

PAID IN CAPITAL IN EXCESS OF PAR                                            27,490,907              26,553,810

UNREALIZED (LOSS) GAIN ON MARKETABLE EQUITY SECURITIES                        (504,200)                998,198

RETAINED EARNINGS                                                           62,842,636              58,003,585

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

TOTAL STOCKHOLDERS' EQUITY                                              $   89,876,752          $   85,602,221

COMMITMENTS (NOTE 17)

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

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                              $1,337,379,300          $1,257,585,067

===============================================================================================================

</TABLE>








                                     - 59 -

<PAGE>



<TABLE>
<CAPTION>

                                           CONSOLIDATED STATEMENTS OF OPERATIONS

--------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31                                              1996                 1995                 1994
==========================================================================================================================
<S>                                                                <C>                  <C>                   <C>        
INTEREST INCOME:

  INTEREST AND FEES ON LOANS                                       $77,946,283          $72,588,415           $65,922,870

  INTEREST ON MORTGAGE-BACKED SECURITIES                             7,692,145           10,703,543             9,069,179

  INTEREST AND DIVIDENDS ON INVESTMENTS                             12,783,090            7,512,907             5,727,784

  OTHER INTEREST INCOME                                                341,183              323,649               406,799

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

     TOTAL INTEREST INCOME                                         $98,762,701          $91,128,514           $81,126,632

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

INTEREST EXPENSE:

  INTEREST ON SAVINGS (NOTE 7)                                     $43,721,607          $48,029,879           $38,220,211

  INTEREST ON SHORT-TERM BORROWINGS                                  1,513,204            3,750,929             1,966,014

  INTEREST ON LONG-TERM BORROWINGS                                  13,720,070            7,754,619             7,197,138

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

     TOTAL INTEREST EXPENSE                                        $58,954,881          $59,535,427           $47,383,363

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

     LESS: INTEREST CAPITALIZED (NOTE 5)                               (10,487)            (162,292)             (532,566)

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

     NET INTEREST EXPENSE                                          $58,944,394          $59,373,135           $46,850,797

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

     NET INTEREST INCOME                                           $39,818,307          $31,755,379           $34,275,835

     PROVISION FOR LOAN LOSSES (NOTE 4)                              1,261,000            1,633,500               281,000

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

     NET INTEREST INCOME AFTER PROVISION FOR LOAN                  $38,557,307          $30,121,879           $33,994,835
     LOSSES

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

NONINTEREST INCOME:

     GAIN (LOSS) ON SALE OF:

       LOANS                                                       $ 1,477,889          $   210,907           $    62,926

       INVESTMENT SECURITIES                                           715,861               90,119               (40,274)

       REAL ESTATE HELD FOR DEVELOPMENT OR SALE, NET                   723,734              (27,519)              607,270

       LESS: PROVISION FOR LOSSES ON REAL ESTATE HELD                 (467,839)          (5,751,878)           (5,035,000)

     OTHER WRITE-DOWNS                                                (251,521)            (908,271)             (635,068)

     OPERATING LOSSES ON REAL ESTATE HELD FOR SALE,                   (632,434)            (671,172)             (868,551)
     NET

     TRADING SECURITIES ACTIVITIES                                           -                    -              (415,511)


                                     - 60 -

<PAGE>





     SERVICING FEE INCOME                                            1,362,700            1,510,271             1,297,761

     OTHER FEE INCOME                                                4,548,524            3,896,855             3,706,663

     OTHER LOSS                                                       (380,968)            (225,143)             (586,014)

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

         TOTAL NONINTEREST INCOME (LOSS)                           $ 7,095,946         $ (1,875,831)         $ (1,905,798)

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

NONINTEREST EXPENSE:

     COMPENSATION AND RELATED BENEFITS                             $12,421,485          $10,715,096           $11,639,362

     OCCUPANCY                                                       2,956,860            3,128,654             2,987,245

     ADVERTISING AND PROMOTION                                       1,614,225            1,086,841             1,149,699

     DATA PROCESSING                                                 2,193,310            2,138,038             1,946,619

     INSURANCE                                                       2,905,011            2,794,970             2,626,868

     SAIF INSURANCE RECAPITALIZATION                                 6,614,232                    -                     -

     AMORTIZATION OF DEPOSIT BASE PREMIUM                              844,139            1,161,555             1,161,555

     OTHER                                                           4,097,222            3,793,385             3,759,632

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

         TOTAL NONINTEREST EXPENSE                                 $33,646,484          $24,818,539           $25,270,980

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

     INCOME BEFORE TAXES                                           $12,006,769          $ 3,427,509           $ 6,818,057

     INCOME TAXES (NOTE 11)                                          5,102,000            1,530,000             2,316,000

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

         NET INCOME                                                $ 6,904,769          $ 1,897,509           $ 4,502,057

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

         INCOME PER SHARE                                          $      1.44          $      0.40           $      0.96

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

</TABLE>


                                     - 61 -

<PAGE>



<TABLE>
<CAPTION>

                                              CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

------------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
====================================================================================================================================
                                                                                                       UNREALIZED
                                                                                                       GAIN (LOSS)
                                                                                                       ON              TOTAL
                                                                                    RETAINED           MARKETABLE      STOCKHOLDERS'
                                                 SHARES          AMOUNT             EARNINGS           EQUITY          EQUITY
                                                                                                       SECURITIES
------------------------------------------------------------------------------------------------------------------------------------
<S>                                           <C>            <C>                <C>                <C>                  <C>        
BALANCE,DECEMBER 31, 1993                     4,583,527      $ 25,848,538       $ 55,676,692       $   (62,866)         $81,462,364
------------------------------------------------------------------------------------------------------------------------------------

SHARES EXERCISED UNDER INCENTIVE STOCK
  OPTION PLAN (NOTE 14)                          30,195      $    209,734          $       -          $       -         $   209,734

SHARES ISSUED UNDER THE DIVIDEND
  REINVESTMENT PLAN (NOTE 14)                    12,341           195,155                  -                  -             195,155

DIVIDENDS PAID ($.44 PER SHARE)                       -                 -         (2,028,617)                 -          (2,028,617)

NET REALIZED LOSSES ON MARKETABLE EQUITY
  SECURITIES (NOTE 2)                                 -                 -                  -         (1,123,203)         (1,123,203)

NET INCOME FOR YEAR ENDED DECEMBER 31,
  1994                                                -                 -          4,502,057                  -           4,502,057

------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994                    4,626,063      $ 26,253,427       $ 58,150,132      $  (1,186,069)       $ 83,217,490
------------------------------------------------------------------------------------------------------------------------------------

SHARES EXERCISED UNDER INCENTIVE STOCK
  OPTION PLAN (NOTE 14)                          26,532      $    185,471          $       -          $       -        $    185,471

SHARES ISSUED UNDER THE DIVIDEND
  REINVESTMENT PLAN (NOTE 14)                    10,184           161,540                                     -             161,540

DIVIDENDS PAID ($.44 PER SHARE)                       -                 -         (2,044,056)                 -          (2,044,056)

NET UNREALIZED GAIN ON MARKETABLE EQUITY
  SECURITIES (NOTE 2)                                 -                 -                  -          2,184,267           2,184,267

NET INCOME FOR YEAR ENDED DECEMBER 31,
  1995                                                -                 -          1,897,509                  -           1,897,509

------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995                    4,662,779      $ 26,600,438       $ 58,003,585        $   998,198         $85,602,221
------------------------------------------------------------------------------------------------------------------------------------

SHARES EXERCISED UNDER INCENTIVE STOCK
  OPTION PLAN (NOTE 14)                          67,412       $   703,797           $      -           $      -         $   703,797

SHARES ISSUED UNDER THE DIVIDEND
  REINVESTMENT PLAN (NOTE 14)                    10,723           234,081                  -                  -             234,081

DIVIDENDS PAID ($.44 PER SHARE)                       -                 -         (2,065,718)                 -          (2,065,718)

NET REALIZED LOSSES ON MARKETABLE EQUITY
  SECURITIES (NOTE 2)                                 -                 -                  -         (1,502,398)         (1,502,398)

NET INCOME FOR YEAR ENDED DECEMBER 31,
  1996                                                -                 -          6,904,769                  -           6,904,769

------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996                    4,790,914       $27,538,316        $62,842,636       $   (504,200)       $ 89,876,752
------------------------------------------------------------------------------------------------------------------------------------

</TABLE>


                                                         - 62 -

<PAGE>


<TABLE>
<CAPTION>


                                                CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31                                                  1996                   1995                  1994
================================================================================================================================
<S>                                                                  <C>                   <C>                    <C>         
Cash Flows from Operating Activities:
Net Income                                                           $  6,904,769          $  1,897,509           $  4,502,057
Adjustments to reconcile net income to net cash provided by
   (used in) operating activities:
     Amortization of:
       Mortgage servicing rights                                          214,204                --                    --
       Loan premium                                                       --                     --                    227,329
       Deferred loan fees                                              (2,776,582)           (2,811,971)            (4,093,454)
       Discount amortization on mortgage-backed bonds                     --                     85,456                488,344
       Deposit base premium                                               844,139             1,161,555              1,161,555
     Net (gain) loss on sale of:
       Loans                                                           (1,477,889)             (210,907)               (62,926)
       Real estate held for development or sale                          (723,734)               27,519               (607,270)
     Net (gain) loss on securities activities                            (715,861)              (90,119)               455,785
     Provision for losses on:
       Loans                                                            1,261,000             1,633,500                281,000
       Real estate held for development or sale                           467,839             5,751,878              5,035,000
     Depreciation and amortization                                      2,378,284             2,594,707              2,324,433
     Decrease in income taxes payable                                  (1,212,643)             (625,072)            (3,429,970)
     Net increase (decrease) in accrued interest payable                  668,924              (429,572)               850,897
     Net increase in accrued interest receivable                       (1,025,310)             (784,252)              (824,047)
     Mortgage loans originated as held for sale                       (82,314,959)          (95,486,430)           (43,243,567)
     Proceeds from loans sold                                          89,888,860            85,199,481             64,345,990
     Purchase of trading account securities                               --                     --                (38,632,428)
     Sale of trading account securities                                   --                     --                 41,186,243
     Other, net                                                          (399,814)           (1,413,193)            (3,257,118)
--------------------------------------------------------------------------------------------------------------------------------
     NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES            $  11,981,227        $   (3,499,911)         $  26,707,853
--------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
   Principal payments on loans                                      $ 210,119,026         $ 189,475,781          $ 232,721,340
   Mortgage loans originated as held to maturity                     (244,243,850)         (187,803,991)          (325,621,537)
   Purchase of loan participations                                    (17,271,208)             (480,600)           (15,878,519)
   Purchase of securities held to maturity                                --                (25,439,665)          (112,933,571)
   Maturity and payments of securities held to maturity                   --                  4,407,494              1,950,000
   Purchase of securities available for sale                         (129,018,962)          (44,599,634)           (37,569,321)
   Maturity and payments of securities available for sale              36,469,121            25,868,987             17,362,213
   Sale of securities available for sale                               46,822,850            52,059,260             14,154,170
   Purchase of office property and equipment, net                      (1,869,479)           (2,252,721)            (3,524,626)
   Purchase of FHLB stock and FHLMC preferred stock                    (3,287,100)           (1,658,300)              (624,017)
   Investment in real estate held for development or sale                (906,018)           (7,395,962)            (7,483,809)
   Proceeds from sales of real estate held for development or           6,549,043            10,514,376             11,857,704
   sale
   Proceeds from sale of foreclosed property                            8,455,250            10,027,330              7,420,578
   Other, net                                                              85,498             1,004,526               (743,186)
--------------------------------------------------------------------------------------------------------------------------------
     NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES            $ (88,095,829)        $  23,726,881          $(218,912,581)
--------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
   Net (decrease) increase in deposit accounts                      $  (9,425,223)        $ (39,317,075)         $ 114,098,168
   Net increase (decrease) in checking accounts                         7,111,742            (1,605,570)             1,914,368
   Proceeds from FHLB advances                                        507,300,000           253,200,000            183,000,000
   Repayments of FHLB advances                                       (406,300,000)         (200,700,000)          (183,800,000)
   Securities sold under agreement to repurchase, net                 (15,858,000)          (29,570,000)            64,978,000
   Payments on mortgage-backed bonds                                   (6,462,509)           (1,520,742)            (6,737,652)
   Bank and other borrowings, net                                         --                     --                   (396,236)
   Proceeds from stock options exercised and dividends                    937,878               347,011                404,889
   reinvested
   Dividends paid to shareholders                                      (2,065,718)           (2,044,056)            (2,028,617)


