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                                  UNITED STATES
                        SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20529
                                    FORM 10-KA
    


(Mark One)

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
                                       OR
[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(b) OF THE SECURITIES

                      FOR THE TRANSITION PERIOD N/A TO N/A
                              EXCHANGE ACT OF 1934


                        COMMISSION FILE NUMBER 333-16951
                                   BSM BANCORP
             (Exact name of registrant as specified in its charter)


              California                               77-0442667
    (State or other jurisdiction of                 (I.R.S. Employer
    incorporation or organization)                 Identification No.)

         2739 Santa Maria Way
            Santa Maria, CA                               93455
(Address of principal executive offices)                (Zip Code)


       Registrant's telephone number, including area code : (805) 937-8551

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

           Securities registered pursuant to Section 12(g) of the Act:
   
                          Common Stock-No par value
    
   
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 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 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. [X]

The aggregate market value of the common stock held by non-affiliates of the 
registrant as of February 27, 1998 was $61,384,095.

The number of shares of common stock of the registrant outstanding as of 
March 18, 1998 was 3,007,639.

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FORM 10-K

TABLE OF CONTENTS AND CROSS REFERENCE SHEET
   
<TABLE>
<CAPTION>
                                                                       PAGE # IN
                                                                         10-KA
                                                                       ---------
<S>                                                                     <C>
PART I
------
  Item 1     Business                                                        1

  Item 2     Properties                                                     15

  Item 3     Legal Proceedings                                              16

  Item 4     Submission of Matters to a Vote of Security Holders            16


PART II
-------
  Item 5     Market for Registrant's Common Equity and Related 
             Stockholder Matters                                            16

  Item 6     Selected Financial Data                                        17

  Item 7     Management's Discussion and Analysis of Financial 
             Condition and Results of Operations                            18

  Item 8     Financial Statements and Supplementary Data                    30

  Item 9     Changes in and Disagreements with Accountants on 
             Accounting and Financial Disclosure                            52


PART III
--------
  Item 10    Directors and Executive Officers of Registrant                 53

  Item 11    Director and Executive Officer Compensation                    55

  Item 12    Security Ownership of Certain Beneficial Owners and 
             Management                                                     60

  Item 13    Certain Relationships and Related Transactions                 61


PART IV
-------
  Item 14    Exhibits, Financial Statement Schedules and Reports on 8-K     61

</TABLE>
    

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PART 1

ITEM 1.  BUSINESS

GENERAL

BSM BANCORP

BSM Bancorp (referred to herein on an unconsolidated basis as "BSM" and on a 
consolidated basis as the "Company") is a bank holding company incorporated 
in California on November 12,1996, and registered under the Bank Holding 
Company Act of 1956, as amended. The Company commenced business on March 12, 
1997 when, pursuant to a reorganization, it acquired all of the voting stock 
of Bank of Santa Maria (the "Bank"). The Bank is the Company's principal 
asset.

   
The Company's principal business is to serve as a holding company for the 
Bank and for other banking or bank related subsidiaries which the Company may 
establish or acquire. The Company has not engaged in any other activity to 
date. As a legal entity separate and distinct from its subsidiaries, BSM's 
principal source of funds is, and will continue to be, dividends paid by and 
other funds advanced by primarily the Bank. Legal limitations are imposed on 
the amount of dividends that may be paid and loans that may be made by the 
Bank to BSM. See "Note L-Regulatory Matters" in the Annual Report to 
Shareholders. At December 31, 1997, the Company had $344.0 million in total 
consolidated assets, $189.2 million in total consolidated net loans and $306.3
million in total consolidated deposits.
    

BSM's authorized Capital Stock consists of 25,000,000 of Preferred Stock, 
none of which is outstanding, and 50,000,000 of Common Stock of which 
2,990,939 was outstanding as of December 31, 1997.

The principal executive offices of the Company and the Bank are located at 
2739 Santa Maria Way, Santa Maria, California.
 
MERGER WITH MID-STATE BANK

On January 29, 1998, Mid-State Bank ("Mid-State") entered into an Agreement 
to Merge and Plan of Reorganization (the "Agreement") with the Company 
pursuant to which, among other things, (i) Bank will merge with and into 
Mid-State, (ii) BSM will become the holding company for Mid-State and change 
its name to Mid-State Bancshares ("MSB"), and (iii) the shareholders of 
Mid-State will become shareholders of MSB in accordance with an exchange 
ratio set forth in the Agreement, all subject to the terms and conditions 
specified in the Agreement

Consummation of the Agreement and the transactions contemplated therein, is 
subject to regulatory and shareholder approval, as well as other conditions 
set forth in the Agreement. No assurance can be given that the Agreement and 
the transactions contemplated therein will be consummated. Should the 
transaction be consummated, current Company shareholders will hold 
approximately 30% of the shares of the newly renamed holding company.

BANK OF SANTA MARIA

The Bank was incorporated under the laws of the State of California on June 
27, 1977, was licensed by the California State Banking Department and 
commenced operations as a California state chartered bank on March 18, 1978. 
The Bank's accounts are insured by the Federal Deposit Insurance Corporation 
("FDIC"), but like most banks of its size in California, is not a member of 
the Federal Reserve Bank. The Bank's authorized Capital Stock consists of one 
class of Common Stock, of which there were 100 shares outstanding as of 
December 31, 1997, which was held by BSM.

The Bank currently operates 13 retail banking offices along the central coast 
of California. The main office and two branch offices are located in the City 
of Santa Maria with additional offices located in the communities of 
Guadalupe, Oak Knolls, Vandenberg Village, Nipomo, Grover Beach, Pismo Beach, 
Paso Robles and Templeton. On January 10, 1997, El Camino National Bank, with 
one office in Lompoc, merged into Bank of Santa Maria. On February 3, 1997, 
the Bank opened a banking office in Atascadero. The Bank has its headquarters 
in the City of Santa Maria at 2739 Santa Maria Way, Santa Maria, California 
93455. Its telephone number is (805) 937-8551.

The Bank has expanded from its initial branches in the larger community of 
Santa Maria both to the North and to the South, along a corridor following 
U.S. Highway 101. The economy in this area of California is based upon 
agriculture, oil, tourism, light industry, the aerospace industries and 
nuclear energy production. Services to support those employed in these 
industries, (including medical, financial, and educational services), have 
expanded the two county areas increasing the population of the Bank's service 
area to 

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approximately 175,000. Certain economic activities are unique to the area 
such as the space launching facility at Vandenberg Air Force Base (which is 
now being actively used by large commercial enterprises) and the production 
of seeds for numerous flowers grown worldwide. While major oil companies have 
elected to do business elsewhere (due to the very stringent county business 
regulations), smaller production companies have moved in to continue the oil 
industry in the area. The moderate climate allows a year round growing season 
for numerous vegetables and fruits. Vineyards and cattle ranches make large 
contributions to the local economy. Access to numerous recreational 
activities, including both mountains and beaches, provide a fairly stable 
tourist industry from larger metropolitan areas to the North, South and East. 
The commercial space industry will continue to bring "high tech" employment 
into the area. Due to the diversity of the industries within the Bank's 
market area, the Central Coast, while not immune to economic fluctuations, 
tends to enjoy more stability than many areas of both the California 
marketplace and the country in general.

ACQUISITION OF TEMPLETON NATIONAL BANK

Following all necessary regulatory approvals, on September 8, 1995, the Bank 
acquired Templeton National Bank ("Templeton") pursuant to an Agreement and 
Plan of Reorganization dated March 10, 1995, providing for the merger of 
Templeton into the Bank. The Agreement provided for Templeton shareholders to 
receive shares of the Bank Common Stock based upon the comparative book 
values of the banks at the closing plus a premium of $500,000. The Bank 
issued 397,561 shares of its Common Stock to the former shareholders of 
Templeton. As of the merger date, Templeton's deposits were approximately $24 
million and loans were approximately $18 million. Templeton had one office 
and two offsite ATM locations. Since the acquisition, one of the offsite ATM 
locations was closed and the second has been relocated to the Atascadero 
Police Station. This acquisition was treated as a pooling transaction for 
accounting purposes.

ACQUISITION OF CITIZENS BANK OF PASO ROBLES, N.A.

Following all necessary regulatory approvals, on May 3, 1996, the Bank 
acquired Citizens National Bank of Paso Robles, N.A. ("Citizens") pursuant to 
an Agreement and Plan of Reorganization dated October 30, 1995, providing for 
the merger of Citizens into the Bank. The Agreement provided for the 
shareholders of Citizens to receive cash at the rate of 1.6 times book value 
per share of Citizens stock as of the end of the month preceding the closing. 
The exchange value used in the merger was $16.94 of each share of Citizens 
stock surrendered. The transaction was treated as a purchase for accounting 
purposes and approximately $1.9 million of goodwill was recorded. Acquired 
deposits were recorded at approximately $29 million and acquired loans at $18 
million. Citizens had two offices at the time of the merger. In August 1997, 
the Bank closed the former Citizens branch in Templeton.

ACQUISITION OF EL CAMINO NATIONAL BANK

Following all necessary regulatory approvals, on January 10, 1997, the Bank 
acquired El Camino National Bank ("El Camino") pursuant to an Agreement and 
Plan of Reorganization dated July 16, 1996, providing for the merger of El 
Camino into the Bank. The Agreement provided for the shareholders of El 
Camino to receive shares of Bank Common Stock based upon the comparative book 
values of the banks as of the end of the month preceding the closing. As of 
the closing date, El Camino's deposits were approximately $16 million, and 
loans were approximately $12 million. This acquisition was treated as a 
pooling transaction for accounting purposes. The exchange value used in the 
merger was .7332 shares of Bank Common Stock for each share of El Camino 
Common Stock. The Bank issued 201,678 shares to complete this transaction. El 
Camino had only one office in Lompoc, California, and the Bank continues to 
operate from this location.

SERVICES

The Bank offers a full range of commercial banking services including the 
acceptance of checking and savings deposits, money market checking and 
savings accounts, time certificates of deposit of varying maturities, 
individual retirement accounts, the making of commercial loans, various types 
of consumer loans and real estate loans and provides safe deposit, travelers 
cheques, notary public and other customary non-deposit banking services. The 
Bank is a merchant depository for Master Charge and Visa drafts enabling 
merchants to deposit both types of drafts with the Bank.

Banks in California have been empowered to conduct certain insurance 
activities and to market such services to the public. The Bank did obtain its 
Organizational Insurance License in the fall of 1989, but has not elected to 
offer products which require this license.

The Bank's organization and operations have been designed to serve the 
banking needs of individuals and small to medium sized businesses located in 
the Northern Santa Barbara and San Luis Obispo County areas of California.

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DEPOSIT AND LIABILITY MANAGEMENT

   
Deposits represent the Bank's primary source of funds. As of December 31, 
1997, the Bank had approximately 18,500 demand, money market checking/savings 
deposits and NOW accounts representing approximately $157.1 million with an 
average balance of approximately $8,500 per account. Of those deposits, 
approximately $82.4 million, or 52%, were interest bearing accounts. The Bank 
had approximately 11,600 savings accounts representing approximately $32.5 
million in total deposits, with an average balance of approximately $2,800 
per account. The Bank had approximately 4,800 time certificates of deposit, 
representing approximately $116.4 million in total deposits with an average 
balance of approximately $24,300 per account. Of the total deposits as of 
December 31, 1997, approximately $38.0 million were in the form of 
certificates of deposit in denominations of $100,000 or more and all other 
time deposits were approximately $79.0 million. During the twelve months 
ending December 31, 1997, demand deposits increased approximately $7.4 
million, money market and NOW accounts increased approximately $3.4 million, 
savings accounts remained essentially flat and time certificates of deposit 
increased approximately $9.4 million.
    

The Bank is not dependent on a single or a few customers for its deposits, 
most of which are obtained from individuals and small to medium businesses. 
This results in relatively small average balances, but makes the Bank less 
subject to adverse effects from the loss of a substantial depositor. As of 
December 31, 1997, no individual, corporate, or public depositor accounted 
for more than 1.0% of the Bank's total deposits and the five largest deposit 
accounts represented only 3.0% of the total deposits.

Liquidity is the Bank's ability to meet fluctuations in deposit levels and to 
provide for the credit needs of its customers. The objective in liquidity 
management is to maintain a balance between the sources and uses of funds. 
Principal sources of liquidity include interest and principal payments on 
loans and investments, proceeds from the maturity of investments and growth 
in deposits. The Bank holds overnight Federal funds as a cushion for 
temporary liquidity needs. During the year ended 1997, Federal funds averaged 
$11.9 million, or 3.7% of total average assets. In addition, the Bank 
maintains Federal funds credit lines with major correspondents aggregating 
$11.1 million, subject to the customary terms for such arrangements.

The Bank's liquidity ratio, which measures the percentage of deposits which 
are used to fund cash, cash equivalents and marketable securities, was 42.0% 
as of December 31, 1997. This ratio is substantially in excess of the Bank's 
minimum percentage of 20%.

LOANS

The Bank makes loans in four main areas, including (1) loans to individuals 
for household, family and other consumer expenditures, (2) commercial and 
industrial loans, (3) real estate loans and (4) agriculture loans. During 
1997, the loan portfolio mix continued to show growth in the percentage of 
agricultural loans now representing over 19% of the Bank's portfolio. 
Commercial loans have also experienced an increase in the percentage of loans 
outstanding constituting over 30% of the portfolio. This change has resulted 
from declines in both consumer and real estate loan categories.

The Bank maintains a reserve for possible loan losses in the loan portfolio. 
Additions to the reserve are made by charges to operating expenses. All loans 
deemed to be uncollectible are charged to the reserve; subsequent recoveries 
are credited to the reserve. The loan loss provision is based on current 
factors which, in management's judgment, deserve recognition in estimating 
possible losses. These factors include the current economic climate, past 
loan loss history and management's forecast for the coming year.

As of December 31, 1997, the reserve for loan losses was approximately 1.11% 
of loans outstanding, a level believed adequate by management. The reserve 
for possible loan losses is maintained on an aggregate basis only and is not 
allocated among the various types of loans made by the Bank. Outside factors, 
not within the Bank's control, such as adverse changes in the economy, can 
effect the adequacy of the reserves and there can be no assurance that, in 
any given period, the Bank might not suffer losses which are substantial in 
relation to the size of the reserve. During the year ending December 31, 
1997, the Bank sustained net charge-offs of approximately $618,000 or .35% of 
the Bank's average loans.

INVESTMENT SECURITIES

The Bank maintains a portfolio of investment securities to provide income and 
to serve as a secondary source of liquidity for its operations in conjunction 
with funds sold overnight in the Federal funds market. The Bank's Investment 
Policy provides for the purchase of United States Treasury Securities, United 
States Government Agency Securities, Corporate Securities and State, County 
and Municipal Securities. As of December 31, 1997, the aggregate book value 
of the Bank's investment securities was approximately $108.8 million. Of this 
total, approximately $18.6 million was in U.S. Government Securities, 
approximately $57.4 million was in U.S. Government Agency Securities, 
approximately $2.6 million was in Corporate Securities and approximately 
$30.2 million was in securities issued by State and local subdivisions 
thereof. The type of investments held in the Bank's portfolio are influenced 
by several factors. Among these are: rate of return, maturity and risk.

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It is the Bank's policy to stagger the maturities of its securities to 
maintain a liquid portfolio and to meet other Bank needs. The sale of 
"Federal Funds" (short-term loans to other banks), are also made as alternate 
investments for available excess funds. Approximately $658,000 of the Bank's 
operating income in 1997, represented interest on Federal Funds sold.

Acceptable securities may be pledged to secure public deposits from state and 
public agencies. As of December 31, 1997, the Bank had Public Funds totaling 
approximately $2,160,000 secured by approximately $6,006,000 in eligible 
securities.

SUPERVISION AND REGULATION

Bank holding companies and banks are extensively regulated under both federal 
and state law. Set forth below, is a summary description of certain laws 
which relate to the regulation of BSM and the Bank. The description does not 
purport to be complete and is qualified in its entirety by reference to the 
applicable laws and regulations.

BSM BANCORP

BSM, as a registered bank holding company, is subject to regulation under the 
Bank Holding Company Act of 1956, as amended (the "BHCA"). BSM is required to 
file with the Federal Reserve Board quarterly, semi-annual and annual 
reports, and such additional information as the Federal Reserve Board may 
require pursuant to the BHCA. The Federal Reserve Board may conduct 
inspections of the BSM and its subsidiary. The first of such inspections 
occurred in September, 1997.

The Federal Reserve Board may require that BSM terminate an activity or 
terminate control of or liquidate or divest certain subsidiaries or 
affiliates when the Federal Reserve Board believes the activity or the 
control of the subsidiary or affiliate constitutes a significant risk to the 
financial safety, soundness or stability of any of its banking subsidiaries. 
The Federal Reserve Board also has the authority to regulate provisions of 
certain bank holding company debt, including authority to impose interest 
ceilings and reserve requirements on such debt. Under certain circumstances, 
BSM must file written notice and obtain approval from the Federal Reserve 
Board prior to purchasing or redeeming its equity securities. 

Under the BHCA and regulations adopted by the Federal Reserve Board, a bank 
holding company and its non-banking subsidiaries are prohibited from 
requiring certain tie-in arrangements in connection with any extension of 
credit, lease or sale of property or furnishing of services. Further, BSM is 
required by the Federal Reserve Board to maintain certain levels of capital. 
See "Item 1 - Prompt Corrective Regulatory Action."

BSM is required to obtain prior approval of the Federal Reserve Board for the 
acquisition of more than 5% of the outstanding shares of any class of voting 
securities or substantially all of the assets of any bank or bank holding 
company. Prior approval of the Federal Reserve Board is also required for the 
merger or consolidation of BSM and another bank holding company.