                                     - 63 -

<PAGE>




--------------------------------------------------------------------------------------------------------------------------------
     NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES            $  75,238,170        $  (21,210,432)         $ 171,432,920
--------------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents                           $    (876,432)       $     (983,462)         $ (20,771,808)
Cash and cash equivalents at the beginning of the year                 17,854,046            18,837,508             39,609,316
--------------------------------------------------------------------------------------------------------------------------------
     CASH AND CASH EQUIVALENTS AT DECEMBER 31                       $  16,977,614         $  17,854,046          $  18,837,508
--------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
   Interest paid                                                    $  59,285,957         $  59,964,999          $  43,128,214
   Cash payments of income taxes                                        5,140,133             1,908,100              5,238,392
--------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of noncash investing and
  financing activities:
   Loans exchanged for mortgage-backed securities                   $    --             $      --                $   8,434,201
   Additions to real estate acquired through foreclosure                8,477,195             6,171,463             11,905,163
   Transfer securities from trading to held to maturity                  --                    --                    4,875,000
   portfolio
   Transfer securities from trading to available for sale                --                    --                   10,014,089
   portfolio
   Transfer securities from held to maturity to available for            --                 223,766,211                --
   sale portfolio
   Unrealized losses (gains) on available for sale securities           2,415,749            (3,762,095)             2,175,077
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying Notes to Consolidated Financial Statements



                                     - 64 -

<PAGE>



                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

               CALIFORNIA FINANCIAL HOLDING COMPANY AND SUBSIDIARY
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994

                               NOTE 1: SUMMARY OF
                        SIGNIFICANT ACCOUNTING POLICIES

        The following describes the significant accounting policies, not
disclosed elsewhere in the notes to the consolidated financial statements, which
California Financial Holding Company and Subsidiary follow in preparing and
presenting their consolidated financial statements.

Basis of Consolidation

         The accompanying consolidated financial statements include the accounts
of the Company and its subsidiary. The Company is a financial services holding
company engaged primarily in the savings and loan business through Stockton
Savings Bank. The Bank, organized in 1887, converted in 1990 from a
state-chartered to a federally-chartered institution which provides financial
services through traditional banking activities. In addition, the Bank has other
subsidiaries which are engaged primarily in real estate acquisition, development
and financing activities. All significant intercompany balances and transactions
have been eliminated in consolidation. In preparing the consolidated financial
statements, management is required to make estimates and assumptions which could
affect the reported amounts of assets and liabilities as of the date of the
consolidated statements of financial condition and income and expense for the
period. Actual results could differ from those estimates. Certain
reclassifications have been made to prior years consolidated financial
statements to conform to the 1996 presentation.

Cash and Cash Equivalents

         The Company considers all highly liquid assets purchased with
maturities of three months or less to be cash equivalents. These include
interest-bearing deposits at other financial institutions, other short-term
investments and securities purchased under agreements to resell.

Investment and Mortgage-Backed Securities

         In accordance with regulation, the Bank maintains an amount at least
equal to 5% of average daily withdrawable savings accounts plus short-term
borrowings in U.S. Government and other securities that are readily convertible
to cash. The Bank classifies debt and equity securities into one of three
categories: held to maturity, available for sale or trading. Securities held to
maturity are limited to debt securities that the holder has the positive intent
and ability to hold to maturity, and are reported at amortized cost.


                                     - 65 -

<PAGE>



Amortization is computed using a method which approximates the interest method.
Securities held for trading are limited to debt and equity securities that are
held principally to be sold in the near term, and are reported at fair value
with unrealized gains and losses reflected in earnings. Securities held as
available for sale consist of all other securities and are reported at fair
value with unrealized gains and losses reflected as a separate component of
stockholders equity. Realized gains and losses for securities classified as
available for sale are included in earnings, and are derived using the specific
identification method for determining the cost of securities sold.

         Interest and dividends on investment securities include interest earned
on investment securities, amortization of related premiums and discounts and
dividends earned on stock of the Federal Home Loan Bank of San Francisco.

Loans Held for Sale

         Loans held for sale are carried at the lower of cost or estimated
market value, determined on an aggregate basis. Market values are calculated
based on direct market quotes for sales of similar loans. The Bank protects the
value of its loan origination pipeline and loans held for sale portfolio against
a potential rise in interest rates by utilizing forward commitments to sell
loans and mortgage-backed securities. These forward sales are entered into at
the time a rate is committed to a potential borrower.

Loans Receivable

         Loans are recorded at cost, net of discounts or premiums, unearned fees
and deferred fees. Discounts and premiums on purchased loans are amortized using
the interest method over the remaining contractual life of the portfolio
adjusted for anticipated prepayments. The Bank measures an impaired loan based
upon the present value of future cash flows discounted at the loans effective
rate, the loans observable market price, or fair value of the collateral if the
loan is collateral dependent. Generally, the factors utilized to determine
impairment include delinquency, borrower financial weaknesses and collateral
value deterioration. Interest is normally accrued to income as earned. All loans
defined as impaired and all loans 90 days or more delinquent, record interest
income on a cash basis. Since substantially all of the Bank's loans are
collateral-dependent, losses are charged-off at the point of foreclosure and the
asset is written down to fair market value. The Bank does not apply the above
standard of measurement to large groups of homogeneous loans under $500,000 that
are collectively evaluated for impairment, consisting of primarily residential
loans.

Mortgage Servicing Rights

         On January 1, 1996, the Bank implemented Statement of Financial
Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" (SFAS
122). SFAS 122 requires that the rights to service mortgage loans for others be


                                     - 66 -

<PAGE>



recognized as a separate asset, however those servicing rights are acquired. The
total cost of originating or purchasing mortgage loans is allocated between the
loan and the servicing rights based upon their relative fair values. The
statement also requires the assessment of all capitalized mortgage servicing
rights for impairment to be based on the current fair value of those rights.

Real Estate Held for Development or Sale

         Real estate held for development or sale consists of real estate
investments and foreclosed properties. Real estate investments are carried at
the lower of cost or net realizable value. Interest and carrying charges related
to certain properties held for development are capitalized throughout the
construction and development period using the Bank's cost of funds.

         Real estate acquired through settlement of loans is recorded at fair
value at the date of foreclosure and at the lower of carrying value or market
value less estimated selling costs thereafter.

         Revenue recognition on the disposition of real estate is dependent on
the transaction meeting certain criteria relating to the nature of the property
sold and terms of sale.

Gain or Loss on Sale of Mortgage Loans and Loan Participations

         Gains or losses resulting from sales of mortgage loans and loan
participations are recorded at the settlement of sale. A cash gain or loss is
recognized to the extent that the sales proceeds of the mortgage loans or
participations sold exceed or are less than the book value, net of unearned
discount or premium, at the time of sale.

Allowance for Losses

         The Bank regularly reviews assets to determine that loss allowances are
maintained at adequate levels. In determining the level to be maintained,
management evaluates many factors including prevailing and anticipated economic
conditions, industry experience, historical loss experience, the borrower's
ability to repay and repayment performance and estimated collateral values.

         Management uses the best information available for estimates of value.
Future adjustments to the allowance may be necessary if economic conditions
differ substantially from the assumptions and information used in making the
evaluation. When it is anticipated that real estate will be held for an extended
period of time, holding costs, including a discount factor to give effect to the
time value of money, are considered in providing the valuation allowance.
Regulatory examiners may require the Bank to recognize additions to the
allowances based upon their judgements at the time of their examination.


                                     - 67 -

<PAGE>



Interest Rate Exchange Contracts

         Interest rate exchange contracts (swaps and caps) are used by the Bank
in the management of its interest rate risk. Swaps are agreements in which the
Bank and another party agree to exchange interest payments on notional principal
amounts. Caps are agreements in which the Bank pays a fixed option premium to an
issuing party, and in return receives a specified return on a notional principal
amount should interest rates exceed a specified minimum. The objective of these
financial instruments is to match estimated repricing periods of
interest-sensitive assets and liabilities in order to reduce interest rate
exposure.

         The effect on interest expense from swaps is recognized currently over
the terms of the agreements and is shown as an adjustment to interest on the
hedged liability. The option premium paid on caps is included in other assets in
the statement of financial condition and is amortized to interest expense on a
straight-line basis over the term of the agreement. Amounts receivable, if any,
are recognized as a reduction of interest expense. These instruments are used
only to hedge asset and liability portfolios, and are not used for speculative
purposes.

Deposit Base Premium

         The Company's branch acquisitions have been accounted for under the
purchase method of accounting in accordance with applicable accounting
requirements. Assets acquired and liabilities assumed were recorded at their
fair values at the date of acquisition. The excess of cost over fair value of
the net assets acquired was classified as deposit base premium based upon a core
deposit study and is being amortized over eight years on a method that
approximates deposit runoff. At December 31, 1996, $425,000 of deposit base
premium had a remaining life of four years.

Loan Origination Fees

         Loan origination fees, offset by certain direct costs of origination,
are recognized as an adjustment to yield over the life of the loan using the
effective interest method, which results in a constant return.

Federal Home Loan Bank Stock

         The Bank is a member of the Federal Home Loan Bank System and as such
is required to own capital stock in an amount specified by regulation, generally
1% of net outstanding residential loans receivable. At December 31, 1996 and
1995, the Bank owned 136,823 and 103,952 shares, respectively, of $100 par value
capital stock of the Federal Home Loan Bank of San Francisco.

Office Property and Equipment

         Depreciation of office property and equipment is computed on a
straight-line basis over the estimated useful lives of the various classes of

                                     - 68 -

<PAGE>



assets. Leasehold improvements are amortized on a straight-line basis over the
remaining term of the lease or the estimated useful life of the asset, whichever
is less. Maintenance and repairs are charged to expense when incurred, and
improvements are capitalized.

Fair Value of Financial Instruments

         The fair value of financial instruments is disclosed throughout the
various notes herein as of December 31, 1996 and 1995. Market quotes for
investments and borrowings were obtained from representative over-the-counter
quotations based on transactions from major market publications. Fair value of
loans and savings deposits was calculated by estimating the net present value of
future cash flows using current market rates of interest. Prepayment assumptions
were obtained from standard industry publications.

Taxes on Income

         The Company accounts for income taxes using the asset and liability
method. Under this method, annual income tax expense is matched with pre-tax
accounting income by providing deferred taxes at current tax rates for timing
differences between the determination of net income for financial reporting and
tax purposes. The objective of the asset and liability method is to establish
deferred tax assets and liabilities for the temporary differences between the
financial reporting bases and the tax bases of the Company's assets and
liabilities at enacted tax rates expected to be in effect when such amounts are
realized or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

Income Per Share

         Income per share is calculated by dividing net income by the weighted
average number of common shares outstanding during the year. Common stock
equivalents do not have a material effect on the income per share calculation.

Stock Option Plan

         Prior to January 1, 1996, the Company accounted for its stock option
plan in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation", which permits entities to recognize
as expense over the vesting period the fair value of all stock-based awards on
the date of grant. Alternatively, SFAS No. 123 also allows entities to continue
to apply the provisions of APB Opinion No. 25 and provide pro forma net income
and pro forma earnings per share disclosures for employee stock option grants
made in 1995 and future years as if the fair-value-based method defined in SFAS


                                     - 69 -

<PAGE>



No. 123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions
of SFAS No. 123.

                          NOTE 2: CASH AND SECURITIES

Cash and Interest-Bearing Deposits

         The Banks short-term liquid investments consist primarily of deposits
with the Federal Home Loan Bank and mutual fund investments. The mutual fund
investments consist of overnight and short-term maturity type funds. The Bank's
investment in overnight mutual funds totaled $1,144,836 and $4,423,776 at
December 31, 1996 and 1995, respectively. These funds yielded 7.07% and 5.86%,
respectively, and are backed by U.S. Government securities bought under
repurchase agreements and Federal Funds.

Investment Securities

         The Bank's investment portfolio is comprised primarily of U.S.
Government and agency securities and collateralized mortgage obligations (CMO's)
which are backed by mortgage-backed securities issued by agencies. The amortized
cost and estimated market values of investment securities are as follows at
December 31:

<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------------------------------
                                                                         GROSS               GROSS              ESTIMATED
                                                   AMORTIZED          UNREALIZED          UNREALIZED             MARKET
                                                     COST                GAINS              LOSSES                VALUE
--------------------------------------------------------------------------------------------------------------------------
<S>                                           <C>                  <C>                 <C>                 <C>         
AVAILABLE FOR SALE 1996:

U.S. GOVERNMENT & AGENCY SECURITIES           $ 43,556,608         $    8,528          $   278,865         $ 43,286,271

CMO'S                                          158,718,104            683,831            1,638,785          157,763,150

OTHER SECURITIES                                    10,000                 --                  280                9,720

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

TOTAL AVAILABLE FOR SALE                      $202,284,712         $  692,359          $ 1,917,930         $201,059,141

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

AVAILABLE FOR SALE 1995:

U.S. GOVERNMENT & AGENCY SECURITIES           $ 47,808,939         $  327,903          $   117,333         $ 48,019,509

CMO'S                                           95,329,548            494,824              774,257           95,050,115

OTHER SECURITIES                                    10,000                 --                  280                9,720

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

TOTAL AVAILABLE FOR SALE                      $143,148,487         $  822,727          $   891,870         $143,079,344

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

</TABLE>


                                     - 70 -

<PAGE>



         The market value of these investment securities is estimated based on
prices published in financial newspapers or bids from securities dealers.

         The Bank held $7.5 million in structured notes issued by government
agencies at December 31, 1996 and 1995, and are included with the U.S.
Government and agency issues.

         The maturities of Bank investments as of December 31, 1996 are as
follows:


----------------------------------------------------------------------
                              ESTIMATED
                              AMORTIZED          MARKET      YIELD BY
                                COST             VALUE       MATURITY
----------------------------------------------------------------------

AVAILABLE FOR SALE:

WITHIN 1 YEAR            $ 10,579,273       $ 10,521,598       5.41%

1 - 5 YEARS                37,125,633         36,925,969       6.16%

6 - 10 YEARS                3,045,908          3,017,631       6.31%

OVER TEN YEARS            151,533,898        150,593,943       6.87%

----------------------------------------------------------------------
                         $202,284,712       $201,059,141       6.66%
----------------------------------------------------------------------


         Issuers may have the right to call or prepay obligations with or
without call or prepayment penalties. This right may cause actual maturities to
differ from contractual maturities summarized above.

         The Bank was permitted to make a one-time transfer of investment and
mortgage-backed securities classified as held to maturity into available for
sale. During 1995, the Bank made a decision to restructure its balance sheet by
selling mortgage-backed securities from the held to maturity portfolio. As a
result, the Bank's entire held to maturity portfolio consisting of securities
with an amortized cost of $69,381,748 and a market value of $68,425,509, was
transferred to the available for sale portfolio. In accordance with the
provisions of SFAS 115, available for sale securities are recorded at market
value with the offsetting unrealized gain or loss netted against shareholders'
equity. At December 31, 1996, the Bank recorded a decrease to shareholders'
equity of $1,502,398 as a result of net unrealized losses on securities, net of
tax effect. This compares to an increase to shareholders' equity of $2,184,267
as a result of net unrealized gains on securities, net of tax effect at December
31, 1995.

         The Bank sold $20,504,000 of securities available for sale during 1996,
recognizing gross gains of $91,199 and gross losses of $84,972. During 1995, the
Bank sold $6,987,813 of securities available for sale, recognizing gross gains
of $4,989 and gross losses of $40,916. This compares to sales of $14,154,170
during 1994, recognizing gross losses of $66,374.


                                     - 71 -

<PAGE>



Trading Account Securities

         During 1994, trading account operations were discontinued by the Bank,
and the remaining securities were transferred out of the trading portfolio at
market value. The Bank had no balance in the trading portfolio as of December
31, 1996 and 1995. In 1994, the Bank transferred $10,014,089 of trading
securities to the available for sale portfolio after recognizing gross losses of
$309,563, and $4,875,000 to the held to maturity portfolio after recognizing
gross losses of $126,563. The Bank sold $41,186,243 of U.S. Government and
agency securities from the trading portfolio in 1994, realizing gross gains of
$38,285 and gross losses of $226,708.

                       NOTE 3: MORTGAGE-BACKED SECURITIES

         Amortized cost and estimated market values of mortgage-backed
securities at December 31 are as follows:

<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------------------------------
                                                                   GROSS                GROSS              ESTIMATED
                                             AMORTIZED           UNREALIZED          UNREALIZED              MARKET
                                               COST                GAINS               LOSSES                VALUE
---------------------------------------------------------------------------------------------------------------------
<S>                                      <C>                 <C>                  <C>                 <C>         
1996
AVAILABLE FOR SALE:

FHLMC MORTGAGE-BACKED SECURITIES         $ 54,074,475        $  501,146           $   279,208         $ 54,296,413

FNMA MORTGAGE-BACKED SECURITIES            28,438,999           121,354                45,481           28,514,872

GNMA MORTGAGE-BACKED SECURITIES            13,814,608           132,420                    --           13,947,028

SBA LOAN POOLS                              4,482,403            19,099                21,054            4,480,448

FHA TITLE 1 SECURITIES                      1,995,752                --               227,245            1,768,507

---------------------------------------------------------------------------------------------------------------------
TOTAL AVAILABLE FOR SALE                 $102,806,237        $  774,019           $   572,988         $103,007,268
---------------------------------------------------------------------------------------------------------------------
1995
AVAILABLE FOR SALE:

FHLMC MORTGAGE-BACKED SECURITIES         $ 82,793,531       $2,007,281        $    57,592        $ 84,743,220

FNMA MORTGAGE-BACKED SECURITIES            30,169,481          505,419                 --          30,674,900

SBA LOAN POOLS                              1,065,462               --                 --           1,065,462

FHA TITLE 1 SECURITIES                      2,580,751               --            798,947           1,781,804

---------------------------------------------------------------------------------------------------------------
TOTAL AVAILABLE FOR SALE                 $116,609,225       $2,512,700        $   856,539        $118,265,386
---------------------------------------------------------------------------------------------------------------
</TABLE>



                                     - 72 -
<PAGE>



         During 1996, sales of mortgage-backed securities totaled $26,318,850,
recognizing gross gains of $572,198 and gross losses of $20,866. This compares
to sales of $45,071,447 in 1995, recognizing gross gains of $561,867 and gross
losses of $435,821. No sales of mortgage-backed securities occurred in 1994.

         The following mortgage-backed securities were pledged as collateral for
borrowings at December 31:

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

                                                          1996            1995
--------------------------------------------------------------------------------

COLLATERALIZED MORTGAGE OBLIGATION (NOTE 9) SERIES B    $   -        $ 6,477,805
--------------------------------------------------------------------------------


                         NOTE 4: LOANS RECEIVABLE, NET

         Loans receivable, net by type of loan, at December 31, are summarized
as follows:

------------------------------------------------------------------------------
                                                  1996               1995
------------------------------------------------------------------------------

RESIDENTIAL MORTGAGE LOANS:
  EXISTING STRUCTURES:

         1-4 UNIT DWELLINGS                   $ 748,324,776     $ 745,793,031

         5 OR MORE UNIT DWELLINGS                45,326,425        38,129,869

  CONSTRUCTION:

         1-4 UNIT DWELLINGS                      55,179,029        57,516,807

         5 OR MORE UNIT DWELLINGS                    45,256         1,278,289

------------------------------------------------------------------------------
  TOTAL RESIDENTIAL                           $ 848,875,486     $ 842,717,996
------------------------------------------------------------------------------
  COMMERCIAL LOANS                            $  68,322,484     $  55,517,994
------------------------------------------------------------------------------
  LAND LOANS                                  $  42,145,792     $  34,226,637

  OTHER LOANS

         EDUCATIONAL LOANS                    $       1,275     $      28,850

         SAVINGS LOANS                            2,057,822         2,196,837

         AUTO LOANS                               7,436,599                --

         CREDIT RESERVE LOANS AND OTHER           3,074,138           476,876
------------------------------------------------------------------------------
  TOTAL OTHER LOANS                           $  12,569,834     $   2,702,563
------------------------------------------------------------------------------
  TOTAL LOANS                                 $ 971,913,596     $ 935,165,190


                                     - 73 -

<PAGE>





------------------------------------------------------------------------------
  LESS:

         UNAMORTIZED LOAN FEES                $   5,054,108     $   5,628,452

         DISCOUNTS AND PREMIUMS, NET                174,071           292,631

         ALLOWANCE FOR LOAN LOSSES                7,276,710         8,173,807

------------------------------------------------------------------------------
         LOANS RECEIVABLE, NET                $ 959,408,707     $ 921,070,300
------------------------------------------------------------------------------
  WEIGHTED AVERAGE INTEREST RATE                       7.91%             7.92%
------------------------------------------------------------------------------



         At December 31, 1996 and 1995, the above table includes $7,057,252 and
$13,153,264 of loans held for sale at book value, which were less than market.

         The estimated fair value of loans, as of December 31, is as follows:

-----------------------------------------------------------------------
                                   1996                      1995
-----------------------------------------------------------------------
  RESIDENTIAL                $ 843,395,000             $ 849,085,000

  COMMERCIAL                    67,125,000                51,059,000

  LAND                          41,383,000                32,733,000

  OTHER LOANS                   12,570,000                 2,703,000
-----------------------------------------------------------------------
  TOTAL                      $ 964,473,000             $ 935,580,000
-----------------------------------------------------------------------

         Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as residential,
commercial, land and other loans. Each loan is further segmented into account
types with similar characteristics.

         The fair value of loans is calculated by discounting scheduled cash
flows through the estimated maturity using estimated discount and prepayment
rates. Discount rates were based on published information with adjustments made,
as required, by an estimate of the differences among products. Estimates of
prepayment speeds were obtained from published information. For loans considered
to have a low propensity to prepay and/or no historical prepayment data
available, a conservative estimate was used. Fair value of nonperforming loans
was based on estimated cash flows. Assumptions regarding credit risk, cash flows
and discount rates were judgementally determined using available market
information and specific borrower information.

         Loans in process, primarily related to construction loans, committed
but unfunded, amounted to $31,549,000 and $34,810,000 at December 31, 1996 and
1995, respectively.


                                     - 74 -

<PAGE>



         The Bank serviced loans and participating interests in loans owned by
investors in the amount of $573,896,980 and $548,462,487 as of December 31, 1996
and 1995, respectively.

         In May 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 122 (Statement 122), "Accounting
for Mortgage Servicing Rights", an amendment of FASB Statement No. 65. Statement
122 requires a mortgage banking enterprise to recognize as separate assets, the
rights to service mortgage loans for others, regardless of how those servicing
rights are acquired. This statement also requires that these capitalized
mortgage servicing rights be assessed for impairment based on the fair value of
those rights. In assessing impairment, the mortgage servicing rights capitalized
after adoption of Statement 122 are to be stratified based on one or more of the
predominant risk characteristics of the underlying loans. Impairment is to be
recognized through a valuation allowance for each impaired stratum.