   
BSM is prohibited by the BHCA, except in certain statutory prescribed 
instances, from acquiring direct or indirect ownership or control of more 
than 5% of the outstanding voting shares of any company that is not a bank or 
bank holding company and from engaging directly or indirectly in activities 
other than those of banking, managing or controlling banks or furnishing 
services to its subsidiary. However, BSM, subject to the prior approval of 
the Federal Reserve Board, may engage in, or acquire shares of companies 
engaged in, any activities that are deemed by the Federal Reserve Board to be 
so closely related to banking or managing or controlling banks as to be a 
proper incident thereto. In making any such determination, the Federal 
Reserve Board is required to consider whether the performance of such 
activities by BSM or an affiliate can reasonably be expected to produce 
benefits to the public, such as greater convenience, increased competition or 
gains in efficiency, that outweigh possible adverse effects, such as undue 
concentration of resources, decreased or unfair competition, conflicts of 
interest or unsound banking practices. The Federal Reserve Board is also 
empowered to differentiate between activities commenced DE NOVO and 
activities commenced by acquisition, in whole or in part, of a going concern. 
In 1996, the Economic Growth and Regulatory Paperwork Reduction Act of 1996 
(the "Budget Act"), eliminated the requirement that the bank holding 
companies seek Federal Reserve Board approval before engaging DE NOVO in 
permissible nonbanking activities listed in Regulation Y, which governs bank 
holding companies, if the holding company and its lead depository institution 
are well-managed and well-capitalized and certain other criteria specified in 
the statute are met. For purposes of determining the capital levels at which a 
bank holding company shall be considered "well-capitalized" under this 
section of the Budget Act and Regulation Y, the Federal Reserve Board adopted 
as an interim rule, risk-based capital ratios (on a consolidated basis) that 
are, with the exception of the leverage ratio (which is lower), the same as 
the levels set for determining that a state member bank is well-capitalized 
under the provisions established under the prompt corrective action 
provisions of federal law. See "Item 1 Prompt Corrective Regulatory Action."
    

Under Federal Reserve Board regulations, a bank holding company is required 
to serve as a source of financial and managerial strength to its subsidiary 
banks and may not conduct its operations in an unsafe or unsound manner. In 
addition, it is the Federal Reserve Board's policy that in serving as a 
source of strength to its subsidiary banks, a bank holding company should 
stand ready to use available resources to provide adequate capital funds to 
its subsidiary banks during periods of financial stress or adversity and 

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should maintain the financial flexibility and capital-raising capacity to 
obtain additional resources for assisting its subsidiary banks. A bank 
holding company's failure to meet its obligations to serve as a source of 
strength to its subsidiary banks, will generally be considered by the Federal 
Reserve Board to be an unsafe and unsound banking practice in violation of 
the Federal Reserve Board's regulations or both.

BSM is also a bank holding company within the meaning of Section 3700 of the 
California Financial Code. As such, BSM and its subsidiary are subject to 
examination by, and may be required to file reports with, the Department of 
Financial Institutions.

Finally, BSM is subject to the periodic reporting requirements of the 
Securities Exchange Act of 1934, as amended, including but not limited to, 
filing annual, quarterly and other current reports with the Securities and 
Exchange Commission, (the "Commission").

AVAILABLE INFORMATION

Reports filed with the Commission can be viewed on the internet. The 
Commission maintains a Web Site that contains reports, proxy and information 
statements and other information. The address of the site is http://www.sec.gov.

BANK OF SANTA MARIA

   
Banks are extensively regulated under both federal and state law. The Bank, 
as a California state chartered bank, is subject to primary supervision, 
periodic examination and regulation by the Commissioner of Financial Insitutions
and the FDIC.
    

The Bank is insured by the FDIC, which currently insures deposits of each 
member bank to a maximum of $100,000 per depositor. For this protection, the 
Bank, as is the case with all insured banks, pays a quarterly statutory 
assessment and is subject to the rules and regulations of the FDIC. Although 
the Bank is not a member of the Federal Reserve System, it is nevertheless 
subject to certain regulations of the Federal Reserve Board.

Various requirements and restrictions under the laws of the State of 
California and the United States affect the operations of the Bank. State and 
federal statutes and regulations relate to many aspects of the Bank's 
operations, including reserves against deposits, interest rates payable on 
deposits, loans, investments, mergers and acquisitions, borrowings, dividends 
and locations of branch offices. Further, the Bank is required to maintain 
certain levels of capital.

   
There are statutory and regulatory limitations on the amount of dividends 
which may be paid to the stockholders by the Bank. California law restricts 
the amount available for cash dividends by state-chartered banks to the 
lesser of retained earnings or the bank's net income for its last three 
fiscal years (less any distributions to stockholders made during such 
period). In the event a bank has no retained earnings or net income for its 
last three fiscal years, cash dividends may be paid in an amount not 
exceeding the net income for such bank's last preceding fiscal year only 
after obtaining the prior approval of the Commissioner.
    

The FDIC also has authority to prohibit the Bank from engaging in activities 
that, in the FDIC's opinion, constitutes an unsafe or unsound practice in 
conducting its business. It is possible, depending upon the financial 
condition of the bank in question and other factors, that the FDIC could 
assert that the payment of dividends or other payments might, under some 
circumstances, be an unsafe or unsound practice.

Banks are subject to certain restrictions imposed by federal law on any 
extensions of credit to, or the issuance of a guarantee or letter of credit 
on behalf of its affiliates, the purchase of or investments in stock or other 
securities thereof, the taking of such securities as collateral for loans and 
the purchase of assets of such affiliates. Such restrictions prevent 
affiliates from borrowing from the Bank unless the loans are secured by 
marketable obligations of designated amounts. Further, such secured loans and 
investments by the Bank to any other affiliate is limited to 10% of the 
Bank's capital and surplus (as defined by federal regulations) and such 
secured loans and investments are limited, in the aggregate, to 20% of the 
Bank's capital and surplus (as defined by federal regulations). California 
law also imposes certain restrictions with respect to transactions involving 
other controlling persons of the Bank. Additional restrictions on 
transactions with affiliates may be imposed on the Bank under the prompt 
corrective action provisions of the FDIC Improvement Act.

POTENTIAL AND EXISTING ENFORCEMENT ACTIONS

Commercial banking organizations, such as the Bank, may be subject to 
potential enforcement actions by the FDIC and the Commissioner for unsafe 
or unsound practices in conducting their businesses or for violations of any 
law, rule, regulation or any condition imposed in writing by the agency or 
any written agreement with the agency. Enforcement actions may include the 
imposition of a conservator or receiver, the issuance of a cease-and-desist 
order that can be judicially enforced, the termination of insurance of 
deposits, the imposition of civil money penalties, the issuance of directives 
to increase capital, the issuance of formal 

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and informal agreements, the issuance of removal and prohibition orders 
against institution-affiliated parties and the imposition of restrictions and 
sanctions under the prompt corrective action provisions of the FDIC 
Improvement Act.

The regulations of these various agencies govern most aspects of the Bank's 
business, including required reserves on deposits, investments, loans, 
certain of their check clearing activities, issuance of securities, payment 
of dividends, opening of branches, and numerous other areas. As a consequence 
of the extensive regulation of commercial banking activities in the United 
States, the Bank's business is particularly susceptible to changes in 
California and the Federal legislation and regulations which may have the 
effect of increasing the cost of doing business, limiting permissible 
activities, or increasing competition.

EFFECT OF GOVERNMENTAL POLICIES AND LEGISLATION

Banking is a business that depends on rate differentials. In general, the 
difference between the interest rate paid by the Bank on its deposits and its 
other borrowings and the interest rate received by the Bank on loans extended 
to its customers and securities held in the Bank's portfolio comprise the 
major portion of the Bank's earnings. These rates are highly sensitive to 
many factors that are beyond the control of the Bank. Accordingly the 
earnings and growth of the Bank are subject to the influence of local, 
domestic and foreign economic conditions, including recession, unemployment 
and inflation.

The commercial banking business is not only affected by general economic 
conditions but is also influenced by the monetary and fiscal policies of the 
federal government and the policies of regulatory agencies, particularly the 
Federal Reserve Board. The Federal Reserve Board implements national monetary 
policies (with objectives such as curbing inflation and combating recession) 
by its open-market operations in United States Government securities, by 
adjusting the required level of reserves for financial intermediaries subject 
to its reserve requirements and by varying the discount rates applicable to 
borrowings by depository institutions. The actions of the Federal Reserve 
Board in these areas influence the growth of bank loans, investments and 
deposits and also affect interest rates charged on loans and paid on 
deposits. The nature and impact of any future changes in monetary policies 
cannot be predicted.

From time to time, legislation is enacted which has the effect of increasing 
the cost of doing business, limiting or expanding permissible activities or 
affecting the competitive balance between banks and other financial 
intermediaries. Proposals to change the laws and regulations governing the 
operations and taxation of banks, bank holding companies and other financial 
intermediaries are frequently made in Congress, in the California legislature 
and before various bank regulatory and other professional agencies. For 
example, legislation has been introduced in Congress that would repeal the 
current statutory restrictions on affiliations between commercial banks and 
securities firms. The likelihood of any major changes and the impact such 
changes might have on the Bank are impossible to predict.

FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991

On December 19, 1991, the FDIC Improvement Act was enacted into law. Set 
forth below is a brief discussion of certain portions of this law and 
implementing regulations that have been adopted or proposed by the Federal 
Reserve Board, the Comptroller of the Currency ("Comptroller"), the Office of 
Thrift Supervision ("OTS") and the FDIC (collectively, the "federal banking 
agencies").

STANDARDS FOR SAFETY AND SOUNDNESS

The FDIC Improvement Act requires the federal banking agencies to prescribe, 
by regulation, standards for all insured depository institutions and 
depository institution holding companies relating to internal controls, loan 
documentation, credit underwriting, interest rate exposure and asset growth. 
Standards must also be prescribed for classified loans, earnings and the 
ratio of market value to book value for publicly traded shares. The FDIC 
Improvement Act also requires the federal banking agencies to issue uniform 
regulations prescribing standards for real estate lending that are to 
consider such factors as the risk to the deposit insurance fund, the need for 
safe and sound operation of insured depository institutions and the 
availability of credit. Further, the FDIC Improvement Act requires the 
federal banking agencies to establish standards prohibiting compensation, 
fees and benefit arrangements that are excessive or could lead to financial 
loss.

In July 1992, the federal banking agencies issued a joint advance notice of 
proposed rule making requesting public comment on the safety and soundness 
standards required to be prescribed by the FDIC Improvement Act. The purpose 
of the notice is to assist the federal banking agencies in the development of 
proposed regulations. In accordance with the FDIC Improvement Act, final 
regulations must become effective no later than December 1, 1993.

In December 1992, the federal banking agency issued final regulations 
prescribing uniform guidelines for real estate lending. The regulations 
require insured depository institutions to adopt written policies 
establishing standards, consistent with such guidelines, 

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for extensions of credit secured by real estate. The policies must address 
loan portfolio management, underwriting standards and loan to value limits 
that do not exceed the supervisory limits prescribed by the regulations.

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

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

PROMPT CORRECTIVE REGULATORY ACTION

The FDIC Improvement Act requires each federal banking agency to take prompt 
corrective action to resolve the problems of insured depository institutions 
that fall below one or more prescribed minimum capital ratios. The purpose of 
this law is to resolve the problems of insured depository institutions at the 
least possible long-term cost to the appropriate deposit insurance fund.

The law requires each federal banking agency to promulgate regulations 
defining the following five categories in which an insured depository 
institution will be placed, based on the level of its capital ratios: well 
capitalized (significantly exceeding the required minimum capital 
requirements), adequately capitalized (meeting the required capital 
requirements), undercapitalized (failing to meet any one of the capital 
requirements), significantly undercapitalized (significantly below any one 
capital requirement) and critically undercapitalized (failing to meet all 
capital requirements).

In September 1992, the federal banking agencies issued uniform final 
regulations implementing the prompt corrective action provisions of the FDIC 
Improvement Act. Under the regulations, an insured depository institution 
will be deemed to be:

     -     "well capitalized" if it (i) has total risk-based capital of 10% or
           greater, Tier 1 risk-based capital of 6% or greater and a leverage
           capital ratio of 5% or greater and (ii) is not subject to an order,
           written agreement, capital directive or prompt corrective action
           directive to meet and maintain a specific capital level for any
           capital measure;
     -     "adequately capitalized" if it has total risk-based capital of 8% or
           greater, Tier 1 risk-based capital of 4% or greater and a leverage
           capital ratio of 4% or greater (or a leverage capital ratio of 3% or
           greater if the institution is rated composite 1 under the applicable
           regulatory rating system in its most recent report of examination);
     -     "undercapitalized" if it has total risk-based capital that is less
           than 8%, Tier 1 risk-based capital that is less than 4% or a leverage
           capital ratio that is less than 4% (or a leverage capital ratio that
           is less than 3% if the institution is rated composite 1 under the
           applicable regulatory rating system in its most recent report of
           examination);
     -     "significantly undercapitalized" if it has total risk-based capital
           that is less than 6%, Tier 1 risk-based capital that is less than 3%
           or a leverage capital ratio that is less than 3%; and
     -     "critically undercapitalized" if it has a ratio of tangible equity
           to total assets that is equal to or less than 2%.


An institution that, based upon its capital levels, is classified as well 
capitalized, adequately capitalized or undercapitalized may be reclassified 
to the next lower capital category if the appropriate federal banking agency, 
after notice and opportunity for hearing, (i) determines that the institution 
is in an unsafe or unsound condition or (ii) deems the institution is 
engaging in an unsafe or unsound practice and not to have corrected the 
deficiency. At each successive lower capital category, an insured depository 
institution is subject to more restrictions and federal banking agencies are 
given less flexibility in deciding how to deal with it. 

The law prohibits insured depository institutions from paying management fees 
to any controlling persons or, with certain limited exceptions, making 
capital distributions if after such transaction the institution would be 
undercapitalized. If an insured depository institution is undercapitalized, 
it will be closely monitored by the appropriate federal banking agency, 
subject to asset growth restrictions and required to obtain prior regulatory 
approval for acquisitions, branching and engaging in new lines of business. 
Any 

                                   7

<PAGE>

undercapitalized depository institution must submit an acceptable capital 
restoration plan to the appropriate federal banking agency 45 days after 
becoming undercapitalized. The appropriate federal banking agency cannot 
accept a capital plan unless, among other things, it determines that the plan 
(i) specifies the steps the institution will take to become adequately 
capitalized, (ii) is based on realistic assumptions and (iii) is likely to 
succeed in restoring the depository institution's capital. In addition, each 
company controlling an undercapitalized depository institution must guarantee 
that the institution will comply with the capital plan until the depository 
institution has been adequately capitalized on an average basis during each 
of four consecutive calendar quarters and must otherwise provide adequate 
assurances of performance. The aggregate liability of such guarantee is 
limited to the lesser of (a) an amount equal to 5% of the depository 
institution's total assets at the time the institution became 
undercapitalized or (b) the amount which is necessary to bring the 
institution into compliance with all capital standards applicable to such 
institution as of the time the institution fails to comply with its capital 
restoration plan. Finally, the appropriate federal banking agency may impose 
any of the additional restrictions or sanctions that it may impose on 
significantly undercapitalized institutions if it determines that such action 
will further the purpose of the prompt correction action provisions.

An insured depository institution that is significantly undercapitalized, or 
is undercapitalized and fails to submit, or in a material respect to 
implement, an acceptable capital restoration plan, is subject to additional 
restrictions and sanctions. These include, among other things: (i) a forced 
sale of voting shares to raise capital or, if grounds exist for appointment 
of a receiver or conservator, a forced merger; (ii) restrictions on 
transactions with affiliates; (iii) further limitations on interest rates 
paid on deposits; (iv) further restrictions on growth or required shrinkage; 
(v) modification or termination of specified activities; (vi) replacement of 
directors or senior executive officers, subject to certain grandfather 
provisions for those elected prior to enactment of the FDIC Improvement Act; 
(vii) prohibitions on the receipt of deposits from correspondent 
institutions; (viii) restrictions on capital distributions by the holding 
companies of such institutions; (ix) required divestiture of subsidiaries by 
the institution; or (x) other restrictions as determined by the appropriate 
federal banking agency. Although the appropriate federal banking agency has 
discretion to determine which of the foregoing restrictions or sanctions it 
will seek to impose, it is required to force a sale of voting shares or 
merger, impose restrictions on affiliate transactions and impose restrictions 
on rates paid on deposits unless it determines that such actions would not 
further the purpose of the prompt corrective action provisions. In addition, 
without the prior written approval of the appropriate federal banking agency, 
a significantly undercapitalized institution may not pay any bonus to its 
senior executive officers or provide compensation to any of them at a rate 
that exceeds such officer's average rate of base compensation during the 12 
calendar months preceding the month in which the institution became 
undercapitalized.

Further restrictions and sanctions are required to be imposed on insured 
depository institutions that are critically undercapitalized. For example, a 
critically undercapitalized institution generally would be prohibited from 
engaging in any material transaction other than in the ordinary course of 
business without prior regulatory approval and could not, with certain 
exceptions, make any payment of principal or interest on its subordinated 
debt beginning 60 days after becoming critically undercapitalized. Most 
importantly, however, except under limited circumstances, the appropriate 
federal banking agency, not later than 90 days after an insured depository 
institution becomes critically undercapitalized, is required to appoint a 
conservator or receiver for the institution. The board of directors of an 
insured depository institution would not be liable to the institution's 
shareholders or creditors for consenting in good faith to the appointment of 
a receiver or conservator or to an acquisition or merger as required by the 
regulator.

The FDIC has adopted risk-based minimum capital guidelines intended to 
provide a measure of capital that reflects the degree of risk associated with 
a banking organization's operations for both transactions reported on the 
balance sheet as assets and transactions, such as letters of credit and 
recourse arrangements, which are recorded as off-balance sheet items. Under 
these guidelines, nominal dollar amounts of assets and credit equivalent 
amounts of off-balance sheet items are multiplied by one of several risk 
adjustment percentages, which range from 0% for assets with low credit risk, 
such as certain U.S. Treasury securities, to 100% for assets with relatively 
high credit risk, such as business loans.