         Mortgage servicing rights are recorded at the lower of cost or present
value of the estimated net future servicing income. The recorded cost is
amortized in proportion to, and over the period of, estimated future servicing
income adjusted to reflect the effect of prepayments received and anticipated.
The carrying value of mortgage servicing rights is stratified into pools based
on loan type and note rate. The fair value of such pools is evaluated in
relation to the estimated future discounted net servicing income over the
estimated remaining loan lives.

         The following is a summary of activity of mortgage servicing rights
originated for 1996:

          ------------------------------------------------------
          Balance December 31, 1995               $     --

          Additions                                1,043,825

          Amortization                               (52,802)

          Estimated Reserve                         (161,402)
          ------------------------------------------------------
          Balance Decvember 31, 1996              $  829,621

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

         The fair value of capitalized mortgage servicing rights at December 31,
1996 was approximately $830,000.

         Certain of the Bank's real estate loans are pledged as collateral for
borrowings as set forth in Note 8.

         At December 31, 1996, 1995 and 1994, there were 88, 79 and 82 mortgage
loans, respectively, with unpaid principal balances of approximately $8,144,000,
$8,010,000 and $7,466,000, respectively, which were past due for three months or
more or were in the process of foreclosure. The interest that would have been
accrued on these loans, but was not, amounted to $377,241, $262,975 and $370,911
for 1996, 1995 and 1994, respectively.

         Impaired loans, as defined in Note 1, include troubled debt
restructuring and loans on which there is a probability that the Bank will not
be able to collect all amounts due. The following summarizes the balances
relating to impaired loans for 1996 and 1995:



                                     - 75 -

<PAGE>





----------------------------------------------------------------------------
As of December 31,                           1996               1995
----------------------------------------------------------------------------
Outstanding Loan Balances                $ 2,443,412        $ 10,270,248

Loans with Valuation Allowances            1,755,264           5,218,830

Valuation Allowances                         756,000           1,190,000

Commitments to Advance Funds                  37,634             666,893

Average Balance for Year                   7,634,498           9,053,868
----------------------------------------------------------------------------

         The Bank records interest income on loans classified as impaired or
past due for three or more months on a cash basis.

         Interest income recorded on impaired loans at year-end was $152,084,
$387,681 and $424,294 for 1996, 1995 and 1994, respectively.

         Activity in the allowance for loan losses is as follows:

------------------------------------------------------------------
Balance at December 31, 1993                    $  9,965,000

  Provision for Losses                               281,000

  Charge-Offs                                     (2,520,500)
------------------------------------------------------------------
Balance at December 31, 1994                    $  7,725,500

  Provision for Losses                             1,633,500

  Charge-Offs                                     (1,185,193)
------------------------------------------------------------------
Balance at December 31, 1995                    $  8,173,807

  Provision for Losses                             1,261,000

  Charge-Offs                                     (2,158,097)
------------------------------------------------------------------
Balance at December 31, 1996                    $  7,276,710
------------------------------------------------------------------

         The allowance for loan losses relates entirely to loans secured by real
estate. Consumer loans represent a minor portion of the Bank's total portfolio.
Losses determined in this portfolio are written off directly against the asset.

         All mortgage loans are secured by real estate in California, generally
located within the Bank's primary lending territory (i.e., Central Northern
California). The Bank's credit risk is therefore related to the economic
condition of the Central Valley. Loans are made on the basis of a secure
repayment source; however, collateral is generally a secondary source for loan
qualification. On occasion, loans have been purchased that are secured by
single-family residences in Southern California and Northern California's Bay
Area.


                                     - 76 -

<PAGE>



                              NOTE 5: REAL ESTATE
                          HELD FOR DEVELOPMENT OR SALE

         Real estate development and sale activities are conducted primarily
through Stockton Service Corporation, a wholly-owned service corporation of the
Bank. Capsulized financial information for Stockton Service Corporation follows:

<TABLE>
<CAPTION>

Statements of Financial Condition
------------------------------------------------------------------------------------------------
At December 31                                                  1996                     1995
------------------------------------------------------------------------------------------------
<S>                                                        <C>                      <C>        
Assets:

   Cash                                                    $   150,896              $   413,057

   Real estate held for development at cost:

     Partially developed and completed projects              1,134,352                6,542,931

     Land held for development/sale                            544,732                2,547,910

     Capitalized interest                                       25,144                  518,483

     Less:  Loss reserves                                     (715,315)              (3,106,250)

-------------------------------------------------------------------------------------------------
     Total real estate held                                $   988,913             $  6,503,074

   Other assets                                              2,537,728                3,174,030
-------------------------------------------------------------------------------------------------
   Total assets                                           $  3,677,537             $ 10,090,161
-------------------------------------------------------------------------------------------------
Liabilities:

   Notes payable - Stockton Savings                       $  3,600,000             $  8,900,000

   Notes Payable - others                                            0                        0

   Other liabilities                                         1,937,229                2,823,194

Stockholders' equity                                        (1,859,692)              (1,633,033)
-------------------------------------------------------------------------------------------------
        Total liabilities and stockholders' equity        $  3,677,537             $ 10,090,161
-------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>

Statements of Operations
-----------------------------------------------------------------------------------------------------------------------
Years ended December 31                                         1996                1995                 1994
-----------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>                <C>                    <C>        
Income:
   Gain (loss) on sale of real estate held
     for development, net                                       $   166,703        $    (27,985)          $   472,766
   Provision for losses                                             (37,839)         (4,121,878)           (2,650,000)
   Other income                                                      88,522              54,531                 7,959
-----------------------------------------------------------------------------------------------------------------------
Total income (loss)                                             $   217,386        $ (4,095,332)          $(2,169,276)
-----------------------------------------------------------------------------------------------------------------------
Expenses:
   Interest expense                                             $   421,135         $   977,921           $ 1,250,225
   Less:  Interest capitalized                                      (10,487)           (162,292)             (532,566)


                                                         - 77 -

<PAGE>




   General and administrative expense                               185,374             280,910               377,312
-----------------------------------------------------------------------------------------------------------------------
Total expenses                                                  $   596,022         $ 1,096,539           $ 1,094,971
-----------------------------------------------------------------------------------------------------------------------
Loss before tax                                                 $  (378,636)        $(5,191,871)          $(3,264,246)
-----------------------------------------------------------------------------------------------------------------------
Income tax benefit                                                 (151,977)         (2,083,913)           (1,310,203)
-----------------------------------------------------------------------------------------------------------------------
Net loss                                                        $  (226,659)        $(3,107,958)          $(1,954,043)
-----------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
Statements of Cash Flows
-----------------------------------------------------------------------------------------------------------------------
Years ended December 31                                           1996                1995                 1994
-----------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>                <C>                  <C>           
Cash Flows From Operations:
   Net loss                                                     $  (226,659)       $ (3,107,958)        $  (1,954,043)
   Provision for losses                                              37,839           4,121,878             2,650,000
   (Gain) loss on sale of real estate                              (166,703)             27,985              (472,766)
   Increase (decrease) in income taxes payable                      170,119              (6,611)             (173,744)
   Increase (decrease) in net accrued interest                       29,871             (21,156)                  632
   Other, net                                                      (454,653)                891              (296,178)
-----------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operations                       $  (610,186)       $  1,015,029         $    (246,099)
-----------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
   Investments in real estate                                   $  (906,018)       $ (6,476,575)        $  (8,852,726)
   Proceeds from sales of real estate                             6,549,043          10,514,376            11,857,704
   Decrease in notes receivable, net                                  5,000          --                       378,265
-----------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities                       $ 5,648,025         $ 4,037,801           $ 3,383,243
-----------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
   Notes payable, net                                           $(5,300,000)        $(4,900,000)          $(3,135,802)
-----------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities                           $(5,300,000)        $(4,900,000)          $(3,135,802)
-----------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash                                 $  (262,161)        $   152,830           $     1,342
Cash at the beginning of the year                                   413,057             260,227               258,885
-----------------------------------------------------------------------------------------------------------------------
Cash at the end of the year                                     $   150,896         $   413,057           $   260,227
-----------------------------------------------------------------------------------------------------------------------
</TABLE>


                                     - 78 -

<PAGE>



         Activity in the allowance for losses is as follows:

-----------------------------------------------------------
Balance at December 31, 1993             $  2,089,858
Provision for losses                        2,650,00
Charge-offs                                (1,031,583)
-----------------------------------------------------------
Balance at December 31, 1994             $  3,708,275
Provision for losses                        4,121,878
Charge-offs                                (4,723,903)
-----------------------------------------------------------
Balance at December 31, 1995             $  3,106,250
Provision for losses                          37,839
Charge-offs                                (2,428,774)
-----------------------------------------------------------
Balance at December 31, 1996              $   715,315
-----------------------------------------------------------


         Also included in real estate held for development or sale is foreclosed
real estate held by the Bank at December 31 as follows:

-------------------------------------------------------------------------
                                              1996              1995
-------------------------------------------------------------------------
Gross foreclosed real estate               $  7,589,236      $  9,829,616
Allowance for losses                         (1,595,173)       (3,852,507)
-------------------------------------------------------------------------
Net balance of foreclosed real estate      $  5,994,063      $  5,977,109
-------------------------------------------------------------------------

   Activity in the allowance for losses on foreclosed property is as follows:

----------------------------------------------------------------------
Balance at December 31, 1993                             $  1,674,655
Provision for losses                                        2,385,000
Charge-offs                                                  (917,294)
----------------------------------------------------------------------
Balance at December 31, 1994                             $  3,142,361
Provision for losses                                        1,630,000
Charge-offs                                                  (919,854)
----------------------------------------------------------------------
Balance at December 31, 1995                             $  3,852,507
Provision for losses                                          430,000
Charge-offs                                                (2,687,334)
----------------------------------------------------------------------
Balance at December 31, 1996                             $  1,595,173
----------------------------------------------------------------------


                            NOTE 6: ACCRUED INTEREST
                            AND DIVIDENDS RECEIVABLE

         Accrued interest and dividends receivable at December 31 are summarized
as follows:
--------------------------------------------------------------------------------
1996 1995
--------------------------------------------------------------------------------
Loans receivable $ 4,758,004 $ 4,076,669 Mortgage-backed securities 663,373
775,906 Investment securities 1,471,778 1,046,078 Other 224,490 193,682
--------------------------------------------------------------------------------
Interest and dividends receivable $ 7,117,645 $ 6,092,335
--------------------------------------------------------------------------------

                                     - 79 -

<PAGE>


                              NOTE 7: SAVINGS AND
                               CHECKING ACCOUNTS

         Savings and checking accounts by type and rate as of December 31 are
summarized as follows:

-------------------------------------------------------------------------------
                                                   1996              1995
-------------------------------------------------------------------------------
Passbook accounts at 2.20%                    $  47,059,022     $  47,423,181
NOW accounts at 1.05% and 1.10%                 115,723,409       108,611,667
Money market deposits at 2.50% and 2.60%         56,748,515        66,066,290
-------------------------------------------------------------------------------
                                              $ 219,530,946     $ 222,101,138
-------------------------------------------------------------------------------
Weighted average interest rate                         1.81%             1.96%
-------------------------------------------------------------------------------
Certificate accounts:
         2.00% to 2.99%                        $    353,690      $    509,137
         3.00% to 3.99%                           5,404,775         9,818,635
         4.00% to 4.99%                         187,906,227       132,273,975
         5.00% to 5.99%                         500,505,182       372,309,964
         6.00% to 6.99%                          37,582,507       213,362,130
         7.00% to 7.99%                           6,393,620         9,360,344
         8.00% to 8.99%                             157,347           271,416
         9.00% to 9.99%                                  --           141,036
-------------------------------------------------------------------------------
                                              $ 738,303,348     $ 738,046,637
-------------------------------------------------------------------------------
Weighted average interest rate                         5.32%             5.59%
-------------------------------------------------------------------------------
Total Savings                                 $ 957,834,294     $ 960,147,775
-------------------------------------------------------------------------------
Weighted average interest rate                         4.52%             4.75%
         (as of dates indicated above)

         The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, savings and NOW accounts, and money market
and checking accounts, is equal to the amount payable on demand as of December
31, 1996 and 1995. The fair value of certificates of deposit is based on the
discounted value of contractual cash flows. The discount rate is estimated using
the rates currently offered for deposits of similar remaining maturities. The
estimated fair value of savings and checking accounts as of December 31, 1996
and 1995 was $956,571,000 and $961,625,000, respectively.