In addition to the risk-based guidelines, the FDIC requires banks to maintain 
a minimum amount of Tier 1 capital to total assets, referred to as the 
leverage ratio. For a bank rated in the highest of the five categories used 
by the FDIC to rate banks, the minimum leverage ratio of Tier 1 capital to 
total assets is 3%. For all banks not rated in the highest category, the 
minimum leverage ratio must be at least 100 to 200 basis points above the 3% 
minimum, or 4% to 5%. In addition to these uniform risk-based capital 
guidelines and leverage ratios that apply across the industry, the FDIC has 
the discretion to set individual minimum capital requirements for specific 
institutions at rates significantly above the minimum guidelines and ratios.

In August 1995, the federal banking agencies adopted final regulations 
specifying that the agencies will include, in their evaluations of a bank's 
capital adequacy, an assessment of the exposure to declines in the economic 
value of the bank's capital due to changes in interest rates. The final 
regulations, however, do not include a measurement framework for assessing 
the level of a bank's exposure to interest rate risk, which is the subject of 
a proposed policy statement issued by the federal banking agencies 
concurrently with the final regulations. The proposal would measure interest 
rate risk in relation to the effect of a 200 basis point change in market 
interest rates on the economic value of a bank. Banks with high levels of 
measured exposure or weak management systems generally will be required to 
hold additional capital for interest rate risk. The specific amount of 
capital that 

                                    8

<PAGE>

may be needed would be determined on a case-by-case basis by the examiner and 
the appropriate federal banking agency. Because this proposal has only 
recently been issued, the Bank currently is unable to predict the impact of 
the proposal on the Bank if the policy statement is adopted as proposed.

In January 1995, the federal banking agencies issued a final rule relating to 
capital standards and the risks arising from the concentration of credit and 
nontraditional activities. Institutions which have significant amounts of 
their assets concentrated in high risk loans or nontraditional banking 
activities and who fail to adequately manage these risks, will be required to 
set aside capital in excess of the regulatory minimums. The federal banking 
agencies have not imposed any quantitative assessment for determining when 
these risks are significant, but have identified these issues as important 
factors they will review in assessing an individual bank's capital adequacy.

In December 1993, the federal banking agencies issued an interagency policy 
statement on the allowance for loan and lease losses which, among other 
things, establishes certain benchmark ratios of loan loss reserves to 
classified assets. The benchmark set forth by such policy statement is the 
sum of (a) assets classified "loss"; (b) 50 percent of assets classified 
"doubtful"; (c) 15 percent of assets classified "substandard"; and (d) 
estimated credit losses on other assets over the upcoming 12 months.

OTHER ITEMS

The FDIC Improvement Act also, among other things, (i) limits the percentage 
of interest paid on brokered deposits and limits the unrestricted use of such 
deposits to only those institutions that are well capitalized; (ii) requires 
the FDIC to charge insurance premiums based on the risk profile of each 
institution; (iii) eliminates "pass through" deposit insurance for certain 
employee benefit accounts unless the depository institution is well 
capitalized or, under certain circumstances, adequately capitalized; (iv) 
prohibits insured state chartered banks from engaging as principal in any 
type of activity that is not permissible for a national bank unless the FDIC 
permits such activity and the bank meets all of its regulatory capital 
requirements; (v) directs the appropriate federal banking agency to determine 
the amount of readily marketable purchased mortgage servicing rights that may 
be included in calculating such institution's tangible, core and risk-based 
capital; and (vi) provides that, subject to certain limitations, any federal 
savings association may acquire or be acquired by any insured depository 
institution.

In addition, the FDIC has issued final and proposed regulations implementing 
provisions of the FDIC Improvement Act relating to powers of insured state 
banks. Final regulations issued in October 1992 prohibit insured state banks 
from making equity investments of a type, or in an amount, that are not 
permissible for national banks. In general, equity investments include equity 
securities, partnership interests and equity interests in real estate. Under 
the final regulations, non-permissible investments must be divested by no 
later than December 19, 1996. The Bank has no such non-permissible 
investments.

Regulations issued in December 1993, prohibit insured state banks from 
engaging as principal in any activity not permissible for a national bank, 
without FDIC approval. The proposal also provides that subsidiaries of 
insured state banks may not engage as principal in any activity that is not 
permissible for a subsidiary of a national bank, without FDIC approval.

Certain provisions of the FDIC Improvement Act, such as the recently adopted 
real estate lending standards and the limitations on investments and powers 
of state banks and the rules to be adopted governing compensation, fees and 
other operating policies, may affect the way in which the Bank conducts its 
business, and other provisions, such as those relating to the establishment 
of the risk-based premium system, may adversely affect the Bank's results of 
operations. Furthermore, the actual and potential restrictions and sanctions 
that apply to or may be imposed on undercapitalized institutions under the 
prompt corrective action and other provisions of the FDIC Improvement Act may 
significantly adversely affect the operations and liquidity of the Bank, the 
value of its Common Stock and its ability to raise funds in the financial 
markets.

CAPITAL ADEQUACY GUIDELINES

The FDIC has issued guidelines to implement the risk-based capital 
requirements. The guidelines are intended to establish a systematic 
analytical framework that makes regulatory capital requirements more 
sensitive to differences in risk profiles among banking organizations, takes 
off-balance sheet items into account in assessing capital adequacy and 
minimizes disincentives to holding liquid, low-risk assets. Under these 
guidelines, assets and credit equivalent amounts of off-balance sheet items, 
such as letters of credit and outstanding loan commitments, are assigned to 
one of several risk categories, which range from 0% for risk-free assets, 
such as cash and certain U.S. Government securities, to 100% for relatively 
high-risk assets, such as loans and investments in fixed assets, premises and 
other real estate owned. The aggregated dollar amount of each category is 
then multiplied by the risk-weight associated with that category. The 
resulting weighted values from each of the risk categories are then added 
together to determine the total risk-weighted assets.

A banking organization's qualifying total capital consists of two components: 
Tier 1 capital (core capital) and Tier 2 capital (supplementary capital). 
Tier 1 capital consists primarily of common stock, related surplus and 
retained earnings, qualifying non-

                                 9

<PAGE>

cumulative perpetual preferred stock and minority interests in the equity 
accounts of consolidated subsidiaries. Intangibles, such as goodwill, are 
generally deducted from Tier 1 capital; however, purchased mortgage servicing 
rights and purchase credit card relationships may be included, subject to 
certain limitations. At least 50% of the banking organization's total 
regulatory capital must consist of Tier 1 capital.

Tier 2 capital may consist of (i) the allowance for possible loan and lease 
losses in an amount up to 1.25% of risk-weighted assets; (ii) perpetual 
preferred stock, cumulative perpetual preferred stock and long-term preferred 
stock and related surplus; (iii) hybrid capital instruments (instruments with 
characteristics of both debt and equity), perpetual debt and mandatory 
convertible debt securities; and (iv) eligible term subordinated debt and 
intermediate-term preferred stock with an original maturity of five years or 
more, including related surplus, in an amount up to 50% of Tier 1 capital. 
The inclusion of the foregoing elements of Tier 2 capital are subject to 
certain requirements and limitations of the federal banking agencies.

The FDIC has also adopted a minimum leverage capital ratio of Tier 1 capital 
to average total assets of 3% for the highest rated banks. This leverage 
capital ratio is only a minimum. Institutions experiencing or anticipating 
significant growth or those with other than minimum risk profiles are 
expected to maintain capital well above the minimum level. Furthermore, 
higher leverage capital ratios are required to be considered well capitalized 
or adequately capitalized under the prompt corrective action provisions of 
the FDIC Improvement Act.

PREMIUMS FOR DEPOSIT INSURANCE

Federal law has established several mechanisms to increase funds to protect 
deposits insured by the Bank Insurance Fund ("BIF") administered by the FDIC. 
The FDIC is authorized to borrow up to $30 billion from the United States 
Treasury; up to 90% of the fair market value of assets of institutions 
acquired by the FDIC as receiver from the Federal Financing Bank; and from 
depository institutions that are members of the BIF. Any borrowings not 
repaid by asset sales are to be repaid through insurance premiums assessed to 
member institutions. Such premiums must be sufficient to repay any borrowed 
funds within 15 years and provide insurance fund reserves of $1.25 for each 
$100 of insured deposits. The FDIC also has authority to impose special 
assessments against insured deposits.

The FDIC implemented a final risk-based assessment system, as required by 
FDICIA, effective January 1, 1994, under which an institution's premium 
assessment is based on the probability that the deposit insurance fund will 
incur a loss with respect to the institution, the likely amount of any such 
loss, and the revenue needs of the deposit insurance fund. As long as BIF's 
reserve ratio is less than a specified "designated reserve ratio," 1.25%, the 
total amount raised from BIF members by the risk-based assessment system may 
not be less than the amount that would be raised if the assessment rate for 
all BIF members were .023% of deposits. The FDIC, effective September 15, 
1995, lowered assessments from their rates of $.23 to $.31 per $100 of 
insured deposits to rates of $.04 to $.31, depending on the condition of the 
bank, as a result of the re-capitalization of the BIF. On November 15, 1995, 
the FDIC voted to drop its premiums for well capitalized banks to zero 
effective January 1, 1996. Other banks will be charged risk-based premiums up 
to $.27 per $100 of deposits.

In 1996, Governor Pete Wilson signed Assembly Bill 3351 (the "Banking 
Consolidation Bill"), authored by Assemblyman Ted Weggeland and sponsored by 
the California State Banking Department (the "Department"), effective July 1, 
1997, which creates the California Department of Financial Institutions 
("DFI") to be headed by a Commissioner of Financial Institutions out of the 
existing Department which regulates state chartered commercial banks and 
trust companies in California.

The Banking Consolidation Bill, among other provisions, also (i) transfers 
regulatory jurisdiction over state chartered savings and loan associations 
from the Department of Savings and Loans ("DSL") to the newly-created DFI and 
abolishes the DSL; (ii) transfers regulatory jurisdiction over state 
chartered industrial loan companies and credit unions from the Department of 
Corporations to the newly-created DFI; and (iii) establishes within the DFI 
separate divisions for credit unions, commercial banks, industrial loan 
companies and savings and loans. As the Banking Consolidation Bill has only 
recently been enacted, it is impossible to predict with any degree of 
certainty, what impact it will have on the banking industry in general and 
the Bank in particular.

   
In 1996, the President signed into law provisions to strengthen the Savings 
Association Insurance Fund (the "SAIF") and to repay outstanding bonds that 
were issued to re-capitalize the SAIF's successor as result of payments made 
due to insolvency of savings and loan associations and other federally 
insured savings institutions in the late 1980's and early 1990's. The new law 
will require savings and loan associations to bear the cost of 
re-capitalizing the SAIF and, after January 1, 1997, banks will contribute 
towards paying off the financing bonds, including interest. In the year 2000, 
the banking industry will assume the bulk of the payments. The new law also 
aims to merge the Bank Insurance Fund and SAIF by 1999, but not until the 
bank and savings and loan charters are combined. The Treasury Department had 
until March 31, 1997, to deliver to Congress on combining the charters. 
Additionally, the new law provides "regulatory relief" for the banking 
industry by effecting approximately 30 laws and regulations. Currently, the 
costs and benefits of the new law to the Bank can not be accurately predicted.
    

                                       10

<PAGE>

INTERSTATE BANKING AND BRANCHING

On September 29, 1994, the President signed into law the Riegle-Neal 
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate 
Act"). Under the Interstate Act, beginning one year after the date of 
enactment, a bank holding company that is adequately capitalized and managed 
may obtain regulatory approval to acquire an existing bank located in another 
state without regard to state law. A bank holding company would not be 
permitted to make such an acquisition if, upon consummation, it would control 
(a) more than 10% of the total amount of deposits of insured depository 
institutions in the United States or (b) 30% or more of the deposits in the 
state in which the bank is located. A state may limit the percentage of total 
deposits that may be held in that state by any one bank or bank holding 
company if application of such limitation does not discriminate against 
out-of-state banks. An out-of-state bank holding company may not acquire a 
state bank in existence for less than a minimum length of time that may be 
prescribed by state law except that a state may not impose more than a five 
year existence requirement.

   
On July 3, 1997, the President signed into law the Reigle-Neal Amendment Act 
of 1997 providing that branches of state banks that operate in other states 
are to be governed by the laws of their home (or chartering) states, not the 
laws of the host states. State banks and state bank regulators pushed for the 
legislation, believing that without it, state banks would switch to national 
charters to avoid having to deal with a different a set of laws in each state 
where they have established branches.
    

State banks will not receive any new powers under the legislation. If a host 
state allows banks more powers than a bank's chartering state, the bank is 
restricted to the powers granted by its chartering state. However, states 
will be prohibited from discriminating against branches of banks from other 
states by the requirement that states must grant branches out-of-state banks 
the same privileges allowed to banks that states have chartered.

The Interstate Act also permits, beginning June 1, 1997, mergers of insured 
banks located in different states and conversion of the branches of the 
acquired bank into branches of the resulting bank. Each state may permit such 
combinations earlier than June 1, 1997, and may adopt legislation to prohibit 
interstate mergers after that date in that state or in other states by that 
state's banks. The same concentration limits discussed in the preceding 
paragraph apply. The Interstate Act also permits a national or state bank to 
establish branches in a state other than its home state if permitted by the 
laws of that state, subject to the same requirement and conditions as for a 
merger transaction. Effective October 2, 1995, California adopted legislation 
which "opts California into" the Interstate Act. However, the California 
Legislation restricts out of state banks from purchasing branches or starting 
a de novo branch to enter the California banking market. Such banks may 
proceed only by way of purchases of whole banks. 

   
The Interstate Act is likely to increase competition in the Bank's market 
areas especially from larger financial institutions and their holding 
companies. It is difficult to access the impact such likely increased 
competition will have on the Bank' operations.
    

   
In 1986, California adopted an interstate banking law. The law allows 
California banks and bank holding companies to be acquired by banking 
organizations in other states on a "reciprocal" basis (i.e., provided the 
other state's law permit California banking organizations to acquire banking 
organizations in that state on substantially the same terms and conditions 
applicable to banking organizations solely within that state). The law took 
effect in two stages. The first stage allowed acquisitions on a "reciprocal" 
basis within a region consisting of 11 western states. The second stage, 
which became effective January 1, 1991, allows interstate acquisitions on a 
national "reciprocal" basis. California has also adopted similar legislation 
applicable to savings associations and their holding companies.
    

On September 28, 1995, Governor Wilson signed Assembly Bill No. 1482, the 
Caldera, Weggeland, and Killea California Interstate Banking and Branching 
Act of 1995 (the "1995 Act"). The 1995 Act, which was filed with the 
Secretary of State as Chapter 480 of the Statutes of 1995, became operative 
on October 2, 1995.

   
The 1995 Acts opts in early for interstate branching, allowing out-of-state 
banks to enter California by merging or purchasing a California bank or 
industrial loan company which is at least five years old. Also, the 1995 Act 
repeals the California Interstate (National) Banking Act of 1986, which 
regulated the acquisition of California banks by out-of-state bank holding 
companies. In addition, the 1995 Act permits California state banks, with the 
approval of the Commissioner of Financial Insitutions, to establish agency 
relationships with FDIC-insured banks and savings associations. Finally, the 
1995 Act provides for regulatory relief, including (i) authorization for the 
Superintendent to exempt banks from the requirement of obtaining approval 
before establishing or relocating a branch office or place of business, (ii) 
repeal of the requirement of directors' oaths (Financial Code Section 682), 
and (iii) repeal of the aggregate limit on real estate loans (Financial Code 
Section 1230).
    

COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS

The Bank is subject to certain fair lending requirements and reporting 
obligations involving home mortgage lending operations and Community 
Reinvestment Act ("CRA") activities. The CRA generally requires the federal 
banking agencies to evaluate the record of financial institutions in meeting 
the credit needs of their local community, including low and moderate income 
neighborhoods. In addition to substantial penalties and corrective measures 
that may be required for a violation of certain fair lending laws, the 

                                      11

<PAGE>

federal banking agencies may take compliance with such laws and CRA into 
account when regulating and supervising other activities.

   
In May 1995, the federal banking agencies issued final regulations which 
change the manner in which they measure a bank's compliance with its CRA 
obligations. The final regulations adopt a performance-based evaluation 
system which bases CRA ratings on an institutions' actual lending service and 
investment performance, rather than the extent to which the institution 
conducts needs assessments, documents community outreach or complies with 
other procedural requirements. In March 1994, the Federal Interagency Tax 
Force on Fair Lending issued a policy statement on discrimination in lending. 
The policy statement describes the three methods that federal agencies will 
use to prove discrimination: overt evidence of discrimination, evidence of 
disparate treatment and evidence of disparate impact.
    

CHANGES IN ACCOUNTING PRINCIPLES

In March of 1995, the FASB issued SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT 
OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. SFAS No. 
121 establishes accounting standards for the impairment of long-lived assets, 
certain identifiable intangibles, and goodwill related to those assets to be 
held and used and for long-lived assets and certain identifiable intangibles 
to be disposed of. The statement does not apply to financial instruments 
long-term customer relationships of a financial institution (core deposits), 
mortgage and other servicing rights, and tax deferred assets. SFAS 121 
requires the review of long-lived assets and certain identifiable intangibles 
for impairment whenever events or changes in circumstances include, for 
example, a significant decrease in market value of an assets, a significant 
change in use of an asset, or an adverse change in a legal factor that could 
affect the value of an asset. If such an event occurs and it is determined 
that the carrying value of the asset may not be recoverable, an impairment 
loss should be recognized and measured by the amount by which the carrying 
amount of the asset exceeds the fair value of the asset. Fair value can be 
determined by a current transaction, quoted market prices, or present value 
of estimated expected future cash flows discounted at the appropriate rate. 
The statement is effective for fiscal years beginning after December 15, 
1995. The implementation of SFAS No. 121 did not have a material impact on 
the Bank's results of operations or financial position.