                                     - 80 -

<PAGE>



         Certificate accounts with balances of $100,000 or more totaled
$165,551,165 and $171,026,736 at December 31, 1996 and 1995, respectively.
Broker-acquired deposits were $4,312,943 at December 31, 1995.

         At December 31, 1996, certificate maturities were as follows:

----------------------------------------------------------------
1997                                              $605,475,565
1998                                                97,815,731
1999                                                17,118,780
2000                                                    14,387
2001                                                         -
2002 and thereafter                                 17,878,885
----------------------------------------------------------------
                                                  $738,303,348
----------------------------------------------------------------


         Interest on savings accounts for the years ended December 31 is
summarized as follows:

<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------------
                                                       1996                  1995                   1994
-----------------------------------------------------------------------------------------------------------------
<S>                                                     <C>                   <C>                    <C>        
Passbook Accounts                                       $ 1,033,619           $ 1,147,524            $ 1,237,088
NOW Accounts (including money market                      1,254,592             1,445,350              1,628,824
   NOW accounts)
Money Market and Certificate Accounts                    41,117,694            44,256,997             32,265,255
Interest Forfeitures                                       (174,275)             (204,825)              (152,166)
Hedging Effect of Interest Rate Swaps
   (Note 18)                                                489,977             1,384,833              3,241,210
------------------------------------------------------------------------------------------------------------------
Net Interest Expense                                    $43,721,607           $48,029,879            $38,220,211
------------------------------------------------------------------------------------------------------------------
</TABLE>

         Interest credited to customer deposits amounted to $35,507,193,
$39,994,929 and $30,584,198 in 1996, 1995 and 1994, respectively.




                                                         - 81 -

<PAGE>



                       NOTE 8: ADVANCES FROM THE FEDERAL
                        HOME LOAN BANK OF SAN FRANCISCO

         Each Federal Home Loan Bank (FHLB) is authorized to make advances to
its member associations, subject to such regulations and limitations as the FHLB
may prescribe. As of December 31, 1996 and 1995, the Bank had pledged its stock
in the Federal Home Loan Bank of San Francisco and real estate loans with
outstanding principal balances of approximately $278,437,020 and $318,461,647,
respectively, to secure current as well as future borrowings. In addition,
investment securities with a market value of $132,411,847 were pledged as
collateral for FHLB advances as of December 31, 1996. No securities were pledged
at December 31, 1995.

         The maturity schedules for advances outstanding as of December 31, 1996
and 1995 is shown in the following table:

-------------------------------------------------------------------------------
                                                    PRINCIPAL AMOUNT
-------------------------------------------------------------------------------
Maturity             Interest Rates            1996                1995
-------------------------------------------------------------------------------
1996                      5.44%            $ -                  $ 62,500,000
1997                  5.64 - 6.04%           100,500,000          10,000,000
1998                  5.91 - 6.00%            85,500,000          60,000,000
1999                  6.28 - 6.94%            50,500,000          20,000,000
2000                      7.24%               10,000,000          10,000,000
Thereafter                6.53%               17,000,000                -
-------------------------------------------------------------------------------
                                            $263,500,000        $162,500,000
-------------------------------------------------------------------------------
Weighted Average Interest Rate
   (as of dates indicated above)                    5.97%               5.98%
-------------------------------------------------------------------------------

         The fair value of FHLB advances was based on the discounted cash flows.
The discount rate is estimated using the rates currently offered for advances of
similar remaining maturities. The estimated market value of advances from the
Federal Home Loan Bank at December 31, 1996 and 1995 was $264,014,000 and
$163,607,000, respectively.

         The interest on advances is payable monthly. The Bank paid interest on
advances of $13,398,635, $7,145,216 and $5,811,011 for the years ended December
31, 1996, 1995 and 1994, respectively.


                                     - 82 -

<PAGE>



                             NOTE 9: COLLATERALIZED
                              MORTGAGE OBLIGATIONS

         On December 16, 1987, Stockton Securities Corporation issued Series B
Collateralized Mortgage Obligations (the "Bonds"), totaling $56,700,000 (net of
discounts, $50,959,288) pursuant to an indenture dated January 1, 1985.
Concurrent with the issuance of the Bonds, the Bank transferred Federal Home
Loan Mortgage Corporation participation securities (the "FHLMC Securities") to
Stockton Securities Corporation with aggregate principal balances of
approximately $56,960,000 to serve as collateral for the Bonds. The weighted
average pass-through rates on the FHLMC Securities were 9.0%. The Bonds were
prepaid in full pursuant to the terms of the indenture on August 20, 1996.
Subsequent to the prepayment, Stockton Securities Corporation transferred the
FHLMC Securities with aggregate principal balances of $5,280,380 back to the
Bank. The outstanding principal balances of the FHLMC Securities amounted to
approximately $6,738,000 at December 31, 1995.

         At December 31, 1995, the Bonds had a remaining principal balance of
$6,462,509 and a fair market value of approximately $6,477,000 with an interest
rate of 8.25%. The fair market value of Series B was calculated from actual
market quotes of the Bonds.


                            NOTE 10: SECURITIES SOLD
                         UNDER AGREEMENTS TO REPURCHASE

         The Bank enters into sales of U.S. Government securities and
mortgage-backed securities under agreements to repurchase (reverse repurchase
agreements). Reverse repurchase agreements are treated as financings, and the
obligations to repurchase securities sold are reflected as a liability in the
consolidated statements of financial condition. The dollar amount of securities
underlying the agreements remains in the asset accounts. The following is a
summary of these securities at December 31:


-------------------------------------------------------------------------------
                                             1996                    1995
-------------------------------------------------------------------------------
Securities Sold Under Agreements            
  to Repurchase                             $ 19,550,000         $ 35,408,000
Average Balance during the year               26,089,788           59,197,595
Maximum Balance at any month-end              59,879,000           95,571,000
Weighted Average Interest Rate                      5.64%                5.90%
-------------------------------------------------------------------------------



         These agreements are collateralized by U.S. Government securities and
mortgage- backed securities. The related collateral was held by the dealer. The

                                       83
<PAGE>



estimated market value of securities sold under agreements to repurchase as of
December 31, 1996 and 1995 was $19,538,000 and $35,404,000, respectively.


                             NOTE 11: INCOME TAXES

         The Company and Bank file consolidated federal income tax returns on a
calendar year basis. In 1995 and 1994 if certain conditions are met in
determining taxable income, the Bank is allowed a special bad debt deduction
based on a percentage of taxable income (8% in those years) or on specified
experience formulas. The Bank used the percentage of taxable income method for
bad debt deductions in 1995 and 1994. Effective for 1996, however, the Bank is
only allowed a bad debt deduction equal to its actual net charge-offs.

         Under the provisions of SFAS 109, savings and loan associations: (1) do
not recognize a deferred tax liability for the tax effects of the "base year"
(December 31, 1987) tax bad debt reserve unless it becomes apparent that the
reserve will reverse in the foreseeable future, (2) do recognize a deferred tax
liability for increases in the tax bad debt reserve over the "base year" tax bad
debt reserve and (3) do recognize a deferred tax asset, reduced by any necessary
valuation allowances for the allowance for loan losses for financial reporting
purposes.

         Federal income and state franchise tax expense (benefit) in the
consolidated statements of operations is comprised of the following:

<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------
1996                                CURRENT              DEFERRED                   TOTAL
---------------------------------------------------------------------------------------------
<S>                              <C>                    <C>                     <C>        
FEDERAL INCOME TAX EXPENSE       $ 2,285,000            $ 1,379,000             $ 3,664,000
CALIFORNIA FRANCHISE
         TAX EXPENSE                 898,000                540,000               1,438,000
---------------------------------------------------------------------------------------------
                                  $3,183,000            $ 1,919,000             $ 5,102,000
---------------------------------------------------------------------------------------------
1995
---------------------------------------------------------------------------------------------
FEDERAL INCOME TAX EXPENSE        $1,476,000            $  (354,000)            $ 1,122,000
CALIFORNIA FRANCHISE
         TAX EXPENSE               1,272,000               (864,000)                408,000
---------------------------------------------------------------------------------------------
                                  $2,748,000            $(1,218,000)             $1,530,000
---------------------------------------------------------------------------------------------
1994
---------------------------------------------------------------------------------------------
FEDERAL INCOME TAX EXPENSE        $4,271,000            $(2,719,000)             $1,552,000
CALIFORNIA FRANCHISE
         TAX EXPENSE                 919,000               (155,000)                764,000
---------------------------------------------------------------------------------------------
                                 $ 5,190,000            $(2,874,000)            $ 2,316,000
---------------------------------------------------------------------------------------------
</TABLE>



                                       84
<PAGE>



         Amounts for the current year are based upon estimates and assumptions
as of the date of this report and could vary from amounts shown on the tax
returns filed. Accordingly, the variances from amounts reported for prior years
are primarily the result of adjustments to conform to prior years' tax returns
as filed.

         Under SFAS 109, the temporary differences between the financial
statement carrying amounts and tax bases of assets and liabilities that give
rise to significant components of the deferred tax asset and liability amounts
for the years ended December 31, 1996 and 1995 relate to the following:

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------
                                                                                    1997                   1995
------------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>                     <C>        
DEFERRED TAX ASSETS:
  BOOK PROVISION FOR LOAN LOSSES IN EXCESS OF TAX                                  $ 3,263,000             $ 3,398,000
  BOOK PROVISION FOR LOSSES ON REAL ESTATE IN EXCESS OF TAX                            851,000               2,931,000
  STATE FRANCHISE TAXES                                                                213,000                 240,000
  TAX EFFECT OF UNREALIZED LOSSES                                                      389,000                       -
  CERTAIN IDENTIFIABLE INTANGIBLES                                                   2,896,000               1,488,000
  OTHER INCOME DEFERRED FOR TAX PURPOSES                                               869,000               1,177,000
  BOOK RESERVE ON MORTGAGE-BACKED SECURITIES                                           161,000                       -
------------------------------------------------------------------------------------------------------------------------
  TOTAL GROSS DEFERRED TAX ASSETS                                                  $ 8,642,000             $ 9,234,000
  LESS: VALUATION ALLOWANCE                                                                  -                       -
------------------------------------------------------------------------------------------------------------------------
  NET DEFERRED TAX ASSETS                                                          $ 8,642,000             $ 9,234,000
------------------------------------------------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
  LOAN FEE INCOME DEFERRED FOR TAX PURPOSES                                        $ 4,763,000             $ 4,544,000
  FHLB STOCK DIVIDENDS DEFERRED FOR TAX PURPOSES                                     2,626,000               2,131,000
  TAX DEPRECIATION IN EXCESS OF BOOK DEPRECIATION                                      455,000                 231,000
  TAX EFFECT OF UNREALIZED GAINS                                                             -               1,579,000
------------------------------------------------------------------------------------------------------------------------
  TOTAL DEFERRED TAX LIABILITIES                                                   $ 7,844,000             $ 8,485,000
------------------------------------------------------------------------------------------------------------------------
  NET DEFERRED TAXES                                                               $   798,000             $   749,000
-----------------------------------------------------------------------------------------------------------------------

</TABLE>

         Management believes a valuation allowance is not needed to reduce the
deferred tax asset because there is no material portion of the deferred tax
asset that will not be realized through sufficient taxable income within the
carryback and carryforward periods.