In May of 1995, the FASB issued SFAS 122, ACCOUNTING FOR MORTGAGE SERVICING 
RIGHTS. SFAS No. 122 eliminates distinctions between servicing rights that 
were purchased and those that were retained upon the sale of loans. The 
statement requires mortgage servicers to recognize as separate assets rights 
to service loans, no matter how the rights were acquired. Institutions who 
sell loans and retain the servicing rights will be required to allocate the 
total cost of the loans to servicing rights and loans based on their relative 
fair values if the value can be estimated. SFAS No. 122 is effective for 
fiscal years beginning after December 15, 1995. Further, SFAS No. 122 
requires that all capitalized mortgage servicing rights be periodically 
evaluated for impairment based upon the current fair value of these rights. 
This Statement which is superseded by SFAS No. 125, ACCOUNTING FOR TRANSFERS 
AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES, did not 
have a material effect on the Bank's financial condition and results of 
operations.

In October of 1995, the FASB issued SFAS No. 123, ACCOUNTING FOR STOCK-BASED 
COMPENSATION, establishing financial accounting and reporting standards for 
stock-based employee compensation plans. This statement encourages all 
entities to adopt a new method of accounting to measure compensation cost of 
all employee stock compensation plans based on the estimated fair value of 
the award at the date it is granted. Companies are, however, allowed to 
continue to measure compensation cost for those plans using the intrinsic 
value based method of accounting, which generally does not result in 
compensation expense recognition for most plans. Companies that elect to 
remain with the existing accounting are required to disclose in a footnote to 
the financial statements pro forma net income and, if presented, earnings per 
share, as if this statement had been adopted. The accounting requirements of 
this statement are effective for transactions entered into in fiscal years 
that begin after December 15, 1995; however, companies are required to 
disclose information for awards granted in their first fiscal year beginning 
after December 15, 1994. The Bank has elected the pro forma disclosure 
requirements as noted in the note to the Financial Statements.

In June of 1996, the FASB issued SFAS No. 125, Accounting for Transfers and 
Servicing of Financial Assets and Extinguishments of Liabilities, and in 
December, 1996 issued SFAS No. 127, Deferral of the Effective Date of Certain 
Provisions of FASB Statement No. 125 (an amendment of FASB Statement No. 125) 
establishing accounting and reporting standards for transfers and servicing 
of financial assets and extinguishments of liabilities based on consistent 
application of the financial-components approach. This approach requires the 
recognition of financial assets and servicing assets that are controlled by 
the reporting entity, the de-recognition of financial assets when control is 
surrendered, and the de-recognition of liabilities when they are 
extinguished. Specific criteria are established for determining when control 
has been surrendered in the transfer of financial assets. Liabilities and 
derivatives incurred or obtained by transferors in conjunction with the 
transfer of financial assets are required to be measured at fair value, if 
practicable. Servicing assets and other retained interests in transferred 
assets are required to be measured by allocating the previous carrying amount 
between the assets sold, if any, and the interest that is retained, if any, 
based on the relative fair values of the assets on the date of the transfer. 
Servicing assets retained are subsequently subject to amortization and 
assessment for 

                                     12

<PAGE>

impairment. Management believes the implementation of this statement will not 
have a material effect on the Banks financial condition or results of 
operations.

In June 1997, the Financial Accounting Standards Board issued Statement No. 
130, "REPORTING COMPREHENSIVE INCOME". This statement, which is effective for 
the year ending December 31, 1998, establishes standards of disclosure and 
financial statement display for reporting comprehensive income and its 
components.

In June 1997, the Financial Accounting Standards Board issued Statement No. 
131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION". 
This statement changes current practice under SFAS 14 by establishing a new 
framework on which to base segment reporting (referred to as the management 
approach), and also requires certain related disclosures about products and 
services, geographic areas, and major customers. The disclosures are required 
for the year ending December 31, 1998.

HAZARDOUS WASTE CLEAN-UP COSTS

Management is aware of recent legislation and cases relating to hazardous 
waste clean-up costs and potential liability. Based on a general survey of 
the loan portfolio of the Bank, conversations with local authorities and 
appraisers, and the type of lending currently and historically done by the 
Bank (generally, the Bank has not made the types of loans usually associated 
with hazardous waste contamination problems), management is not aware of any 
potential material liability for hazardous waste contamination.

OTHER REGULATIONS AND POLICIES

The federal regulatory agencies have adopted regulations that implement 
Section 304 of FDICIA which requires federal banking agencies to adopt 
uniform regulations prescribing standards for real estate lending. Each 
insured depository institution must adopt and maintain a comprehensive 
written real estate lending policy, developed in conformance with prescribed 
guidelines, and each agency has specified loan-to-value limits in guidelines 
concerning various categories of real estate loans.

Various requirements and restrictions under the laws of the United States and 
the State of California affect the operations of the Bank. Federal 
regulations include requirements to maintain non-interest bearing reserves 
against deposits, limitations on the nature and amount of loans which may be 
made, and restrictions on payment of dividends. The California Commissioner 
of Financial Institutions approves the number and locations of the branch 
offices of a bank. California law exempts banks from the usury laws.

YEAR 2000 SAFETY AND SOUNDNESS

Safety and soundness guidance on the risks posed to financial institutions by 
the Year 2000 problem was issued by the Federal Financial Institutions 
Examination Council. The guidance underscores that Year 2000 preparation is 
not only an information systems issue, according to the FFIEC, but also an 
enterprise-wide challenge that must be addressed at the highest level of a 
financial institution.

The guidance sets out the responsibilities of senior management and boards of 
directors in managing their Year 2000 projects. Among the responsibilities of 
institution managers and directors is that of managing the internal and 
external risks presented by providers of data-processing products and 
services, business partners, counterparties and major loan customers.

Under the guidance, senior management must provide the board of directors 
with status reports, at least quarterly, on efforts to reach Year 2000 goals 
both internally and by the institution's major vendors. Senior management and 
directors must allocate sufficient resources to ensure that high priority is 
given to seeing that remediation plans are fulfilled, and that the project 
receives the quality personnel and timely support it requires.

A Year 2000 management committee has been formed by the the Company to 
identify potential problems associated with the turn of the century and to 
develop resolutions to these problems. Renovation activities such as hardware 
and software upgrades, system replacements, and vendor certifications are 
anticipated to be completed during the fourth quarter of 1998. The Company 
was examined by the FDIC in January, 1998 specifically in regards to its 
efforts to meet Year 2000 compliance guidelines. The Company's efforts were 
judged to be satisfactory. Current costs and estimated future expenditures do 
not appear to be material and are expected to have negligible effects on the 
Company's results of operations, liquidity and capital resources.

                                     13

<PAGE>

MONETARY POLICY

Banking is a business which depends on rate differentials. In general, the 
difference between the interest paid by the Bank on its deposits and its 
other borrowings and the interest rate received by the Bank on loans extended 
to its customers and securities held in the Bank investment portfolios will 
comprise the major portion of the Bank's earnings.

The earnings and growth of the Bank will be affected not only by general 
economic conditions, both domestic and international, but also by the 
monetary and fiscal policies of the United States and its agencies, 
particularly the Federal Reserve Board. The Federal Reserve Board can and 
does implement national monetary policy, such as seeking to curb inflation 
and combat recession, by its open market operations in U.S. Government 
securities, limitations upon savings and time deposit interest rates, and 
adjustments to the discount rates applicable to borrowings by banks which are 
members of the Federal Reserve System. The actions of the Federal Reserve 
Board influence the growth of bank loans, investments and deposits and also 
affect interest rates charged on loans and paid on deposits. The nature and 
impact that future changes in fiscal or monetary policies or economic 
controls may have on the Bank's businesses and earnings cannot be predicted.

COMPETITION

The banking business in California generally, and in the Bank's primary 
service areas specifically, is highly competitive with respect to both loans 
and deposits and is dominated by a relatively small number of major banks 
with many offices and operations over a wide geographic area. Among the 
advantages such major banks have over the Bank are their ability to finance 
wide-ranging advertising campaigns and to allocate their investment assets to 
regions of higher yield and demand. Such banks offer certain services such as 
trust services and international banking which are not offered directly by 
the Bank; but which can be offered indirectly by the Bank through 
correspondent institutions. In addition, by virtue of their greater total 
capitalization, such banks have substantially higher lending limits than the 
Bank. (Legal lending limits to an individual customer are based upon a 
percentage of a bank's total capital accounts.) Other entities, both 
governmental and in private industry, seeking to raise capital through the 
issuance and sale of debt or equity securities also provide competition for 
the Bank in the acquisition of deposits. Banks also compete with money market 
funds and other money market instruments which are not subject to interest 
rate ceilings.

In order to compete with other competitors in their primary service areas, 
the Bank attempts to use, to the fullest extent, the flexibility which their 
independent status permits. This includes an emphasis on specialized 
services, local promotional activity, and personal contacts by their 
respective officers, directors and employees. In particular, each of the 
banks offers highly personalized banking services.

EMPLOYEES

At December 31, 1997, the Company had a total of 155 full-time employees and 
63 part-time employees.  The Bank believes that its employee relations are 
satisfactory.

                                       14

<PAGE>

ITEM 2.  PROPERTIES

The Bank owns the land and buildings at ten of its thirteen locations. Those 
locations include:

<TABLE>
<CAPTION>
                       OFFICE NAME                   ADDRESS
                       -----------                   -------
                      <S>                          <C>
                      MAIN OFFICE                  2739 Santa Maria Way
                                                   Santa Maria, California
                      SOUTH BROADWAY               528 South Broadway
                                                   Santa Maria, California
                      OAK KNOLLS                   1070 East Clark Avenue
                                                   Santa Maria, California
                      GUADALUPE                    905 Guadalupe Street
                                                   Guadalupe, California
                      VANDENBERG VILLAGE           3745 Constellation
                                                   Vandenberg Village, CA
                      GROVER BEACH                 1580 Grand Avenue
                                                   Grover Beach, California
                      PISMO BEACH                  790 Price Street
                                                   Pismo Beach, California
                      TEMPLETON                    1025 Las Tablas Road
                                                   Templeton, California
                      PASO ROBLES                  840 Spring Street
                                                   Paso Robles, California
                      ATASCADERO                   5955 E. Mall Street
                                                   Atascadero, California
</TABLE>

The Bank also leases the land where the NIPOMO branch has been built and a 
portion of the land upon which the NORTH BROADWAY branch building now stands. 
Both leases were long-term (25 years with an option to renew for a like 
period) and do contain the right of first refusal if the lessor elects to 
sell. However, neither lease has any options to purchase and therefore no 
ownership is assumed.

With the addition of our LOMPOC BRANCH, the Bank acquired a lease on the 
building in which the branch is located. This shopping center lease, which 
became in effect on November 1, 1989, is a five year term lease with a five 
year option to renew which expires in October, 1999.

In addition, the Bank now leases one off-site ATM location in Atascadero, 
California.

OTHER PROPERTIES

When real estate loans are foreclosed, the Bank retains the property and 
records the transaction on the Balance Sheet to the Other Real Estate Owned 
account. The following is a summary of the changes in Other Real Estate Owned 
for the periods ending December 31, 1997, 1996 and 1995.

<TABLE>
<CAPTION>

          (In  Thousands)                              1997            1996          1995
                                                       ----            ----          ----
          <S>                                      <C>              <C>           <C>
          Balance at beginning of year             $  1,678         $ 1,516       $ 1,398
          Additions                                     630           1,515           838
          Provisions charged to income                  (55)            (75)         (189)
          Sales of other real estate owned           (1,284)         (1,278)         (531)
                                                   ---------        --------      -------
               TOTAL                               $    969         $ 1,678       $ 1,516
                                                   ---------        --------      -------
                                                   ---------        --------      -------
</TABLE>

                                      15

<PAGE>

ITEM 3: LEGAL PROCEEDINGS

Due to the nature of its business, the Bank is a party to claims and legal 
proceedings arising in the ordinary course of business. It is management's 
opinion that there are no material actions pending against the bank as of 
this filing date.

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

None.


PART II


ITEM 5: MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDERS 
MATTERS

The common stock of the Company is not listed on any national stock exchange 
or with NASDAQ. Trading in the stock has not been extensive and such trades 
which have occurred would not constitute an active trading market. As of 
December 31, 1997, there were approximately 2,000 shareholders, including 
those listed in "street name" under various brokers. The management of the 
Company is aware of three securities dealers who maintain an inventory and 
make a market in the Company's common stock. The market makers are Maguire 
Investments of Santa Maria, Hoefer & Arnett of San Francisco, and Sutro & 
Company, with a local office in Santa Maria.

Since 1984, the Bank has consistently declared and paid a cash dividend to 
the then shareholders of Bank of Santa Maria, with the equivalent of $.06 
being paid since February of 1988. In 1994, the Board of Directors of the 
Bank increased the per share dividend to $.10. In 1995, the Board of 
Directors again increased the per share dividends to $.11 payable in 
February, 1995, to the holders of their stock.

In 1996, the Board of Directors increased the cash dividend to $.20 payable 
in February, 1996. At the 1996 Annual Shareholders Meeting, the Bank 
announced that it would begin to pay dividends on a semi-annual basis. In 
July 1996, a $.15 dividend was declared to be paid in August, 1996. In 
January of 1997, the Board again declared a $.15 cash dividend payable in 
February, 1997. Following the formation of the BSM Bancorp, the Directors of 
the Company continued the semi-annual dividend policy. In August of 1997, the 
Company paid a $.20 cash dividend. In January of 1998, the Company Board 
again declared a cash dividend of $.30 per share payable on February 6, 1998.

The California Financial Code provides that a bank may not make a cash 
distribution to its shareholders in excess of the lessor of the Company's 
undivided profits, or the Company's net income for its last three fiscal 
years; less the amount of any distribution made by the Company to 
shareholders during the same period. Under these restrictions, approximately 
$8,608,000 was available for payment of dividends at December 31, 1997. In 
addition, as part of the Agreement with Mid-State, the Company's mid-year 
cash dividend, if any, is limited to a maximum of $.10 per share.

The following quarterly summary of market activity is furnished by Maguire 
Investments, Inc. of Santa Maria and by the OTC Bulletin Board. These quotes 
do not necessarily include retail markups, markdowns, or commissions and may 
not necessarily represent actual transactions. Additionally, there may have 
been transactions at prices other than those shown below:

<TABLE>
<CAPTION>
                                                             Bid                  Ask
                                                            ------               ------
                 <S>                                        <C>                  <C>
                 1st Quarter 1996                           $14.00               $14.50
                 2nd Quarter 1996                           $13.75               $14.25
                 3rd Quarter 1996                           $15.00               $15.75
                 4th Quarter 1996                           $15.00               $16.00
                 1st Quarter 1997                           $15.25               $16.75
                 2nd Quarter 1997                           $16.13               $17.63
                 3rd Quarter 1997                           $16.75               $18.63
                 4th Quarter 1997                           $18.00               $27.50
</TABLE>

                                 16

<PAGE>

ITEM 6: SELECTED FINANCIAL DATA


BSM BANCORP SUMMARY HISTORICAL FINANCIAL DATA

The following summarizes historical financial data for the five years ended 
December 31, 1997. The data should be read in conjunction with the 
consolidated financial statements, related notes, and other financial 
information included or incorporated by reference in this Form 10-K.

<TABLE>
<CAPTION>
                                                              ------------------------------------------------------
(Amounts in thousands, except per share data.)                          AT OR FOR THE YEAR ENDED DECEMBER 31,
                                                              ------------------------------------------------------
                                                              1997         1996        1995         1994        1993
                                                              ----         ----        ----         ----        ----
<S>                                                       <C>           <C>         <C>          <C>         <C>
SUMMARY OF OPERATIONS: 
   Interest Income                                         $ 24,977     $ 23,372    $  22,367    $ 19,378    $ 18,431
   Interest Expense                                           8,425        7,991        7,045       5,560       5,625
                                                           --------     --------    ---------    --------    --------
   Net Interest Income                                       16,552       15,381       15,322      13,818      12,806
   Provisions for Loan Losses                                    30          227          876         340         712
                                                           --------     --------    ---------    --------    --------
   Net Interest Income After Provision for Loan Losses       16,522       15,154       14,446      13,478      12,094
   Noninterest Income                                         3,504        3,098        2,728       2,448       2,550
   Noninterest Expense                                       13,205       12,471       12,090      11,723      11,158
                                                           --------     --------    ---------    --------    --------
   Income Before Income Taxes                                 6,821        5,781        5,084       4,203       3,486
   Income Taxes                                               2,616        2,313        1,885       1,475       1,146
                                                           --------     --------    ---------    --------    --------
   Net Income                                              $  4,205     $  3,468    $   3,199    $  2,728    $  2,340
                                                           --------     --------    ---------    --------    --------
                                                           --------     --------    ---------    --------    --------
   Dividends on Common Stock                               $  1,402     $    964    $     257    $    219    $    131

PER SHARE DATA:
   Net Income-Basic                                        $   1.41     $   1.17    $    1.10    $   0.96    $   0.86
   Net Income-Diluted                                      $   1.38     $   1.16    $    1.09    $   0.95    $   0.83
   Dividends on Common Stock                               $   0.35     $   0.35    $    0.11    $   0.10    $   0.06
   Book Value                                              $  12.06     $  10.97    $   10.16    $   9.17    $   8.35
   Tangible Book Value                                     $  11.45     $  10.33    $   10.16    $   9.17    $   8.35

STATEMENTS OF FINANCIAL CONDITION SUMMARY:
   Total Assets                                            $344,046     $321,397    $ 284,616    $266,987    $253,311
   Total Deposits                                           306,292      286,278      252,544     238,954     229,137
   Loans Held for Sale                                        1,200        1,400        1,310         958       3,644
   Total Loans                                              191,346      179,391      166,086     164,406     164,004
   Allowance for Loan Losses                                  2,115        2,702        2,729       2,413       2,524
   Total Shareholders' Equity                                36,062       32,632       29,978      26,387      22,683

SELECTED RATIOS:
   Return on Average Assets                                    1.31%        1.15%        1.17%       1.05%       0.95%
   Return on Average Equity                                   12.15%       11.06%       11.26%      10.99%      10.80%
   Average Loans as a Percent of Average Deposits             62.44%       63.96%       63.04%      64.67%      66.94%
   Allowance for Loan Losses to Total Loans                    1.11%        1.51%        1.64%       1.47%       1.54%
   Average Capital to Average Assets                          10.76%       10.41%       10.42%       9.56%       8.79%
   Tier 1 Capital to Risk-Weighted Assets                     14.74%       14.10%       13.69%      12.29%      10.89%
   Total Capital to Risk-Weighted Assets                      15.66%       15.30%       14.96%      14.71%      12.13%
</TABLE>

                                      17

<PAGE>

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

The following discussion is intended to provide information to facilitate the 
understanding and assessment of significant changes and trends related to the 
results of operations and the financial condition of BSM Bancorp and its 
subsidiary, Bank of Santa Maria ("the Company"). This discussion and analysis 
should be read in conjunction with the Company's audited financial statements 
and the notes thereto.

BSM Bancorp ("the Bancorp") was incorporated on November 12, 1996, for the 
sole purpose of becoming a bank holding company for Bank of Santa Maria ("the 
Bank"). Following regulatory approval and with the approval of the Bank's 
shareholders, the Bank merged with BSM Merger Company, (a wholly-owned 
subsidiary of the Bancorp), as of the close of business on March 11, 1997. 
The resulting bank assumed the name of Bank of Santa Maria, becoming a 
wholly-owned subsidiary of the Bancorp. This acquisition was accounted for 
using the pooling of interest method.

Bank of Santa Maria was initially incorporated under the laws of the State of 
California on June 27, 1997, and was licensed by the California State Banking 
Department. The Bank commenced operations on March 18, 1978, and operated 
thirteen retail locations along the central coast of California. The Bank 
offers a full range of commercial banking services designed to serve the 
banking needs of individuals as well as small to medium sized businesses 
located within its primary market area.

As reported in Note B to the Financial Statements, the Bank has been actively 
involved in the acquisition of other central coast banks during the periods 
under discussion below. During 1997, El Camino National Bank was merged into 
the Bank. This acquisition was accounted for by using the pooling of interest 
method which requires the restatement of all previously reported numbers to 
give effect for this merger. The acquisition of Citizens Bank of Paso Robles 
in 1996, on the other hand, was accounted for by using the purchase method of 
accounting where no restatement of prior periods numbers was required. During 
1995, Templeton National Bank merged into the Bank. Like El Camino, this 
acquisition was also accounted for by using the pooling of interest method 
which requires the restatement of all previously reported numbers to give 
effect for this merger.

                             RESULTS OF OPERATIONS

The Company reported net earnings of $4,205,000, or $1.41 per share, in 1997. 
This represents an increase of 21.3% over 1996 where net earnings were 
$3,468,000, or $1.17 per share. Net earnings in 1995 were $3,199,000, or 
$1.10 per share.

The increase in profitability during 1997 is the net result of several major 
factors. On a pre-tax basis, the difference between the income figures 
reported in 1997 over 1996 is approximately $1,040,000. The following recaps 
are presented as a preview to a more detailed discussion to follow:

<TABLE>
<CAPTION>

CHANGES BETWEEN THE 1997 AND 1996 OPERATING PERIODS
<S>                                                                                   <C>

Increase in interest income due to increase in the volume of earning assets           $1,268,000
(Increase) in interest expenses due to increase in the volume of interest-
   bearing liabilities                                                                  (583,000)
Increase in net interest income due to improved net interest margin                      486,000
Reduction in the provision for loan losses                                               197,000
Increase in non-interest income from service charges                                     186,000
Increase in non-interest income from mortgage loan fees                                  168,000
(Increase) in salary & employee benefit costs                                           (621,000)
(Increase) in advertising & promotional expenses                                        (141,000)
Reduction in professional fees                                                           161,000
(Increase) in other costs (net)                                                          (81,000)
                                                                                      ----------
Change in pretax income between 1997 and 1996                                         $1,040,000
                                                                                      ----------
                                                                                      ----------
</TABLE>

                                        18

<PAGE>

<TABLE>
<CAPTION>

CHANGES BETWEEN THE 1996 AND 1995 OPERATING PERIODS
<S>                                                                          <C>
Contribution of former Citizens branches to profitability since merger        $  230,000
(Increase) in advertising & promotional expenses                                (133,000)
Decline in net interest income due to reduced net interest margin               (551,000)
Reduction in the provision for loan losses                                       649,000
Reduction in regulatory assessments                                              288,000
Reduction in merger-related expenses                                             107,000
Reduction in net losses on the sale of other real estate and fixed assets        107,000
                                                                              ----------
Change in pretax income between 1996 and 1995                                 $  697,000
                                                                              ----------
                                                                              ----------
</TABLE>

Other key financial ratios are listed below:

TABLE 1  - KEY FINANCIAL RATIOS

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                 --------------------------------------------------------
                                     1997        1996        1995       1994        1993
-----------------------------------------------------------------------------------------
<S>                               <C>          <C>         <C>        <C>         <C> 
Return on average assets             1.31%       1.15%       1.17%       1.05%      0.95%
Return on average equity            12.15%      11.06%      11.26%      10.99%     10.80%
Return on beginning equity          12.89%      11.57%      12.12%      12.03%     11.47%
Dividend payout ratio               24.82%      29.91%      10.00%      10.36%      6.97%
Average equity to average assets    10.76%      10.41%      10.42%       9.56%      8.79%
</TABLE>


NET INTEREST INCOME AND NET INTEREST MARGIN
Table 2, entitled Average Balances and Interest Rates, shows the Company's 
average assets, liabilities, and stockholders' equity with the related 
interest income, interest expense and rates for the years 1997, 1996, and 
1995. Rates for tax preferenced investments are shown on a tax equivalent 
basis using a 34% tax rate. Table 3 analyzes the reasons for change in net 
interest income resulting from movement in rates and changes in average 
outstanding balances. Reference should be made to both Table 2 and Table 3 to 
assist in understanding this major component of Company profitability.

Net interest income is the difference between the interest and fees earned on 
interest-bearing assets, such as loans and investments, and the interest paid 
on interest-bearing liabilities, such as deposits. Net interest income is 
similar to "Gross profits on sales" used in the financial statements for 
retail sales organizations. Net interest income in 1997 was $16.6 million as 
compared to $15.4 million in 1996, and $15.3 million in 1995. Net interest 
income, when expressed as a percentage of total average interest-earning 
assets, is referred to as net interest margin or "NIM". The Company's NIM was 
5.95% in 1997, compared to 5.84% in 1996, and 6.39% in 1995.

NIM is used as a measure of the efficiency of the Company's asset/liability 
management. The Company's NIM in 1997 increased by 1.9% compared to the 
decrease of 8.6% in 1996. The increase in NIM noted in 1997 is primarily the 
result of improved effective yield on the loan portfolio.

There are several reasons for the decline in 1996, which are best explained 
by an analysis of the NIM's major components. The two components of NIM are 
interest income and interest expense. Loans are the largest interest earning 
assets group which contribute to interest income. Loan demand in California 
during 1996 was weak. Although the average earning assets (after excluding 
the effect of the purchase of Citizens assets) increased by approximately $10 
million during 1996. Loans, as a percentage of earning assets, declined from 
66.7% to 62.8%. The investment portfolio absorbed these dollars, increasing 
their percentage of earning assets from 27.6% to 31.9%. This change in mix 
from higher yielding loans to the moderate yields available in low risk 
investments would have the effect of lowering interest income by over 
$500,000, assuming an average 5.0% differential between the two asset groups. 
In addition, the Company's average base rate declined from an average 8.83% 
for the year 1996, to an average 8.27% for the year 1997. This 56 basis point 
decline had a significant effect on the Company's loan portfolio because 
approximately 38% of all Company loans are tied to base rates, which re-price 
immediately upon movements in prime rates. Close to 60% of all loan dollars 
are subject to repricing within 90 days, and more than 72% of all loan 
dollars can be re-priced within any 12 month period. The actual decline in 
effective rates on the loan portfolio was 49 basis points during 1997. The 
effect on interest loan income of this decline in the effective interest 
rates would approximate $800,000.

                                     19

<PAGE>

Total interest income on earning assets for the year 1996 was up by $1.0 
million, despite the large decline in overall interest rate yields. This can 
be primarily attributable to the acquisition of earning assets obtained in 
the Citizens merger, although non-acquisition growth also was a contributing 
factor.

The funding of earning assets comes primarily from deposits. Between 1995 and 
1997, the percentage of average interest bearing deposits remained within the 
range of 78% to 79% of all deposits. However, the mix among average 
interest-bearing deposits changed with time deposits growing from 40.7% to 
50.4% of all average interest-bearing funds. This resulted in an increase in 
the cost of interest-bearing funds by 11 basis points and, at the same time, 
interest-earning assets were experiencing a decline of 37 basis points. 
Within the bank's marketplace, customers appeared to be willing to forego 
immediate liquidity to earning a better return on funds normally held in both 
savings and money market savings accounts.

Interest expense on interest-bearing deposits increased $434,000 in 1997 over 
1996, and by $946,000 in 1996 over 1995, primarily due to the increase in the 
volume of time deposits which fully offset the reductions in rates during 
this period.

The average interest rate from interest expense used in NIM is based upon 
average earning ASSETS rather than average interest-bearing deposits. 
Accordingly, fluctuations in earning assets affect the results of the 
percentages used in arriving at NIM. In 1997, interest expense, as expressed 
as a percentage of earning assets, increased by .7% to 2.96%, in comparison 
with 1996, where the percentage was an increase of 3.1% over the previous 
year.

Overall, NIM increased to 5.95% in 1997, up 10 basis points from 1996. This 
was in contrast to 1996, where NIM declined by 58 basis points as a result of 
the decline in interest-earning assets during the same time that increases 
were occurring in interest-bearing liabilities. Changes in both the mix of 
interest-earning assets and interest-bearing liabilities exacerbated the 
anticipated narrowing of the interest margin which would have normally 
occurred when general interest rates are on the decline.

                                       20

<PAGE>

TABLE 2 - AVERAGE BALANCES AND INTEREST RATES

<TABLE>
<CAPTION>

                                                                         Year ended December 31,
                               -----------------------------------------------------------------------------------------------------
                                               1997                                1996                         1995
                               -----------------------------------------------------------------------------------------------------
                                  Average     Amount                   Average     Amount              Average    Amount
INTEREST                          Balance       of        Average      Balance       of     Average    Balance      of     Average
EARNING ASSETS:                   (000'S)    Interest     Rate(2)      (000'S)    Interest   Rate(2)   (000'S)   Interest   Rate(2)
------------------------------------------------------------------------------------------------------------------------------------
<S>                             <C>          <C>        <C>           <C>        <C>        <C>        <C>       <C>        <C>
INVESTMENT 
SECURITIES
  Taxable                         $78,333      4,723       6.03%      $71,046      4,264      6.00%     $54,775    $3,180     5.81%
  Non-Taxable                      19,071        794       6.31%       14,528        568      5.92%      12,324       463     5.70%
                                 --------     ------      ------      -------     ------     ------    --------   -------   -------
    TOTAL SECURITIES               97,404      5,517       6.08%       85,574      4,832      5.99%      67,099     3,643     5.79%
                                 --------     ------      ------      -------     ------     ------    --------   -------   -------
Federal Funds Sold                 11,865        658       5.55%       14,367        753      5.24%      13,977       775     5.54%
Net Loans (1)                     175,660     18,802      10.70%      168,392     17,787     10.56%     162,397    17,949    11.05%
                                 --------     ------      ------      -------     ------     ------    --------   -------   -------
TOTAL EARNING ASSETS              284,929     24,977       8.91%      268,333     23,372      8.82%     243,473    22,367     9.28%
TOTAL NON-EARNING
           ASSETS                  36,602                              32,896                            28,986
                                 --------                            --------                          --------
     TOTAL ASSETS                $321,531                            $301,229                          $272,459
                                 --------                            --------                          --------
                                 --------                            --------                          --------
LIABILITIES                                                                                                         
AND CAPITAL:                                                                                                   
------------------------------------------------------------------------------------------------------------------------------------
Interest-bearing                                                                                                   
  demand/savings                  110,026      2,413       2.19%      113,022      2,547      2.31%     113,217     2,954     2.61%
Time deposits                                                                                                   
  under $100,000                   75,589      4,036       5.34%       67,516      3,647      5.40%      53,914     2,828     5.25%
Time deposits $100,000
  or more                          35,995      1,976       5.49%       32,906      1,797      5.46%      23,796     1,263     5.31%
                                 --------     ------      ------     --------     ------     ------    --------   -------    ------
     TOTAL INTEREST
   BEARING DEPOSITS               221,610      8,425       3.80%      213,444      7,991      3.79%     190,927     7,045     3.69%
                                 --------     ------      ------     --------     ------     ------    --------   -------    ------
Demand deposits                    63,636                              54,271                            51,215
Other liabilities                   1,691                               2,161                             1,915
Capital                            34,594                              31,353                            28,402
                                 --------                            --------                          --------
   TOTAL LIABILITIES                                                                                                   
         AND CAPITAL             $321,531                            $301,229                          $272,459
                                 ---------                           --------                          --------
                                 ---------                           --------                          --------
Spread on average
  interest-bearing funds                                   5.11%                              5.03%                           5.59%
Interest income/earning assets                             8.91%                              8.82%                           9.28%
Interest expense/earning assets                            2.96%                              2.98%                           2.89%
Net interest margin                                        5.95%                              5.84%                           6.39%
</TABLE>

(1) Non-accrual loans have been included in net loan figures
(2) Yields are calculated on a tax equivalent basis

The impact of changes in the net interest income spread during 1997 and 1996 
can also be examined by reference to Table 3, where increases or decreases in 
interest income is broken down into two components. Changes due primarily to 
increases or decreases in the size of the category are called volume 
variances. Changes due primarily to increases or decreases in the rates 
associated with each category are called rate variances. 

   
During 1996, net interest income increased by only $59,000.  However, the 
method of accounting for the acquisition of Citizens tends to overshadow some 
of the factors which net to a relatively nominal change in 1996.  See the pro 
forma analysis below which excludes the effects of net interest income from 
the former Citizen's operations subsequent to the acquisition in May of that 
year.
    

                                       21

<PAGE>

TABLE 3 - RATE AND VOLUME ANALYSIS
                 (In thousands)

   
<TABLE>
<CAPTION>
                                                             Year ended December 31,
                                               -----------------------------------------------------------
                                                    1997 over 1996                    1996 over 1995
                                                  Increase (Decrease)              Increase (Decrease)
                                                    due to change in                due to change in
                                               ------------------------         --------------------------
INTEREST EARNING ASSETS:                     Volume     Rate      Total       Volume      Rate      Total
----------------------------------------------------------------------------------------------------------
<S>                                         <C>       <C>      <C>         <C>        <C>         <C>
Investment securities
  Taxable                                    $  440    $  19    $  459       $  973      $  111    $1,084
  Non-taxable                                   189       37       226           86          19       105
                                             ------    -----    ------       ------     -------    -------
                  TOTAL SECURITIES              629       56       685        1,059         130     1,189
Federal funds sold                             (139)      44       (95)          21         (43)      (22)
Net loans                                       778      237     1,015          649        (811)     (162)
                                             ------    -----    ------       ------     -------    -------
             TOTAL EARNING ASSETS            $1,268    $ 337    $1,605       $1,729      $ (724)   $1,005
                                             ------    -----    ------       ------     -------    -------
                                             ------    -----    ------       ------     -------    -------
INTEREST BEARING LIABILITIES:
----------------------------------------------------------------------------------------------------------
Interest-bearing demand/savings              $ (18)    $(116)   $ (134)      $   (5)     $ (402)   $ (407)
Time deposits under $100,000                   431       (42)      389          733          86       819
Time deposits $100,000 or above                170         9       179          497          37       534
                                             ------    -----    ------       ------     -------    -------
                  TOTAL INTEREST
                BEARING DEPOSITS             $ 583     $(149)   $  434       $1,225      $ (279)   $  946
                                             ------    -----    ------       ------     -------    -------
                                             ------    -----    ------       ------     -------    -------
Increase (decrease) in interest 
  differential                               $ 685     $ 486    $1,171       $  504      $ (445)   $   59
</TABLE>
    

Information is provided in each category with respect to (a) changes 
attributable to changes in volume (changes in volume multiplied by prior 
rate); (b) changes attributable to changes in rates (changes in rates 
multiplied by prior volume); and (c) the net change. The change attributable 
to the combined impact of volume and rate has been allotted proportionately 
to the change due to volume and the change due to rate.

   
PRO FORMA 1996 RATE AND VOLUME ANALYSIS

<TABLE>
<CAPTION>
                                                                        Pro forma   Per Table
                                                    Volume      Rate       Total       Three
--------------------------------------------------------------------------------------------
<S>                                                 <C>       <C>         <C>        <C>
Total Earning Assets                                $ 257      $(724)      $(467)     $1,005
Total Interest-Bearing Liabilities                    363       (279)         84         946
                                                    -----      -----       -----      ------
Increase (decrease) in interest differential        $(106)     $(445)      $(551)     $   59
                                                    -----      -----       -----      ------
                                                    -----      -----       -----      ------
</TABLE>
    

The level of non-performing loans in the Company's portfolio affects the 
amount of interest income. As noted in the notes to the Financial Statements, 
when serious doubt exists as to the repayment of a loan, that loan is placed 
on non-accrual status, and previously accrued and uncollected interest for 
the current year is reversed against income. Had non-performing loans as of 
December 31, 1997, complied with original terms, related interest income 
would have been approximately $100,000, in which $23,000 was collected. The 
difference of approximately $77,000 was not taken into income, which, if 
included, would have increased NIM by 3 basis points to 5.98%.