         The reconciliation from the statutory income tax rate to the
consolidated effective tax rate, expressed as a percentage of pre-tax income, is
as follows:

--------------------------------------------------------------------------
YEARS ENDED DECEMBER 31                  1996          1995        1994
--------------------------------------------------------------------------
STATUTORY FEDERAL TAX RATE               35.0%        35.0%        34.0%
CALIFORNIA FRANCHISE TAX,                 7.9%         7.9%        7.4%
  NET OF FEDERAL INCOME TAX BENEFIT
ADJUSTMENT TO AMORTIZATION EXPENSE         -            -         (7.4%)
  AS A RESULT OF CHANGE IN TAX LAW
OTHER                                    (0.4%)        1.7%          -
--------------------------------------------------------------------------
                                         42.5%        44.6%        34.0%



                                     - 85 -

<PAGE>


                              NOTE 12: REGULATORY
                         CAPITAL & STOCKHOLDERS' EQUITY

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

         Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). As of December 31, 1996, the Bank meets all capital
adequacy requirements to which it is subject.

         As of December 31, 1996, the most recent notification from the Office
of the Comptroller of the Currency categorized the Bank as adequately
capitalized under the regulatory framework for prompt corrective action. To be
categorized as adequately capitalized, the Bank must maintain a 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 that
management believes have changed the Bank's category.

         The Bank's actual capital amounts and ratios are also presented in the
table:

<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------------------------------
                                                                                                       TO BE WELL
                                                                         FOR CAPITAL                CAPITALIZED UNDER
(DOLLARS IN THOUSANDS)                        ACTUAL                  ADEQUACY PURPOSES             PROMPT CORRECTIVE
                                                                                                    ACTION 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)             $92,723       12.69%          $58,475       8.00%          $73,094       10.00%
TIER 1 CAPITAL
  (TO RISK-WEIGHTED ASSETS)              86,409       11.82%           29,238       4.00%           43,856        6.00%
TIER 1 CAPITAL
  (TO AVERAGE ASSETS)                    86,409        6.62%           52,202       4.00%           65,254        5.00%
--------------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1995:
TOTAL CAPITAL
  (TO RISK-WEIGHTED ASSETS)             $83,083       12.12%          $54,819       8.00%          $68,524       10.00%
TIER 1 CAPITAL
  (TO RISK-WEIGHTED ASSETS)              76,440       11.16%           27,409       4.00%           41,114        6.00%
TIER 1 CAPITAL
  (TO AVERAGE ASSETS)                    76,440        6.00%           50,962       4.00%           63,703        5.00%
--------------------------------------------------------------------------------------------------------------------------
</TABLE>


         At December 31, 1996, the Bank was required to deduct from capital 100%
of the Bank's investment in real estate. This compares to a 60% deduction at
December 31, 1995. The Bank's total loans and investments in its real estate
investment subsidiary totaled $3.6 million and $8.9 million at December 31, 1996
and 1995, respectively.


                                     - 86 -

<PAGE>



         Retained earnings at December 31, 1996 includes $8,168,000 which has
been allocated on a tax basis by the Bank to bad debt reserves for federal
income tax purposes and for which no provision for income taxes has been made.
If, in future periods, this amount is used for any purpose other than absorbing
losses for bad debts, the Bank will be liable for federal income tax at the then
current corporate tax rate. The Bank does not anticipate using this amount in a
manner which will create a federal income tax liability. In addition, a
liquidation account with a current balance of $428,499 is reserved by the Bank
as a result of the Bank's conversion from a mutual to a stock association.


                             NOTE 13: PENSION PLAN

         Due to escalating costs, the Bank curtailed future benefit accruals and
service under the noncontributory defined benefit pension plan (the Plan) by
"freezing" the Plan June 30, 1995 under the provisions of Statement of Financial
Accounting Standards No. 88. Assets of the Plan are maintained by a trustee and
administered by the Bank's advisory board. In January 1987, the Bank adopted the
provisions of Statement of Financial Accounting Standards No. 87, on a
prospective basis. The purpose of this pronouncement is to reflect in the
projected benefit obligation all benefit improvements to which the Bank is
committed as of the current valuation date and to use a market-related value of
assets to determine pension cost. The Bank's policy is to fund the pension cost
accrued on a projected benefit cost method. The Bank experienced pension income
of $69,434 for the year ended December 31, 1996, compared to pension income of
$1,167,587 for the year ended December 31, 1995, and a pension expense of
$859,110 for 1994. The disclosed values utilized a 7.50%, 7.00% and 8.50%
discount rate for December 31, 1996, 1995 and 1994, respectively. A 4.50% rate
of compensation increase was used for December 31, 1994 and 1993; however, due
to the Plan curtailment, compensation increases will have no future impact to
the plan obligations. The pension expense is based on market conditions as of
January 1, 1996, 1995 and 1994 and has been based on a discount rate of 7.00%
for 1996, 8.50% for 1995 and 7.00% for 1994. The expected long-term rate of
return on assets was 9.00% for all three years.

         The following table provides a reconciliation of the Plan's estimated
funded status and amounts recognized in the Bank's financial statements at
December 31:

-------------------------------------------------------------------------------
                                       1996           1995            1994
-------------------------------------------------------------------------------
PENSION BENEFIT OBLIGATIONS:
ACCUMULATED BENEFIT OBLIGATIONS:
  VESTED                            $3,078,827     $3,762,661      $2,674,534
  NONVESTED                            349,780        421,039         365,979
-------------------------------------------------------------------------------
                                    $3,428,607     $4,183,700      $3,040,513
-------------------------------------------------------------------------------
PROJECTED BENEFIT OBLIGATION        $3,428,607     $4,183,700      $4,794,442
MARKET VALUE OF PLAN ASSETS         (4,124,791)    (3,925,856)     (3,912,583)


                                     - 87 -

<PAGE>




-------------------------------------------------------------------------------
(OVERFUNDED) UNFUNDED
  PROJECTED BENEFIT OBLIGATION      $ (696,184)    $  257,844     $  881,859
UNRECOGNIZED NET TRANSITION
  OBLIGATION                                 -              -              -
UNRECOGNIZED NET TRANSITION ASSET            -              -        386,174
UNRECOGNIZED PRIOR SERVICE COSTS             -              -       (305,251)
UNRECOGNIZED NET GAIN                  705,328         50,404        513,053
ADDITIONAL LIABILITY                         -              -              -
-------------------------------------------------------------------------------
PENSION LIABILITY RECOGNIZED         $   9,144     $  308,248     $1,475,835
-------------------------------------------------------------------------------


Net pension cost for the year included the following components:
-------------------------------------------------------------------------------
                                       1996           1995           1994
-------------------------------------------------------------------------------
SERVICE COST                         $      0      $ 321,604      $ 822,657
INTEREST COST                         257,921        346,988        365,148
ACTUAL RETURN ON PLAN ASSETS         (555,917)    (1,011,502)        16,482
OTHER COMPONENTS - NET                228,562       (824,677)      (345,177)
-------------------------------------------------------------------------------
NET PERIODIC PENSION
  (BENEFIT) COST                     $(69,434)   $(1,167,587)     $ 859,110
-------------------------------------------------------------------------------


         Included in the Plan assets are 4,790 common shares of the Company's
stock. The market value of these shares as of December 31, 1996 was $138,311.
The market value of Company's stock held in the Plan as of January 31, 1997 was
$138,012. Dividends received on Company stock were $2,107.

         On August 1, 1995, the Bank modified its 401(k) plan. Prior to August
1, 1995, the 401(k) was funded by the employees. On August 1, 1995, the 401(k)
plan became a defined contribution profit sharing plan. The Bank makes a monthly
cash contribution equal to 5% of each employee's base salary and an employer
matching contribution of .25% for each 1.00% of employee contribution up to a
maximum contribution of 1.00% by the Bank. The Bank also contributes 1.50% of
each employee's base salary in CFHC stock on a monthly basis. The Bank's total
contribution ranges therefore from 6.50% of base salary to 7.50% of base salary,
depending on the level of employee contribution. The assets of the 401(k) plan
are maintained by a trustee and administered by the employer. The administrative
costs of the plan are paid by the Bank. These costs amounted to $22,777, $21,784
and $20,574 for the years ended December 31, 1996, 1995 and 1994, respectively.

         Per the terms of the agreement and plan of merger between Temple-Inland
Inc., and California Financial Holding Company, the Plan will be terminated May
15, 1997. On March 1, 1997, a contribution of $578,400, the maximum deductible
contribution for the 1996 plan year, will be made to the Plan. Immediately prior
to Plan termination, an additional payment of approximately $2 million will be
made to fully fund the Plan. Upon approval by the Internal Revenue Service,
distributions to Plan participants will be made by Temple-Inland, Inc.


                                     - 88 -

<PAGE>



                             NOTE 14: STOCK OPTIONS
                         AND DIVIDEND REINVESTMENT PLAN

         At December 31, 1983, 264,000 shares of common stock were reserved for
issuance to key employees under the Bank's 1982 Incentive Stock Option Plan. On
July 15, 1985, April 25, 1988 and March 15, 1993, the Board of Directors
reserved options for an additional 191,466, 196,340 and 220,000 shares of common
stock, respectively. The exercise price of all options is the market price of
the common stock at the date of grant. Options are exercisable on various
conditions but generally not more than 10 years from date of grant.

         The per share weighted-average fair value of stock options granted
during 1996 was $9.55 on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions: 1996 -
expected dividend yield 2.03%, risk-free interest rate of 6.47%, and an expected
life of 9 years.

         The Company applies APB Opinion No. 25 in accounting for its Plan, and
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123, the
Company's net income would have been reduced to the pro forma amounts indicated
below:

-------------------------------------------------------------------------------
                                                 1996                 1995
-------------------------------------------------------------------------------
NET INCOME          AS REPORTED                $6,904,769          $1,897,509
                    PRO FORMA                   6,423,989           1,897,509
-------------------------------------------------------------------------------

         Pro forma net income reflects only options granted in 1996. No options
were granted in 1995. Therefore, the full impact of calculating compensation
cost for stock options under SFAS No. 123 is not reflected in the pro forma net
income amounts presented above because compensation cost for options granted
prior to January 1, 1995 is not considered.

         Information with respect to options under the above plan is summarized
as follows:

-------------------------------------------------------------------------------
                                     WEIGHTED                         NUMBER
                                   AVERAGE PRICE                     OF SHARES
-------------------------------------------------------------------------------
OUTSTANDING, DECEMBER 31, 1993        $ 10.11                         266,807
-------------------------------------------------------------------------------
  GRANTED (PRICE - $12.75)                                             50,000
  EXERCISED (PRICE - $4.89)                                           (10,910)
  EXERCISED (PRICE - $7.95)                                           (11,000)
  EXERCISED (PRICE - $8.18)                                            (6,531)
  EXERCISED (PRICE - $8.86)                                            (1,756)
-------------------------------------------------------------------------------
OUSTANDING, DECEMBER 31, 1994         $ 10.91                         286,610
-------------------------------------------------------------------------------
  EXERCISED (PRICE - $4.89)                                           (12,463)
  EXERCISED (PRICE - $8.18)                                           (10,993)
  EXERCISED (PRICE - $8.86)                                            (1,463)
  EXERCISED (PRICE - $13.41)                                           (1,619)
  EXPIRED (PRICE - $4.89)                                                (691)
-------------------------------------------------------------------------------
OUTSTANDING, DECEMBER 31, 1995        $ 11.31                         259,381
-------------------------------------------------------------------------------


                                     - 89 -

<PAGE>




  GRANTED (PRICE - $19.63)                                             16,320
  GRANTED (PRICE - $21.38)                                             11,000
  GRANTED (PRICE - $22.00)                                             60,000
  EXERCISED (PRICE - $8.18)                                           (32,689)
  EXERCISED (PRICE - $8.86)                                            (6,376)
  EXERCISED (PRICE - $12.75)                                           (9,342)
  EXERCISED (PRICE - $13.41)                                          (18,318)
  EXERCISED (PRICE - $22.00)                                             (696)
-------------------------------------------------------------------------------
OUTSTANDING, DECEMBER 31, 1996        $ 14.70                         279,280
-------------------------------------------------------------------------------
  (PRICE - $8.18)                                                      42,824
  (PRICE - $8.86)                                                      19,111
  (PRICE - $12.75)                                                     40,658
  (PRICE - $13.41)                                                     90,063
  (PRICE - $19.63)                                                     16,320
  (PRICE - $21.38)                                                     11,000
  (PRICE - $22.00)                                                     59,304
-------------------------------------------------------------------------------
                                                                      279,280
-------------------------------------------------------------------------------
SHARES CURRENTLY EXERCISABLE          $ 14.70                         279,280
-------------------------------------------------------------------------------
SHARES AVAILABLE FOR FUTURE GRANTS                                     24,568
-------------------------------------------------------------------------------


         The options outstanding on December 31, 1996 had a weighted average
outstanding life of 7 years.

         The Company also paid $.44 per share in cash dividends in 1996, 1995
and 1994 totaling $2,065,718, $2,044,056 and $2,028,617, respectively.

         A dividend reinvestment program was introduced in October 1991. This
plan provides for the issuance of additional stock at a 3% discount from
prevailing market prices. During 1996 and 1995, 10,723 and 10,184 shares were
issued under this plan, adding $234,081 and $161,540, respectively, to
stockholders' equity. As a result of the merger agreement with Temple-Inland,
the dividend reinvestment program has been discontinued in 1997.


                            NOTE 15: PARENT COMPANY
                             FINANCIAL INFORMATION

         The Company and its Subsidiary file a consolidated federal income tax
return in which the taxable income or loss of the Company is combined with that
of its Subsidiary. The Company's share of income tax expense is based on the
amount which would be payable if separate returns were filed. Accordingly, the
Company's equity in net income of its Subsidiary is excluded from the
computation of the provision for income taxes for financial statement purposes.

         Unconsolidated financial information for the Company follows:


                                     - 90 -

<PAGE>




-------------------------------------------------------------------------------
STATEMENTS OF FINANCIAL CONDITION
-------------------------------------------------------------------------------
AT DECEMBER 31,                                  1996                  1995
-------------------------------------------------------------------------------
ASSETS:
  CASH                                        $ 1,806,254          $ 1,797,993
  INVESTMENT IN SUBSIDIARY                     88,153,509           83,836,341
  OTHER ASSETS                                      7,007                  933
-------------------------------------------------------------------------------
TOTAL ASSETS                                  $89,966,770          $85,635,267
-------------------------------------------------------------------------------
LIABILITIES:
  ACCOUNTS PAYABLE TO SUBSIDIARY              $         0          $    33,046
  OTHER LIABILITIES                                90,018                    0
  STOCKHOLDERS' EQUITY                         89,876,752           85,602,221
-------------------------------------------------------------------------------
TOTAL LIABILITIES AND                         $89,966,770          $85,635,267
  STOCKHOLDERS' EQUITY
-------------------------------------------------------------------------------




-------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
-------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,                   1996           1995          1994
-------------------------------------------------------------------------------
INCOME:
  INTEREST INCOME                      $   57,260     $  118,106      $  97,533
  DIVIDEND FROM SUBSIDIARY              1,800,000        550,000      2,350,000
  UNDISTRIBUTED NET INCOME
    OF SUBSIDIARY                       5,819,565      1,470,578      2,344,328
-------------------------------------------------------------------------------
GROSS OPERATING INCOME                 $7,676,825     $2,138,684     $4,791,861
GENERAL AND ADMINISTRATIVE EXPENSES     1,080,152        246,474        231,155
-------------------------------------------------------------------------------
INCOME BEFORE TAXES                    $6,596,673     $1,892,210     $4,560,706
INCOME TAX (BENEFIT) EXPENSE             (308,096)        (5,299)        58,649
-------------------------------------------------------------------------------
NET INCOME                             $6,904,769     $1,897,509     $4,502,057
-------------------------------------------------------------------------------



                                     - 91 -

<PAGE>


<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
-----------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,                              1996                 1995                 1994
-----------------------------------------------------------------------------------------------------------
<S>                                                  <C>                  <C>                  <C>       
CASH FLOWS FROM OPERATIONS:
  NET INCOME                                         $6,904,769           $1,897,509           $4,502,057
  ADJUSTMENTS TO RECONCILE NET
   INCOME TO NET CASH PROVIDED
   BY OPERATIONS:
     UNDISTRIBUTED NET
      INCOME OF SUBSIDIARY                           (5,819,565)          (1,470,578)          (2,344,328)
DECREASE (INCREASE) IN OTHER
  ASSETS AND OTHER LIABILITIES                           50,897               12,754             (25,185)
-----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATIONS                      $1,136,101           $  439,685           $2,132,544
-----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  DIVIDENDS PAID                                    $(2,065,718)         $(2,044,056)         $(2,028,617)
  PROCEEDS FROM ISSUANCE OF STOCK                       937,878              347,011              404,889
-----------------------------------------------------------------------------------------------------------
NET CASH USED BY FINANCING ACTIVITIES               $(1,127,840)         $(1,697,045)         $(1,623,728)
-----------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH                     $     8,261          $(1,257,360)         $  (508,816)
CASH AT BEGINNING OF YEAR                             1,797,993            3,055,353            2,546,537
-----------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR                                  $1,806,254           $1,797,993           $3,055,353
-----------------------------------------------------------------------------------------------------------

</TABLE>


                             NOTE 16: INTEREST RATE
                               EXCHANGE CONTRACTS

         Results from interest rate swap agreements, exchanging interest rate
flows on notional principal amounts for 1996, 1995 and 1994 were as follows:

<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------------------------
                                              INTEREST RATE AT                   NET INTEREST EXPENSE FOR THE YEARS
      NOTIONAL           TERMINATION           DEC. 31, 1995                               ENDED DEC. 31,
  PRINCIPAL AMOUNT          DATE               PAID RECEIVED                   1996                1995                1994
-------------------------------------------------------------------------------------------------------------------------------
<S>                     <C>                                                 <C>                <C>                 <C>       
$25,000,000             2/95                      MATURED                   $       -          $  158,671          $1,184,678
 25,000,000            12/95                      MATURED                           -             700,959           1,035,751
  5,000,000             8/94                      MATURED                           -                   -              35,234
  5,000,000             3/95                      MATURED                           -              21,316             142,739
  5,000,000             7/96                      MATURED                      16,000              33,558              88,767
                                            FIXED        VARIABLE
 15,000,000             3/97                7.36%         4.84%               355,805             350,237             522,116
                                            FIXED        VARIABLE
 10,000,000             7/97                6.18%         4.84%               118,172             120,091             231,925
                                            FIXED        VARIABLE
 15,000,000             6/98                5.44%         5.61%               (59,942)           (152,690)            163,042
-------------------------------------------------------------------------------------------------------------------------------
                                                                             $430,035          $1,232,142          $3,404,252
-------------------------------------------------------------------------------------------------------------------------------

</TABLE>

         Although interest rate exchange contracts have no book value of
principal, SFAS No. 107 requires disclosure of fair value based upon the cost of
terminating these agreements which is estimated to be $48,000 and $628,000 at
December 31, 1996 and 1995, respectively.

                                     - 92 -

<PAGE>




         Of the variable rates paid to the Bank on the agreements, $25,000,000
are indexed to the FHLB Eleventh District Cost of Funds and the remaining
$15,000,000 are indexed to one-month LIBOR.

         On December 30, 1994, the Bank paid a fixed option premium of $255,000
for an interest rate cap agreement in exchange for future interest income on a
$30,000,000 notional principal amount to the extent that LIBOR exceeds 7.50%.
The agreement expires on December 30, 1997. Amortization of the premium totaled
$85,000 in 1996 and 1995. No amortization of the premium was affected in 1994.

         The fair market value of the interest rate cap agreement was $12,000
and $15,500 on December 31, 1996 and 1995, respectively.


                              NOTE 17: COMMITMENTS

         The Bank's off-balance sheet credit risk exposure is the contractual
amount of commitments to extend credit and stand-by letters of credit. The Bank
applies the same credit standards to these contracts as it uses in its lending
process. As of December 31, 1996 and 1995, the Bank had outstanding commitments
to fund or purchase real estate loans in the amount of $14,479,391 and
$12,865,845, respectively. Of these, approximately 47% and 50% were for variable
rate loans in 1996 and 1995, respectively. The Bank typically sells the major
portion of its fixed-rate loan originations to minimize interest rate risk. The
Bank generally enters into forward sales of loans or mortgage-backed securities
to protect the loans held for sale and loans committed from market pricing
losses resulting from rising interest rates. At December 31, 1996, 1995 and
1994, the Bank had outstanding commitments to sell loans and mortgage-backed
securities of $8,538,000, $9,024,000 and $4,297,000, respectively, to provide
this protection of its unsold loans held for sale and committed loans. These
commitments are short-term in nature, and the fair value is based on prevailing
offering prices in the secondary market for similar loans expected to fund
within 30 days. The net gains from the resulting loan sales were $1,478,000,
$211,000 and $63,000 for 1996, 1995 and 1994, respectively.

         The Bank issues letters of credit relating to its real estate
development and real estate development loans. The balance of these commitments
was $3,374,000 and $9,443,000 as of December 31, 1996 and 1995. Loans sold with
recourse totaled $4,582,218 and $4,979,016 as of December 31, 1996 and 1995,
respectively.

         The Board of Directors of the Company has established a quarterly
dividend policy. The Board declared cash dividends totaling $.44 in 1996 and
1995. On January 21, 1997, the Board of Directors of the Company declared a
regular quarterly dividend of $.11 per share, payable February 15, 1997, to
holders of record on February 3, 1997. The total dividend was approximately
$527,000.


                                     - 93 -

<PAGE>



         Certain properties are leased by the Bank under operating-type leases
expiring at various dates through the year 2019. Lease rental expense for 1996,
1995 and 1994 amounted to $500,875, $518,327 and $487,751, respectively.

         The following summarizes, by year, the future minimum rental payments
as of December 31, 1996:

-----------------------------------------------------------------
Years Ending December 31                      Rental Payments
-----------------------------------------------------------------

1997                                            $   592,461

1998                                                591,118

1999                                                484,692

2000                                                402,346

2001                                                285,987

2002 and thereafter                               4,066,927

-----------------------------------------------------------------
                                                $ 6,423,531
-----------------------------------------------------------------


                          NOTE 18: SALE OF THE COMPANY

         On December 9, 1996, the Company announced its intention to merge with
Temple-Inland, Inc. ("TI"), subject to approval of the Company's shareholders
and primary regulator. Terms of the agreement provide for the shareholders of
the Company to receive a combination of Temple-Inland common stock and cash
valued at $30 per share, for a total consideration of approximately $150
million. The transaction is expected to close in the second quarter of 1997.
Additionally, in connection with execution of the merger agreement, the Company
granted TI an option, exercisable under certain conditions, to purchase 940,095
shares of its common stock, at a price of $27.25 per share.