SUMMARY OF CREDIT LOSS EXPERIENCE

   
The Company maintains an allowance for loan losses, which is reduced by net 
loan charge-offs and increased by provisions for loan losses charged against 
operating income. It is the Company's practice to maintain the allowance for 
loan and lease losses at a level considered by Management to be adequate.  
Each quarter, Management calculates an acceptable allowance for loan and 
lease losses using an internal rating system based upon the risk associated 
with various categories of loans.  A portion of the calculation is based upon 
the historical loss experience of the preceding five years and in some risk 
categories the degree of collateralization.  The risk assigned to each loan 
is first determined when the loan is originated.  It is then reviewed 
quarterly and revised as appropriate.  In addition, the Bank maintains a 
monitoring system for all credits that have been identified either internally 
or externally as warranting additional Management attention.  These credits 
are formally reported to Management by the lending officers on a quarterly 
basis and are subsequently reviewed by the Loan Committee of the Board of 
Directors.  Reserves against these loans are based on the credit risk 
assigned to the loans as described above utilizing a schedule of percentages 
developed by Management in accordance with historical loss experience, 
ranging from .18% to 50% of the present loan balances.  These percentages may 
be modified, based upon current or prospective local economic conditions.  
The comments of bank examiners, the Company's independent auditors and a 
third party loan review consultant hired by the Bank on a periodic basis are 
also considered in revising risk category assignments.  In determining the 
actual allowance for loan and lease losses to be maintained, Management 
augments this calculation with an analysis of the present and prospective 
financial condition of certain borrowers, industry concentrations within the 
portfolio, trends in delinquent and nonaccrual loans and general economic 
conditions.
    

   
The primary risk element considered by Management with respect to each 
installment and conventional real estate loan is lack of timely payment and the 
value of the collateral.  The primary risk elements with respect to real estate 
construction loans are fluctuations in real estate values in the Company's 
market areas, inaccurate estimates of construction costs, fluctuations in 
interest rates, the availability of conventional financing, the demand for 
housing in the Company's market area and general economic conditions.  The 
primary risk elements with respect to commercial loans are the financial 
condition of the borrower, general economic conditions in the Company's market 
area, the sufficiency of collateral, the timeliness of payment and with respect 
to adjustable rate loans, interest rate fluctuations.  Management has a policy 
of requesting and reviewing annual financial statements from its commercial 
loan customers and periodically reviews the existence of collateral and its 
value. Management also has a reporting system that monitors all past due loans
and has adopted policies to pursue its creditor's rights in order to preserve 
the Company's position.
    

                                       22

<PAGE>

In addition to internal evaluation, the adequacy of the allowance for loan 
losses is subject to review by regulators and outside consultants. While no 
assurance can be given that economic conditions which adversely affect the 
Company's service areas or other unforeseen circum-stances, will not require 
increased provisions for loan losses in the future. It is management's 
opinion that the allowance for loan losses as of December 31, 1997, of 
$2,115,000 or 1.11% of total loans was adequate to absorb losses from any 
known or inherent risks in the portfolio. Table 4 shows comparative 
statistics and a more detailed breakdown of activity in the loan loss reserve 
account. The low amount of the provision for 1997 reflects the overall 
stability in the loan portfolio.

TABLE 4 - SUMMARY OF LOAN LOSS EXPERIENCE
                     (In thousands)

<TABLE>
<CAPTION>
                                                    Year ended December 31,
                                     -------------------------------------------------------
                                         1997         1996       1995      1994      1993
--------------------------------------------------------------------------------------------
<S>                                    <C>          <C>        <C>        <C>       <C>
BALANCE OF RESERVE AT
  BEGINNING OF YEAR                     $2,703       $2,801     $2,412    $2,524     $2,650

CHARGE OFFS
  Consumer                                 427          269        222       226        480
  Commercial                               193          302        242       141        171
  Agricultural                               0            0          0         0         64
  Construction and development               0           32          0         0        151
  Other real estate                        103           49        129        17        134
                                        ------      -------    -------    ------     ------
             TOTAL CHARGE OFFS             724          652        593       584      1,000

RECOVERIES
  Consumer                                  27           23         41        33         64
  Commercial                                79           74         65        62         96
  Agricultural                               0            0          0        36          0
  Construction and development               0            0          0         1          0
  Other real estate                          0            1          0         0          1
                                        ------      -------    -------    ------     ------
             TOTAL RECOVERIES              106           99        106       132        161
                                        ------      -------    -------    ------     ------
              NET CHARGE OFFS              618          553        487       452        839
                                        ------      -------    -------    ------     ------
Acquired Allowance from Citizens             0          228          0         0          0
                                        ------      -------    -------    ------     ------
Provision charged to operations             30          227        876       340        713
                                        ------      -------    -------    ------     ------
          BALANCE AT YEAR END           $2,115       $2,703     $2,801    $2,412     $2,524
                                        ------      -------    -------    ------     ------
                                        ------      -------    -------    ------     ------
Ratio of net charge-offs to average
  net loans during the period            0.35%        0.33%      0.30%     0.27%      0.52%
</TABLE>

                                     23

<PAGE>

NON-INTEREST INCOME

Non-interest income increased by $406,000 to $3.5 million in 1997, from $3.1 
million in 1996, and $2.7 million in 1995. Service charges related to the 
Company's deposit products account for the largest portion of non-interest 
income. The increase noted in service charges and fees comes primarily from 
increased service charges on many of the bank's deposit products. Merchant 
discount fees are obtained in conjunction with the processing of credit card 
drafts and related products. Increases in fees are generally offset by 
increased costs from the bank's service provider. Other fee income includes 
mortgage broker fees, servicing fees on loans sold in the secondary markets, 
and other non-deposit related charges, including wires, safe deposit, ATM's, 
etc. The increase noted in this category was primarily from increase in 
mortgage broker activity. Other non-interest income includes net gains on 
sale of fixed assets and other real estate owned, income generated from the 
holding of other real estate owned and other non-fee related income. The 
decrease noted in this category was from reduced net gains on the sale of 
fixed assets and other real-estate owned and reduced income generated from 
rents on previously owned other real estate.

NON-INTEREST EXPENSE

The Bank's total non-interest expense amounted to $13.2 million in 1997, 
$12.5 million in 1996, and $12.1 million in 1995. Both the increase in 1997 
of $773,000, or 5.69%, and the increase in 1996 of $380,000, or 3.1%, were 
due primarily to costs associated with the expansion of the bank into San 
Luis Obispo County.

Non-interest expense as a percentage of average assets has continued to 
decline from 4.44% in 1995, to 4.14% in 1996, and to 4.11% in 1997.

                                     24

<PAGE>

                     BALANCE SHEET ANALYSIS

Total assets as of year end increased by 7.0% in 1997 to $344.0, compared to 
an 12.9% increase in 1996.  The majority of the growth in assets and in 
deposits during 1996 can be attributed to the acquisition of Citizens Bank.

INVESTMENT SECURITIES
The Company maintains a portfolio of investment securities to provide income 
and to serve as a secondary source of liquidity for its operations in 
conjunction with funds sold overnight in the Federal funds market. The types 
of investments held in the portfolio include U.S. Treasury Bills and Notes, 
Government Agency issues, short-term municipal issues, and corporate 
obligations. The type of investments held in the Company's portfolio are 
influenced by several factors among which are; rate of return, maturity and 
risk. Note C to the Financial Statements sets forth additional information 
regarding our investment portfolio, as well as Table 5 below, which reports 
maturity distributions and weighted tax-equivalent rates by types of 
investments.

TABLE 5 - INVESTMENT PORTFOLIO
         (In thousands)

<TABLE>
<CAPTION>
                                                              Year ended December 31, 1997
                ------------------------------------------------------------------------------------------------------------------
                                                                     After 1 But        After 5 But
                        Total Securities     Within One Year       Within 5 Years      Within 10 Years       After 10 Years
                      ------------------  ------------------   -------------------    ----------------    ------------------
                                WEIGHTED            WEIGHTED              WEIGHTED            WEIGHTED               WEIGHTED
                       BOOK     AVERAGE     BOOK     AVERAGE     BOOK      AVERAGE    BOOK     AVERAGE      BOOK      AVERAGE
                       VALUE    T/E YIELD   VALUE   T/E YIELD    VALUE    T/E YIELD   VALUE   T/E YIELD     VALUE    T/E YIELD
<S>                    <C>      <C>        <C>      <C>         <C>      <C>         <C>      <C>          <C>      <C>
Held to Maturity, at
Amortized Cost:
U.S. Treasury           $1,000    5.65%   $ 1,000     5.65%     $     0      0.00%    $    0     0.00%    $    0      0.00%
U.S. Government
  Agencies              28,914    5.96%    10,459     5.73%      18,347      6.10%       108     6.52%         0      0.00%
Municipal Issues        30,238    6.50%     3,288     6.06%      16,376      6.38%     9,235     6.67%     1,339      7.76%
Other Debt Securities    2,615    5.97%     1,007     5.86%       1,608      6.04%         0     0.00%         0      0.00%
                      --------   ------   -------    ------     -------     ------    ------    ------    ------     ------
                        62,767    6.22%    15,754     5.80%      36,331      6.22%     9,343     6.67%     1,339      7.76%
Available for
Sale,
  at Market:
U.S. Treasury           17,561    5.91%     6,130     5.78%      11,431      5.97%         0     0.00%         0      0.00%
U.S. Government
  Agencies              28,439    6.14%     3,003     5.61%      25,436      6.20%         0     0.00%         0      0.00%
                      --------   ------   -------    ------     -------     ------    ------    ------    ------     ------
TOTAL SECURITIES      $108,767    6.15%   $24,887     5.77%     $73,198      6.18%    $9,343     6.67%    $1,339      7.76%
                      --------   ------   -------    ------     -------     ------    ------    ------    ------     ------
                      --------   ------   -------    ------     -------     ------    ------    ------    ------     ------
</TABLE>

LOANS
Table 6, entitled LOAN PORTFOLIO ANALYSIS BY CATEGORY, sets forth the 
distribution of the Company's loan portfolio for the past five years. During 
1997, the loan portfolio mix continued to show growth in the percentage of 
agricultural loans, now representing over 19% of the Company's portfolio. 
Commercial loans also have experienced an increase in the percentage of loans 
outstanding making up over 30% of the portfolio. This change has resulted 
from declines in both consumer and real estate loan categories.

                                    25

<PAGE>

TABLE 6 - LOAN PORTFOLIO ANALYSIS BY CATEGORY
            (In thousands)

<TABLE>
<CAPTION>
                                                Year ended December 31,
                                                -----------------------
                                1997         1996         1995         1994         1993
                             -------------------------------------------------------------
<S>                          <C>          <C>         <C>            <C>          <C>
Consumer                       $42,856     $45,572       $40,548      $42,140      $41,392
Commercial                      58,226      50,903        49,997       46,942       37,566
Agricultural                    36,993      32,021        23,633       22,806       21,722
Construction/Development        16,778      13,748        12,619       13,227       20,780
Other Real Estate               36,493      37,147        39,290       39,291       42,543
                              --------    --------      --------     --------     --------
           TOTAL LOANS        $191,346    $179,391      $166,087     $164,406     $164,003
                              --------    --------      --------     --------     --------
                              --------    --------      --------     --------     --------
</TABLE>

The vast majority of the loans in the portfolio are either amortizing monthly 
or have relatively short maturities. This helps maintain liquidity in the 
portfolio. As noted, most of the loans which have floating rates are tied to 
the Company's base rate or other market rate indicators. This serves to 
lessen the risk to the Company from movement in interest rates, particularly 
rate increases. Table 7 shows the maturity of certain loan categories 
outstanding as of December 31, 1997, net of deferred fees and deferred costs.

TABLE 7 - MATURITIES AND SENSITIVITIES OF CERTAIN LOAN TYPES TO CHANGES IN 
INTEREST RATES
            (In thousands)

<TABLE>
<CAPTION>
                                                      Due after
                                    Due in one       ne year to       Due after
                                  year or less       five years      five years          Total
-------------------------------------------------------------------------------------------------
<S>                                 <C>             <C>                <C>              <C>
Commercial and Agricultural
  Floating Rate                      $33,960          $ 8,096           $16,203          $58,259
  Fixed Rate                           7,390           20,484             9,085           36,959

Real Estate Construction
  Floating Rate                        3,336            4,161                 -            7,497
  Fixed Rate                           6,275            3,006                 -            9,281
                                     -------          -------           -------         --------
                 TOTAL               $50,961          $35,747           $25,288         $111,996
                                     -------          -------           -------         --------
                                     -------          -------           -------         --------
</TABLE>


At December 31, 1997, non-performing assets (non-accrual loans, loans 90 days 
or more past due, restructured loans and other real estate loans) totaled 
$2.5 million, or .73% of total assets, down from $3.1 million or .95% from 
December 31, 1996, as restated for the El Camino merger. Management believes 
that these assets are generally well secured and that potential losses have 
already been reflected in valuation or allowance accounts. In November of 
1996, the FDIC concluded its periodic safety and soundness examination. At 
that time, the internal grading system of the Company was tested against the 
findings of the FDIC examiners. In July of 1997, the Department of Financial 
Institutions performed their periodic review of the Company. Again, the 
internal grading system of the Company was tested against their findings. 
During both examinations, management was directed to downgrade only one 
extension of credit, which reflects positively on management's efforts to 
identify and manage credit problems on a timely basis. Management is not 
aware of any information where serious doubts exist regarding any significant 
borrower's ability to comply with loan repayment terms. Table 8 sets forth 
information on non-performing assets for the periods indicated. The market 
value of other real estate owned and collateral securing non-performing loans 
is regularly monitored for changes.

                                      26

<PAGE>

TABLE 8 - NON-ACCRUAL AND NON-PERFORMING ASSETS
            (In thousands)

   
<TABLE>
<CAPTION>
                                                            Year ended December 31,
                                             -------------------------------------------------
                                                1997      1996      1995      1994      1993
----------------------------------------------------------------------------------------------
<S>                                          <C>         <C>       <C>       <C>      <C>
Non-Accrual                                   $  790      $  981    $1,027   $2,120    $2,893
Loans currently accruing which are
   past due 90 days or more                       31           -       395      119       223
Restructured loans                               737         407       190       35        28
Other real estate owned                          969       1,678     1,516    1,726     2,225
                                              ------      ------    ------   ------   -------
       TOTAL NON-PERFORMING
                     ASSETS                   $2,527      $3,066    $3,128   $4,000    $5,369
                                              ------      ------    ------   ------   -------
                                              ------      ------    ------   ------   -------
Percentage of non-performing loans
   to total loans                              0.81%       0.77%     0.97%    1.38%     1.92%
                                              ------      ------    ------   ------   -------
                                              ------      ------    ------   ------   -------
Percentage of non-performing
   assets to total assets                      0.73%       0.95%     1.10%    1.50%     2.12%
                                              ------      ------    ------   ------   -------
                                              ------      ------    ------   ------   -------
</TABLE>
    

DEPOSITS

As noted above, deposits have grown steadily over the reporting periods. The 
average balances for deposit categories and their associated costs are 
presented in Table 9.

TABLE 9 - DETAILED DEPOSIT SUMMARY
            (In thousands)

<TABLE>
<CAPTION>
                                                Year ended December 31,
                           --------------------------------------------------------------------
                                   1997                    1996                  1995
                           --------------------------------------------------------------------
                                Average               Average               Average
                                Balance     Rate      Balance     Rate      Balance     Rate
-----------------------------------------------------------------------------------------------
<S>                           <C>         <C>       <C>         <C>       <C>         <C>
Interest-bearing demand        $ 30,324    1.06%     $ 28,710    1.21%     $ 25,913    1.48%
Savings accounts                 32,269    2.20%       32,529    2.41%       35,279    2.50%
Money market savings             47,433    2.91%       49,189    2.88%       52,026    3.24%
TCD less than $100,000           75,589    5.34%       67,516    5.40%       53,914    5.24%
TCD $100,000 or more             35,995    5.49%       32,907    5.46%       23,796    5.31%
                               --------   ------     --------   ------     --------   ------
      TOTAL INTEREST-
     BEARING DEPOSITS           221,610    3.80%      210,851    3.79%      190,928    3.78%
Demand                           63,636       -        56,864       -        51,215       -
                               --------   ------     --------   ------     --------   ------
      TOTAL DEPOSITS           $285,246    2.95%     $267,715    2.99%     $242,143    2.98%
                               --------   ------     --------   ------     --------   ------
                               --------   ------     --------   ------     --------   ------
</TABLE>

                                     27

<PAGE>

The effective cost of all funds decreased during 1997, primarily as the 
result of the increase in demand deposits as a percentage of total deposits 
outstanding. Demand deposits increased by 5.0% and now represents 22% of all 
deposits in the Bank. The interest-bearing deposit mix has several notable 
changes, modifying the previous trend towards more liquidity and 
shorter-termed accounts. Time deposits of less than $100,000, grew by 5.1%, 
time deposits of $100,000 or more grew by 2.6%, while money market savings 
declined by 9.5% and regular savings by 6.9%.

Table 10 sets forth the remaining maturities of large denominational time 
deposits, including public funds, as of December 31, 1997.

TABLE 10 - MATURITY DISTRIBUTION OF TCD'S OF $100,000 OR MORE
             (In thousands)

<TABLE>
<CAPTION>
                                                           Year ended December 31, 1997
---------------------------------------------------------------------------------------
<S>                                                                     <C>
Three months or less                                                            $15,463
After three months to six months                                                  9,596
After six months to one year                                                      7,878
Over one year                                                                     5,052
                                                                               --------
                         TOTAL                                                  $37,989
                                                                               --------
                                                                               --------
</TABLE>

LIQUIDITY
Liquidity is the Company's ability to meet fluctuations in deposit levels and 
provide for the credit needs of its customers. The objective in liquidity 
management is to maintain a balance between the sources and the uses of 
funds. Principal sources of liquidity include interest and principal payments 
on loans and investments, proceeds from the maturity of investments and 
growth in deposits. The Company holds overnight Federal funds as a cushion 
for temporary liquidity needs. During 1997, Federal funds averaged $11.9 
million, or 3.7% of total average assets. In addition, the Company maintains 
Federal funds credit lines with major correspondents, aggregating to $11.1 
million, subject to the customary terms for such arrangements.

   
As shown in the consolidated statements of cash flows, cash and cash 
equivalents declined by $5.6 million during 1997, to $25.9 million at 
December 31, 1997.  The decrease reflects $5.2 million in net cash provided 
by operating activities, $30.3 million used in investing activities and $19.1 
million provided by financing activities.  Net cash used by investing 
activities is primarily the result of increases in the security purchases and 
an equal increase in loan growth.  Net cash provided by financing activities 
primarily reflect equal increases in both liquid and short-term deposits.
    

There are several accepted methods of measuring liquidity as utilized by the 
regulators. One ratio, which is fairly easy to understand, is referred to as 
the liquidity ratio. This ratio measures the percentage of deposits which are 
used to fund cash, equivalents and marketable securities. The Company has set 
a minimum standard percentage of 20% and, as of December 31, 1997, the 
Company's liquidity ratio was 42.0%. The Company appears to be sufficiently 
liquid to meet its operational needs.

   
MARKET RISK MANAGEMENT 

Market risk is the possibility that changes in interest rates will impair the 
fair value of the Company's financial instruments.  The Asset/Liability 
Committee measures and reviews the market risk of the Company and established 
policies and procedures to limit its exposure to changes in interest rates.  
Their policies are reviewed and approved by the Board of Directors of the 
Company's subsidiary bank.
    

   
Interest rate risk is the most significant market risk regularly undertaken 
by the Company.  This risk is monitored through the use of three 
complementary measurement methods:  rate sensitivity gap, rate shocked 
interest margin and rate shocked economic value of equity.  Rate sensitivity 
gap analysis measures interest rate risk due to volume differences, called 
the gap, between repricable assets and liabilities over a specific period of 
time.  Rate shock is a method for stress testing the net interest margin 
(NIM) over the next four quarters under several rate change levels.  Rate 
shock on equity is used to approximate the bank's liquidation value as 
interest rates change.
    

   
At year end, the average twelve month gap as a percentage of earning assets 
was 7.3%.  This results in a four basis point difference for each 100 basis 
points interest rate movement.  Using the rate shock analysis method on NIM 
results in seven basis points for each 100 basis points interest rate 
movement.  The mark-to-market method of rate shocking the economic value of 
equity results in a 12% change for every 100 basis points change in interest 
rates.  All of the above approximation of interest rate risk are within the 
guidelines established by the Company.
    

   
The interest rate risk position is actively managed and changes on a regular 
basis as the interest rate enviroment changes. Accordingly, positions at the 
end of any period may not reflect the Company's position in any subsequent 
period.
    

CAPITAL RESOURCES
The primary source of capital for the Company is the retention of operating 
profits. The Company reviews its capital needs on an ongoing basis to ensure 
an adequate level of capital to support growth and to ensure depositor 
protection. Total capital grew by $3.4 million or 10.5%, to $36.0 million as 
of December 31, 1997. During 1997 and 1996, the Company's capital was 
augmented by the exercise of stock options. During 1996, the Company 
purchased land adjacent to the Paso Robles branch for the purpose of building 
a permanent building. The cost of the land was approximately $900,000. The 
Company had sufficient liquidity and capital to purchase the land without 
financing either by debt or equity funding. Comments regarding the 
established minimum capital ratios can be found in Footnote L of the 
financial statements. The Company can operate safely at its current level of 
capital and is positioned to grow within acceptable parameters.

MARKET INFORMATION REGARDING THE COMPANY'S COMMON STOCK
The common stock of the Company is not listed on any national stock exchange 
or with NASDAQ. Trading in the stock has not been extensive and such trades 
which have occurred would not constitute an active trading market. As of 
December 31, 1997, there were approximately 2,000 shareholders, including 
those listed in "street name" under various brokers. The management of the 
Company is aware of three securities dealers who maintain an inventory and 
make a market in the Company's common stock. The market makers are Maguire 
Investments of Santa Maria, Hoefer & Arnett of San Francisco, and Sutro & 
Company, with a local office in Santa Maria.

Since 1984, the Bank has consistently declared and paid a cash dividend to 
the then shareholders of Bank of Santa Maria, with the equivalent of $.06 
being paid since February of 1988. In 1994, the Board of Directors of the 
Bank increased the per share dividend 

                                      28

<PAGE>

to $.10. In 1995, the Board of Directors again increased the per share 
dividends to $.11 payable in February, 1995, to the holders of their stock.

In 1996, the Board of Directors increased the cash dividend to $.20 payable 
in February, 1996. At the 1996 Annual Shareholders Meeting, the Bank 
announced that it would begin to pay dividends on a semi-annual basis. In 
July 1996, a $.15 dividend was declared to be paid in August, 1996. In 
January of 1997, the Board again declared a $.15 cash dividend payable in 
February, 1997. Following the formation of the BSM Bancorp, the Directors of 
the Company continued the semi-annual dividend policy. In August of 1997, the 
Company paid a $.20 cash dividend. In January of 1998, the Company Board 
again declared a cash dividend of $.30 per share payable on February 6, 1998. 
Restrictions on future dividend payments are outlined in the notes to the 
financial statements.

The following quarterly summary of market activity is furnished by Maguire 
Investments, Inc. of Santa Maria and by the OTC Bulletin Board. These quotes 
do not necessarily include retail markups, markdowns, or commissions and may 
not necessarily represent actual transactions. Additionally, there may have 
been transactions at prices other than those shown below:

<TABLE>
<CAPTION>
                                                                                       Bid                  Ask
                                                                                       ---                  ---
                                         <S>                                        <C>                  <C>
                                         1st Quarter 1996                           $14.00               $14.50
                                         2nd Quarter 1996                           $13.75               $14.25
                                         3rd Quarter 1996                           $15.00               $15.75
                                         4th Quarter 1996                           $15.00               $16.00
                                         1st Quarter 1997                           $15.25               $16.75
                                         2nd Quarter 1997                           $16.13               $17.63
                                         3rd Quarter 1997                           $16.75               $18.63
                                         4th Quarter 1997                           $18.00               $27.50
</TABLE>

Selected Financial Data

The following is a summary of operations of Bank of Santa Maria for each of 
the last five years ended December 31, 1997. This summary has not been 
examined by an independent public accountant. However, in the opinion of 
management, this summary reflects all adjustments which would be considered 
necessary for a fair presentation of the results of operations for each of 
these periods. This summary of operations should be read in conjunction with 
the financial statements and notes relating thereto included elsewhere in 
this report.

   
    

<TABLE>
<CAPTION>

(IN THOUSANDS)                                 1997              1996              1995            1994             1993
                                           --------          --------          --------        --------         --------
<S>                                        <C>               <C>               <C>             <C>              <C>
Total assets                               $344,046          $321,397          $284,616        $266,989         $253,311
Net interest income                         $16,552           $15,154           $14,446         $13,818          $12,805
Provision for loan loss                         $30              $227              $876            $340             $712
Other income                                 $3,504            $3,098            $2,728          $2,448           $2,550
Other expense                               $13,205           $12,471           $12,090         $11,723          $11,158
Net income                                   $4,205            $3,468            $3,199          $2,728           $2,340
Net income per share                          $1.41             $1.17             $1.10            $.96             $.86
Cash dividend per share                        $.35              $.35              $.11            $.10             $.06
</TABLE>

                                      29

<PAGE>


ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                     REPORT OF CERTIFIED PUBLIC ACCOUNTANTS


To the Shareholders and Board of Directors
of BSM Bancorp and Subsidiary


INDEPENDENT AUDITORS' REPORT


           We have audited the accompanying consolidated balance sheets of 
BSM Bancorp and Subsidiary as of December 31, 1997 and 1996, and the related 
consolidated statements of income, changes in shareholders' equity, and cash 
flows for each of the three years in the period ended December 31, 1997. 
These financial statements are the responsibility of the Company's 
management. Our responsibility is to express an opinion on these 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 financial statements referred to above present 
fairly, in all material respects, the financial position of BSM Bancorp and 
Subsidiary as of December 31, 1997 and 1996, and the results of its 
operations and its cash flows for each of the three years in the period ended 
December 31, 1997, in conformity with generally accepted accounting 
principles.

         /s/ Vavrinek, Trine, Day & Co.
---------------------------------------
Vavrinek, Trine, Day & Co.


January 8, 1998, except for Note O as to which the date is January 29, 1998.
Laguna Hills, California

                                      30

<PAGE>

                         CONSOLIDATED BALANCE SHEETS

   
<TABLE>
<CAPTION>
                                                         December 31,
                                              ---------------------------------
ASSETS                                            1997                 1996
-------------------------------------------------------------------------------
<S>                                           <C>                  <C>
Cash and Due from Banks                       $ 18,472,719         $ 17,643,554
Federal Funds Sold                               7,461,000           13,920,000
                                              ------------         ------------
TOTAL CASH & CASH EQUIVALENTS                   25,933,719           31,563,554
                                              ------------         ------------
Investment Securities - Note C:
    Securities available for sale               46,143,134           23,865,611
    Securities held to maturity                 62,767,464           68,339,127
                                              ------------         ------------
    TOTAL INVESTMENT SECURITIES                108,910,598           92,204,738
Loans - Note D:
    Commercial                                  58,225,966           50,902,945
    Agricultural                                36,992,494           32,020,648
    Real Estate                                 53,271,399           50,895,476
    Consumer                                    42,855,965           45,572,297
                                              ------------         ------------
            TOTAL LOANS                        191,345,824          179,391,366
    Allowance for possible credit losses        (2,114,684)          (2,701,876)
                                              ------------         ------------
            NET LOANS                          189,231,140          176,689,490
Premises and equipment - Note E                 12,709,127           12,648,207
Accrued interest and other assets                4,555,235            4,744,483
Goodwill                                         1,737,220            1,868,500
Other Real Estate Owned                            968,577            1,678,313
                                              ------------         ------------
            TOTAL ASSETS                      $344,045,616         $321,397,285
                                              ------------         ------------
                                              ------------         ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
-------------------------------------------------------------------------------
Deposits
    Noninterest-bearing demand                $ 74,450,817         $ 67,181,717
    Interest-bearing demand and savings        114,900,337          111,528,482
    Time deposits under $100,000                78,951,276           70,229,443
    Time deposits of $100,000 or more           37,989,170           37,338,194
                                              ------------         ------------
            TOTAL DEPOSITS                     306,291,600          286,277,836
Accrued interest and other liabilities           1,691,788            2,487,932
                                              ------------         ------------
            TOTAL LIABILITIES                  307,983,388          288,765,768
                                              ------------         ------------
Commitments - Note J
Shareholders' Equity - Note F:
    Preferred shares - authorized 25,000,000
        shares outstanding - none
    Common shares - authorized 50,000,000
        shares; issued and outstanding
        2,990,939 as of December 31, 1997;
        2,973,631 as of December 31, 1996       11,636,514           11,460,488
    Undivided profits                           24,339,778           21,176,801
    Net unrealized appreciation (depreciation)
      on available for sale securities, net
      of taxes of $57,291 in 1997 and $3,819
      in 1996                                       85,936               (5,772)
                                              ------------         ------------
            TOTAL SHAREHOLDERS' EQUITY          36,062,228           32,631,517
                                              ------------         ------------
            TOTAL LIABILITIES AND
            SHAREHOLDERS' EQUITY              $344,045,616         $321,397,285
                                              ------------         ------------
                                              ------------         ------------
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
    

                                      31

<PAGE>

<TABLE>
<CAPTION>

                      CONSOLIDATED STATEMENTS OF INCOME
                                                             Year ended December 31,
                                              -----------------------------------------------------
INTEREST INCOME                                  1997                 1996                 1995
---------------------------------------------------------------------------------------------------
<S>                                           <C>                  <C>                  <C>
Interest and fees on loans                    $18,801,501          $17,787,334          $17,948,550
Interest on investment securities-taxable       4,722,703            4,264,162            3,180,013
Interest on investment securities-non
  taxable                                         794,328              567,881              463,366
Other interest income                             657,987              752,795              774,828
                                              -----------          -----------          -----------
            TOTAL INTEREST INCOME              24,976,519           23,372,172           22,366,757
                                              -----------          -----------          -----------
INTEREST EXPENSE
---------------------------------------------------------------------------------------------------
Interest on demand and savings deposits         2,413,035            2,546,602            2,953,779
Interest on time CD's over $100,000             1,975,827            1,797,494            1,262,855
Interest on time CD's less than $100,000        4,035,997            3,647,378            2,828,677
                                              -----------          -----------          -----------
            TOTAL INTEREST EXPENSE              8,424,859            7,991,474            7,045,311
                                              -----------          -----------          -----------
              NET INTEREST INCOME              16,551,660           15,380,698           15,321,446
Provision for credit losses                        30,000              227,000              875,500
                                              -----------          -----------          -----------
   NET INTEREST INCOME AFTER
  PROVISION FOR CREDIT LOSSES                  16,521,660           15,153,698           14,445,946
                                              -----------          -----------          -----------
NON-INTEREST INCOME
---------------------------------------------------------------------------------------------------
Service charges on deposits                     2,016,085            1,829,790            1,681,995
Merchant discount fees                            587,357              493,031              446,075
Loan and servicing fees                           527,693              358,767              243,515
Other fee income                                  257,564              235,014              228,524
Other non-interest income                         115,512              181,197              128,133
                                              -----------          -----------          -----------
            TOTAL                               3,504,211            3,097,799            2,728,242
                                              -----------          -----------          -----------
NON-INTEREST EXPENSE
---------------------------------------------------------------------------------------------------
Salaries and employee benefits                  7,162,366            6,540,602            6,327,466
Occupancy expenses                                982,920              952,114              879,116
Furniture and equipment                         1,409,854            1,382,105            1,316,207
Advertising and promotion                         697,019              556,042              422,655
Professional                                      308,618              469,984              606,858
General Office                                    553,781              446,549              444,306
Communications                                    393,407              378,850              334,879
Regulatory assessments                             70,225               43,220              330,739
Merchant processing costs                         550,723              501,191              446,108
Other OREO expense                                 54,742              136,053               39,568
Other expenses                                  1,021,249            1,064,253              942,722
                                              -----------          -----------          -----------
            TOTAL                              13,204,904           12,470,963           12,090,624
                                              -----------          -----------          -----------
INCOME BEFORE TAXES                             6,820,967            5,780,534            5,083,564
Income taxes - Note H                           2,616,000            2,312,800            1,884,900
                                              -----------          -----------          -----------
            NET INCOME                         $4,204,967           $3,467,734           $3,198,664
                                              -----------          -----------          -----------
                                              -----------          -----------          -----------
Earnings per share data - Note I
   Net Income - Basic                               $1.41                $1.17                $1.10
                                              -----------          -----------          -----------
                                              -----------          -----------          -----------
   Net Income - Diluted                             $1.38                $1.16                $1.09
                                              -----------          -----------          -----------
                                              -----------          -----------          -----------
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>


                                      32

<PAGE>

<TABLE>
<CAPTION>


                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                                                  Year ended December 31,
                                                              ----------------------------------------------------------------
OPERATING ACTIVITIES                                             1997                          1996                   1995
------------------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>                           <C>                    <C>
Net income                                                   $ 4,204,967                   $ 3,467,734            $ 3,198,664
Adjustments to reconcile net income to net cash
    provided by operating activities:
       Depreciation and amortization                           1,358,448                     1,216,500              1,111,910
       Provision for credit losses                                30,000                       227,000                875,500
       Amortization of premium/discounts
          on investment securities                               278,076                       345,514                 96,824
       Loans originated for sale                              (4,547,941)                   (7,839,650)            (4,316,600)
       Proceeds from loan sales                                4,779,279                     7,744,846              3,969,394
       Net (gain) from sale of fixed assets                      (14,812)                      (51,912)               (30,450)
       Net loss (gain) on sale of other real
           estate loans                                         (101,129)                       39,212                149,571
       Other items- Net                                         (669,854)                      263,095               (275,382)
                                                             -----------                   -----------            -----------
                                NET CASH PROVIDED BY
                                OPERATING ACTIVITIES           5,245,981                     5,412,339              4,779,431

INVESTING ACTIVITIES
-----------------------------------------------------------------------------------------------------------------------------
Proceeds from maturities of securities held
    to maturity                                               29,940,827                     36,380,923            31,385,000
Proceeds from maturities of securities held
    for sale                                                  16,073,000                      6,702,750             5,582,750
Purchases of held to maturity securities                     (27,277,773)                   (34,125,412)          (46,118,216)
Purchases of available for sale securities                   (35,565,324)                   (25,783,500)           (3,619,038)
Net (increase) decrease in loans                             (13,078,658)                     2,889,950            (2,488,647)
Purchases of premises and equipment                           (1,602,476)                    (3,146,259)             (724,388)
Proceeds from sales of other real estate owned                 1,157,587                      1,313,618               729,018
Proceeds from sales of fixed assets                               55,890                         65,706                40,949
Net cash received for purchase of Citizens Bank
        of Paso Robles                                                                        8,067,071
                                                             -----------                    -----------           -----------
                                    NET CASH USED BY
                                INVESTING ACTIVITIES         (30,296,927)                    (7,635,153)          (15,212,572)
FINANCING ACTIVITIES
-----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in demand deposits and
    savings accounts                                          10,640,955                     (9,596,605)            1,319,523
Net increase in time deposits                                  9,372,809                     14,012,070            12,271,245
Payments for dividends/distributions                          (1,041,990)                      (964,191)             (256,832)
Proceeds from exercise of stock options                          176,026                        210,200               580,294
                                                             -----------                    -----------           -----------
                                NET CASH PROVIDED BY
                                FINANCING ACTIVITIES          19,147,800                      3,661,474            13,914,230
                         INCREASE (DECREASE) IN CASH
                                AND CASH EQUIVALENTS          (5,629,835)                     1,438,660             3,481,089
Cash and cash equivalents at beginning of year                31,563,554                     30,124,894            26,643,805
                                                             -----------                    -----------           -----------