                                     - 94 -

<PAGE>


                   QUARTERLY RESULTS OF OPERATIONS (UNAUDTED)

                             (Dollars in Thousands)

         Selected  quarterly  results of oeprations for the years ended December
31, 1996, 1995, and 1994 are summarized as follows:

<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------
                                                                INCOME BEFORE
                                                     PROVISION    ACCOUNTING
                             INTEREST  NET INTEREST   FOR LOAN    CHANGE AND                EARNINGS
                              INCOME     INCOME        LOSSES    INCOME TAXES  NET INCOME  PER SHARE
-----------------------------------------------------------------------------------------------------
<S>           <C>             <C>       <C>              <C>      <C>           <C>           <C>  
First quarter 1996            $23,577   $  9,229      $  265      $  4,383      $  2,553     $ 0.54
Second quarter 1996            24,815     10,176         256         4,984         2,896       0.60
Third quarter 1996             25,154     10,324         525        (1,732)       (1,041)     (0.22)
Fourth quarter 1996            25,217     10,089         215         4,372         2,495       0.52
-----------------------------------------------------------------------------------------------------

                              $98,763   $ 39,818      $1,261       $12,007       $ 6,905     $ 1.44
-----------------------------------------------------------------------------------------------------

First quarter 1995            $21,758   $  7,646      $  265       $ 1,451       $   834     $ 0.18
Second quarter 1995            22,614      7,535       1,301        (1,266)         (794)     (0.17)
Third quarter 1995             23,391      7,990          68         2,625         1,524       0.32
Fourth quarter 1995            23,365      8,584           -           618           334       0.07
-------------------------------------------------------------------------------------------------------

                              $91,128    $31,755      $1,634        $3,428        $1,898     $ 0.40
-----------------------------------------------------------------------------------------------------

First quarter 1994            $19,073    $ 8,821      $ (221)       $3,007        $1,869     $ 0.40
Second quarter 1994            19,970      8,952         282         2,476         1,349       0.29
Third quarter 1994             20,869      8,488         740          (637)          120       0.02
Fourth Quarter 1994            21,215      8,015        (500)        1,972         1,184       0.25
-----------------------------------------------------------------------------------------------------

                              $81,127    $34,276       $ 281        $6,818        $4,502     $ 0.96
-----------------------------------------------------------------------------------------------------
</TABLE>


                                     - 95 -
<PAGE>


                          INDEPENDENT AUDITORS' REPORT

         The Board of Directors, California Financial Holding Company:

         We have audited the accompanying consolidated statements of financial
condition of California Financial Holding Company and Subsidiary as of December
31, 1996 and 1995, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1996. 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 auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of California
Financial Holding Company and Subsidiary as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1996 in conformity with generally
accepted accounting principles.

         As discussed in Notes 1 and 4 to the Consolidated Financial Statements,
the Company adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 122 "Accounting for Mortgage
Servicing Rights," in 1996.

                            
                                                     /s/ KPMG Peat Marwick LLP 
                                                     KPMG Peat Marwick LLP    
                                                     Sacramento, California    
                                                        February 21, 1997      
                                                                               
                                     - 96 -

<PAGE>




ITEM  9.          CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

         Not applicable.















                                     - 97 -

<PAGE>



                                    PART III


ITEM 10.  DIRECTORS AND OFFICERS OF THE REGISTRANT

         Information regarding Directors and Officers of California Financial
Holding Company is contained in the Proxy Statement and Notice of Annual Meeting
of Stockholders to be held on April 28, 1997 and incorporated herein by
reference.

ITEM 11.  EXECUTIVE COMPENSATION

         Information regarding Executive Remuneration and Transactions is
contained in the Proxy Statement and Notice of Annual Meeting of Stockholders to
be held on April 28, 1997 and incorporated herein by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT

         Information regarding Security Ownership of Certain Beneficial Owners
and Management is contained in the Proxy Statement and Notice of Annual Meeting
of Stockholders to be held on April 28, 1997 and incorporated herein by
reference.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Information regarding Certain Relationships and Related Transactions is
contained in the Proxy Statement and Notice of Annual Meeting of Stockholders to
be held on April 28, 1997 and incorporated herein by reference.


                                     - 98 -

<PAGE>



                                     PART IV

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

        A.       Index to Consolidated Financial Statements

    1.  a.  Selected Five-Year Financial Information
        b.  Consolidated Statements of Financial Condition at December 31, 1996
            and 1995
        c.  Consolidated Statements of Operations for the years ended December
            31, 1996, 1995 and 1994
        d.  Consolidated Statements of Stockholders' Equity for the years ended
            December 31, 1996, 1995 and 1994
        e.  Consolidated Statements of Cash Flows for the years ended December
            31, 1996, 1995 and 1994
        f.  Notes to the Consolidated Financial Statements
        g.  Independent Auditors' Report  

    2.  All schedules are omitted because they are not applicable, not required
        or the information is included in the consolidated financial statements
        or notes thereto.

 B.   Exhibits

         See Exhibit Index on page 101-103.


 C.   Reports on Form 8-K

      California Financial filed a Current Report on Form 8-K on December 23,
      1996 relating to the signing of a definitive agreement and Plan of Merger
      with Temple-Inland Inc. See "Business-Merger with Temple-Inland Inc.,"
      Item 1.



                                      - 99 -

<PAGE>



                                   SIGNATURES

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

                                CALIFORNIA FINANCIAL HOLDING COMPANY
                                              Registrant

     03-17-97                      BY: /s/Robert V. Kavanaugh
----------------------                ----------------------------------
       DATE                                 ROBERT V. KAVANAUGH
                                      President, Chief Operating Officer

     03-17-97                      BY: /s/Jane R. Butterfield
----------------------                ----------------------------------
       DATE                                 JANE R. BUTTERFIELD
                                      Senior Vice President, Treasurer,
                                      Chief Financial Officer
                                      (Principal Financial Officer and
                                      Principal Accounting Officer)

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


BY: /s/DAVID K. REA                                                03-17-97
    ---------------------------------------------           --------------------
    DAVID K. REA, Chairman of the Board                            DATE

BY: /s/ROBERT V. KAVANAUGH                                         03-17-97
    ---------------------------------------------           --------------------
    ROBERT V. KAVANAUGH, Director                                  DATE

BY: /s/DENNIS DONALD GEIGER                                        03-17-97
    ---------------------------------------------           --------------------
    DENNIS DONALD GEIGER, Director                                 DATE

BY: /s/G. THOMAS EGAN                                              03-17-97
    ---------------------------------------------           --------------------
    G. THOMAS EGAN, Director                                       DATE

BY: /s/JERALD KIRSTEN                                              03-17-97
    ---------------------------------------------           --------------------
    JERALD KIRSTEN, Director                                       DATE

BY: /s/GERALD L. BARTON                                            03-17-97
    ---------------------------------------------           --------------------
    GERALD L. BARTON, Director                                     DATE



                                     - 100-

<PAGE>



                                  EXHIBIT INDEX


Exhibit No.    Exhibit                                                  Page
-----------    -------                                                  ----


2.01          Agreement and Plan of Merger by and among
              Temple-Inland Inc., California Financial
              Holding Company, Guaranty Federal Bank, F.S.B.
              and Stockton Savings Bank, F.S.B. dated as of
              December 8, 1996. (Incorporated by reference
              to Exhibit 2.01 to Amendment No. 1 to the
              Registration Statement on Form S-4
              (Registration No. 333-21937) filed on March
              17, 1997.)

2.02         Stock Option Agreement between Temple-Inland
             Inc. and California Financial Holding Company
             dated as of December 8, 1996. (Incorporated by
             reference to Exhibit 2.02 to Amendment No. 1 of
             the Registration Statement on Form S-4
             (Registration No. 333-21937 filed on March 17,
             1997.)

3.1          Certificate of Incorporation of California
             Financial Holding Company. (Incorporated by
             reference to Exhibit C to the Prospectus and
             Proxy Statement filed as part of the Post-
             Effective Amendment on Form S-8 to the
             Registration Statement on Form S-4,
             Registration No. 33-19998 ("Registration
             Statement").


3.2          Bylaws of California Financial Holding Company
             (Incorporated by reference to Exhibit 3.2 to
             Annual Report on Form 10-K for the year ended
             December 31, 1995.)


10.1         Incentive Stock Plan. (Incorporated by
             reference to Exhibit A to the Prospectus and
             Proxy Statement files as part of the
             Registration Statement.)



                                     - 101 -
<PAGE>




10.2         1982 Stockton Savings Incentive Stock Option
             Plan.  (Incorporated by reference to Exhibit B
             to the Prospectus and Proxy Statement filed as
             part of the Registration Statement.)


10.3         Amendments to the Incentive Stock Plan.
             (Incorporated by reference to Exhibit 4.3 to
             Post-Effective Amendment No. 1 to the
             Registration Statement.)


10.4         Amended and Restated Incentive Stock Plan.
             (Incorporated by reference to Exhibit 4.4 to
             post-effective amendment number 1 to the
             Registration Statement on Form S-8 (Reg.
             #33-62584) filed on June 25, 1993.)


10.5         Severance Agreement dated June 21, 1993
             between Stockton Savings Bank, FSB
             ("Stockton Savings") and David K. Rea.
             (Incorporated by reference to Exhibit 10.5 to
             Annual Report on Form 10-K for the year
             ended December 31, 1993.)


10.6         Severance Agreement dated as of June 21, 1993,
             as amended and restated as of March 18, 1996,
             between Stockton Savings and Robert V.
             Kavanaugh. (Incorporated by reference to
             Exhibit 10.6 to Annual Report on Form 10-K for
             the year ended December 31, 1995.)


10.7         Severance Agreement dated as of June 21, 1993,
             as amended and restated as of March 18, 1996,
             between Stockton Savings and Jane R.
             Butterfield. (Incorporated by reference to
             Exhibit 10.7 to Annual Report on Form 10-K for
             the year ended December 31, 1995.)


10.8         Severance Agreement dated as of June 21, 1993,
             as amended and restated as of March 18, 1996,
             between Stockton Savings and W. Henry Claussen.
             (Incorporated by reference to Exhibit 10.8 to
             Annual Report on Form 10-K for the year ended
             December 31, 1995.)


                                     - 102 -

<PAGE>




10.9         Severance Agreement dated as of June 21, 1993,
             as amended and restated as of March 18, 1996,
             between Stockton Savings and Morris W. Knight.
             (Incorporated by reference to Exhibit 10.9 to
             Annual Report on Form 10-K for the year ended
             December 31, 1995.)


10.10         Stockton Savings Bank Executive Compensation
              Plan. (Incorporated by reference to Exhibit
              10.10 to Annual Report on Form 10-K for the
              year ended December 31, 1995.)


10.11         Stockton Savings and Loan Association
              Directors' Retirement Plan. (Incorporated by
              reference to Exhibit 10.11 to Annual Report on
              Form 10-K for the year ended December 31,
              1995.)


10.12        Stockton Savings Tax Deferred 401(k) Plan-
             Defined Contribution Plan. (Incorporated by
             reference to Exhibit 4.1(a) to the Registration
             Statement on Form S-8 (Registration No. 33-
             96308) filed on August 29, 1995.)


10.13        Stockton Savings Tax Deferred 401(k) Plan -
             Adoption Agreement #003.  (Incorporated by
             reference to Exhibit 4.1(b) to Post -Effective
             Amendment No. 1 to Registration Statement
             on Form S-8 (Registration No. 33-96308) filed
             on November 3, 1995.)


10.14         Amendment dated March 26, 1996, effective as
              of November 21, 1994, to Severance Agreement
              dated as of June 21, 1993 between Stockton
              Savings and David K. Rea. (Incorporated by
              reference to Exhibit 10.14 to Annual Report on
              Form 10-K for the year ended December 31,
              1995.)

21.1         Subsidiaries of the Registrant.  (Incorporated
             by reference to Item 1.  "Business in
             Subsidiaries and Affiliates in this Form 10-K.)



23.1         Consent of KPMG Peat Marwick LLP


27           Financial Data Schedule





                                     - 103-