                           CASH AND CASH EQUIVALENTS
                                      AT END OF YEAR         $25,933,719                    $31,563,554           $30,124,894
                                                             -----------                    -----------           -----------
                                                             -----------                    -----------           -----------
Supplemental disclosures of cash flow information:
    Cash paid during the year for interest                   $ 9,089,872                    $ 7,824,179           $ 6,587,042
    Cash paid during the year for income taxes               $ 2,271,032                    $ 2,244,705           $ 2,194,780

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

</TABLE>


                                      33

<PAGE>

                       CHANGES IN SHAREHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                                                                            
                                                                                                            Net
                                                                                                         Unrealized
                                                                                                        Appreciation/
                                                     Common Shares                                     (Depreciation)
                                                 -----------------------                                in Available
                                                 Number of                          Undivided             for Sale
                                                  Shares          Amount             Profits             Securities         Total
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>            <C>                <C>                    <C>           <C>
BALANCE AT JANUARY 1, 1995                       2,878,593      $10,669,994        $15,731,426            $(14,409)     $26,387,011
Proceeds from exercise of stock options             18,450          165,600                                                 165,600
Proceeds from exercise of stock options
    (Templeton only)                                53,019          414,058                                                 414,058
Proceeds from exercise of stock options
    (El Camino only)                                   146            2,200                                                   2,200
Partial Distribution-Templeton Merger                 (127)          (1,564)                                                 (1,564)
Dividends paid                                                                        (256,832)                            (256,832)
Net income                                                                           3,198,664                            3,198,664
Adjustment in Available for Sale
    Securities, Net of Taxes of ($43,753)                                                                   65,630           65,630
                                                 ---------      -----------        -----------            --------      -----------
BALANCE AT DECEMBER 31, 1995                     2,950,081       11,250,288         18,673,258              51,221       29,974,767
                                                 ---------      -----------        -----------            --------      -----------

Proceeds from exercise of stock options             23,400          208,700                                                 208,700
Issuance of organizational stock                       150            1,500                                                   1,500
Dividends paid                                                                        (964,191)                            (964,191)
Net income                                                                           3,467,734                            3,467,734
Adjustment in Available for Sale
    Securities, Net of Taxes of $37,995                                                                    (56,993)         (56,993)
                                                 ---------      -----------        -----------            --------      -----------
BALANCE AT DECEMBER 31, 1996                     2,973,631       11,460,488         21,176,801              (5,772)      32,631,517
                                                 ---------      -----------        -----------            --------      -----------

Retirement of organizational stock                    (150)          (1,500)                                                 (1,500)
Proceeds from exercise of stock options             17,600          179,725                                                 179,725
Partial Distribution-El Camino Merger                 (142)          (2,199)                                                 (2,199)
Dividends paid                                                                      (1,041,990)                          (1,041,990)
Net income                                                                           4,204,967                            4,204,967
Adjustment in Available for Sale
    Securities, Net of Taxes of ($61,139)                                                                   91,708           91,708
                                                 ---------      -----------        -----------            --------      -----------
BALANCE AT DECEMBER 31, 1997                     2,990,939      $11,636,514        $24,339,778             $85,936      $36,062,228
                                                 ---------      -----------        -----------            --------      -----------
                                                 ---------      -----------        -----------            --------      -----------
</TABLE>

                         NOTES TO FINANCIAL STATEMENTS



NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


The accounting and reporting policies of BSM Bancorp and Subsidiary (the 
"Company") are in accordance with generally accepted accounting principles 
and conform to practices with the banking industry. A summary of the 
significant accounting policies consistently applied in the preparation of 
the accompanying consolidated financial statements follows:

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


                                      34

<PAGE>

NOTE A (CONTINUED)


PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of BSM Bancorp 
(the "Bancorp") and its wholly owned subsidiary, Bank of Santa Maria (the 
"Bank"). All material intercompany accounts and transactions have been 
eliminated in the consolidated financial statements.


NATURE OF OPERATIONS

The Company's primary operations are related to traditional banking 
activities, including the acceptance of deposits and the lending and 
investing of money through the operations of the Bank. The Bank's customers 
are predominantly small and middle-market businesses and individuals who are 
located in the central coast area of California. The Bank operates 13 
branches, with headquarters in the city of Santa Maria.


USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

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


CASH AND DUE FROM BANKS

For purposes of reporting cash flows, cash and due from banks includes cash 
on hand and amount due from banks. Cash flows from loans originated by the 
Company, deposits, and federal funds sold are reported net.

The Company maintains amounts due from banks which exceed federally insured
limits. The Company has not experienced any losses in such accounts.


INVESTMENTS SECURITIES

Securities held to maturity are stated at cost, adjusted for amortization of
premiums and accretion of discounts over the period to maturity, or to an
earlier call, if appropriate, on a straight-line basis. Such securities include
those that management intends and has the ability to hold into the foreseeable
future.

Securities would be considered available for sale if they would be sold under 
certain conditions, among these being changes in interest rates, fluctuations 
in deposit levels or loan demand, or a need to restructure the portfolio to 
better match the maturity or interest rate characteristics of liabilities 
with assets. Securities classified as available for sale are accounted for at 
their current fair value rather than amortized historical cost. Unrealized 
gains or losses are not recognized as current income or expense, but rather 
as an increase or decrease of capital through a separate reserve.


LOANS AND LOAN FEES

Loans are recorded at amount advanced less payments collected. Interest on 
loans is accrued daily as earned, except where management believes that 
serious doubt exists as to the full collectability of interest or principal. 
When this occurs, the accrual of income is discontinued and the balance of 
accrued interest is reversed against current income. Loans are generally put 
on nonaccrual status when interest is ninety days or more past due, unless 
the loan is well secured and in the process of collection. Subsequent cash 
payments are applied fully to the principal balance. Only after the principal 
is reduced to zero is interest income realized. Once a loan is placed on 
nonaccrual it generally remains on nonaccrual until the loan is termed 
uncollectable or the borrower's capacity and intent to make further payments 
is evidenced by keeping the loan current for a period of three to six months.

                                     35

<PAGE>

NOTE A - (CONTINUED)

Loans originated and intended for sale in the secondary market are carried at 
the lower of cost or estimated market value in the aggregate. Net unrealized 
losses are recognized through a valuation allowance by charges to income. 
Service income is generally recognized on a cash basis over the life of the 
loan. If the normal servicing fees are expected to be less than the estimated 
servicing costs, a loss would be recognized when the loan was sold. The 
Company also acts in a broker capacity assisting customers in obtaining 
mortgage loans with other institutions. The Company earns points and 
documentation fees but is otherwise not involved in the loan. Fees are 
recorded when payment is received.

Loan origination fees offset by certain direct origination costs are deferred 
and recognized over the contractual life of the loan as an adjustment to the 
yield. The unrecognized fees and costs are reported either as a reduction of 
the loan principal outstanding, or, if deferred costs are greater than 
deferred fees, as additions to the applicable loan grouping. Commitment fees 
are deferred and recognized over the term of the commitment. Most deferred 
fees and costs are recognized using the interest method. When a loan is 
repaid or sold, an unamortized net deferred balance is credited or charged to 
income. Accretion of deferred loan fees is discontinued when loans are placed 
on nonaccrual status.


ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS

The determination of the balance in the allowance for possible loan losses is 
based on an analysis of the loan portfolio and reflects an amount which, in 
management's judgment, is adequate to provide for potential loan losses after 
giving consideration to the character of the loan portfolio, current economic 
conditions, past loan loss experience and such other factors as warrant 
recognition in estimating loan losses. In addition, various regulatory 
agencies, as an integral part of their examination process, periodically 
review the Bank's allowance for loan losses. Such agencies may require the 
Bank to record additions to the allowance based upon their judgments on 
information available to them at the time of the examination.

The Company also evaluated loans in accordance with guidelines found in SFAS 
No. 114 and SFAS No. 118 from the Financial Accounting Standards Board (FASB) 
regarding loan impairment, income recognition and related disclosures, which 
the Company adopted in the first quarter of 1995. The Company considers a 
loan to be impaired when, based upon current information and events, it 
believes it is probable that the Company will be unable to collect all 
amounts due on a timely basis, according to the contractual terms of the loan 
agreement. Impairment of a loan is measured by the present value of the 
expected future cash flows discounted at the loan's effective interest rate, 
the loan's observable market price, or the fair value of the collateral if 
the loan is collateral dependent. If the measure of the impaired loan is less 
than the recorded investment in the loan, the Company recognizes impairment 
by creating a valuation allowance with a corresponding charge to provision 
for loan losses.


PREMISES AND EQUIPMENT

Premises and equipment are stated at cost, less accumulated depreciation, 
which is computed principally on the straight-line method over the estimated 
useful lives of the assets. Leasehold improvements are amortized over the 
shorter of their economic lives or the term of the lease.


GOODWILL

The Company has classified as goodwill the cost in excess of fair value of 
the net assets (including tax attributes) of businesses acquired in purchase 
transactions. Goodwill is being amortized on a straight line method over 
fifteen years. The Company periodically reviews goodwill to assess 
recoverability from projected, undiscounted net cash flows of the related 
business unit, and impairments which would be recognized in operating results 
if a permanent reduction in value were to occur.


OTHER REAL ESTATE OWNED

Other real estate owned, which represents real estate acquired through 
foreclosure, or deed in lieu of foreclosure, is reported at the fair value of 
the property at the time of transfer to other real estate owned, reduced by 
estimated selling expenses. Any subsequent operating expenses, or income, 
reductions in estimated values, and gains or losses on disposition of such 
properties are charged to current operations.


INCOME TAXES

Income taxes are accounted for by the asset and liability method as required 
by Statement of Financial Accounting Standards No. 109, "Accounting for 
Income Taxes" (SFAS 109). Deferred tax liabilities or assets are established 
for temporary differences between financial and tax reporting basis and are 
subsequently adjusted to reflect changes in tax rates expected to be in 
effect when the temporary differences reverse. A valuation allowance is 
established for any deferred tax asset for which realization is not likely.

                                      36

<PAGE>

NOTE A - (CONTINUED)

STATEMENT OF CASH FLOWS

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

EARNINGS PER SHARE

Basic EPS (Earnings per Share) excludes dilution and is computed by dividing 
income available to common stockholders by the weighted-average number of 
common shares outstanding for the period. Diluted EPA reflects the potential 
dilution that could occur if securities or other contracts to issue common 
stock were exercised or converted into common stock or resulted in the 
issuance of common stock that then shared in the earnings of the entity.

CURRENT ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board issued Statement No. 
130, "Reporting Comprehensive Income". This statement, which is effective for 
the year ending December 31, 1998, establishes standards of disclosure and 
financial statement display for reporting comprehensive income and its 
components.

In June 1997, the Financial Accounting Standards Board issued Statement No. 
131, "Disclosures about Segments of an Enterprise and Related Information". 
This statement changes current practice under SFAS 14 by establishing a new 
framework on which to base segment reporting (referred to as the management 
approach), and also requires certain related disclosures about products and 
services, geographic areas, and major customers. The disclosures are required 
for the year ending December 31, 1998.

RECLASSIFICATION

Certain reclassifications were made to prior years' presentations to conform 
to the current year. These reclassifications are of a normal recurring 
nature. All prior years' numbers have been restated to give affect for the 
acquisition of El Camino National Bank and Templeton National Bank by Bank of 
Santa Maria, and Bank of Santa Maria by BSM Bancorp, on a pooling of interest 
basis.

NOTE B - MERGERS AND ACQUISITIONS

On March 11, 1997, BSM Bancorp acquired Bank of Santa Maria by issuing 
2,973,539 shares of Bancorp common stock in exchange for the surrender of all 
outstanding shares of the Bank's common stock. There was no cash involved in 
this transaction. The acquisition was accounted for as a pooling of interest 
and the consolidated financial statements contained herein have been restated 
to give full affect to this transaction.

Prior to this acquisition, the Bank acquired three other local financial 
institutions either through the exchange of stock or by cash payment. Details 
regarding these acquisitions can be found below.

MERGER WITH EL CAMINO NATIONAL BANK

At the close of business on January 10, 1997, Bank of Santa Maria consummated 
a merger with El Camino National Bank. This merger was accounted for by the 
pooling of interest method, whereby the Company's Financial Statements have 
been restated as if the two banks were historically one unit. A total of 
201,678 common shares were issued to the shareholders of El Camino National 
Bank in connection with this merger.

                                      37

<PAGE>

NOTE B - (CONTINUED)

The following summarizes the separate revenue and net income of Bank of Santa 
Maria and El Camino National Bank that have been reported in the restated 
financial statements included herein:

<TABLE>
<CAPTION>
                                             1996                    1995
                                          -----------             -----------
<S>                                       <C>                     <C>
Interest and Nonintest Income:
   Bank of Santa Maria                    $24,627,927             $23,021,319
   El Camino National Bank                  1,842,044               2,073,680
                                          -----------             -----------
                                          $26,469,971             $25,094,999
                                          -----------             -----------
                                          -----------             -----------
Net Income:
   Bank of Santa Maria                    $ 3,718,740             $ 3,149,392
   El Camino National Bank                   (250,206)                 49,272
   BSM Merger Company                            (800)                      -
                                          -----------             -----------
                                          $ 3,467,734             $ 3,198,664
                                          -----------             -----------
                                          -----------             -----------
</TABLE>


MERGER WITH CITIZENS BANK

On May 3, 1996, the Bank acquired 100% of the outstanding common stock of 
Citizens Bank of Paso Robles, N.A. (Citizens) for $4,129,000 in cash. 
Citizens had total assets of approximately $31,858,000. The acquisition was 
accounted for using the purchase method of accounting in accordance with 
Accounting Principles Board Opinion No. 16. "Business Combinations". Under 
this method of accounting, the purchase price was allocated to the assets 
acquired and deposits and liabilities assumed based on their fair values as 
of the acquisition date. The financial statements include the operations of 
Citizens from the date of the acquisition. Goodwill arising from the 
transaction totaled approximately $1,958,000 and is being amortized over 
fifteen years on a straight-line basis.

The following table sets forth selected unaudited pro forma combined 
financial information of the Bank and Citizens for the years ended December 
31, 1996, and 1995. The pro forma operating data reflects the effect of the 
acquisition of Citizens as if it was consummated at the beginning of each 
year presented. The pro forma results are not necessarily indicative of the 
results that would have occurred had the acquisition been in effect for the 
full years presented, nor are they necessarily indicative of the results of 
future operations.

<TABLE>
<CAPTION>
                                                  1996              1995
                                              -----------        -----------
<S>                                           <C>                <C>
Interest and Noninterest Income:
   Bank of Santa Maria restated               $26,469,971        $25,094,999
   Citizens Bank of Paso Robles                 1,024,332          3,187,381
   Interest on Purchase Price                    (218,800)          (229,600)
                                              -----------        -----------
                                              $27,275,503        $28,052,780
                                              -----------        -----------
                                              -----------        -----------
Net Income:
   Bank of Santa Maria Restated               $ 3,467,734        $ 3,198,664
   Citizens Bank of Paso Robles                    19,134            331,682
                                              -----------        -----------
                                                3,486,868          3,530,346
                                              -----------        -----------
                                              -----------        -----------
   Merger Related Adjustments                     (16,927)          (196,332)
                                              -----------        -----------
Pro forma Net Income                          $ 3,469,941        $ 3,334,014
                                              -----------        -----------
                                              -----------        -----------
   Pro forma Net Income Per Share - Basic     $      1.17        $      1.14
                                              -----------        -----------
                                              -----------        -----------
   Pro forma Net Income Per Share - Diluted   $      1.16        $      1.13
                                              -----------        -----------
                                              -----------        -----------
</TABLE>

                                      38

<PAGE>

NOTE - B (CONTINUED)


Merger related adjustments include adjustments to interest income from the
payment of the purchase price in cash, goodwill amortization, depreciation,
professional expenses related to the merger, data processing, and other
operating costs and related tax effects.


MERGER WITH TEMPLETON NATIONAL BANK
At the close of business on September 8, 1995, Bank of Santa Maria consummated a
merger with Templeton National Bank. This merger was accounted for by the
pooling of interest method, whereby the Balance Sheets and the Statements of
Income are combined and restated as if the two banks were historically one unit.
A total of 397,561 common shares were issued to the shareholders of Templeton
National Bank in connection with this merger.

The following summarizes the historical separate revenue and net income of Bank
of Santa Maria and Templeton National Bank that have been reported in the
restated financial statements included herein:

<TABLE>
<CAPTION>

                                                                 Eight month
                                                                period ended
                                                             August 31, 1995
                                                          ------------------
    <S>                                                     <C>
    Interest and non-interest income
    --------------------------------------
    Bank of Santa Maria                                          $13,608,014
    Templeton National Bank                                        1,754,146
                                                              --------------
                                                                 $15,362,160
                                                              --------------
                                                              --------------
    Net Income
    --------------------------------------
    Bank of Santa Maria                                         $  2,061,359
    Templeton National Bank                                          199,598
                                                              --------------
                                                                $  2,260,957
                                                              --------------
                                                              --------------

</TABLE>

                                     39

<PAGE>

NOTE C - INVESTMENT SECURITIES


Securities have been classified in the Balance Sheets according to management's
intent. The carrying amount of securities and their approximate fair values at
December 31, were as follows:

<TABLE>
<CAPTION>

                                                                          Gross                Gross               Estimated
                                                Amortized            Unrealized           Unrealized                  Market
                                                     Cost                 Gains               Losses                   Value
                                           ---------------         ------------         ------------          --------------
<S>                                          <C>                     <C>                  <C>                  <C>
1997:
Available for Sale Securities:
U.S. Treasury securities                      $17,560,736               $52,037              $3,009             $17,609,764
U.S. Government and agency
      securities                               28,439,171               124,560              30,361              28,533,370
                                           ---------------         ------------         ------------          --------------
                                              $45,999,907              $176,597             $33,370             $46,143,134
                                           ---------------         ------------         ------------          --------------
                                           ---------------         ------------         ------------          --------------
1997:
Held to Maturity Securities:
U.S. Treasury securities                         $999,750                     -                 $69                $999,681
U. S. Government and agency
    securities                                 28,913,811                71,152              86,281              28,898,683
Obligations of states and
    political subdivisions                     30,238,482               333,100               1,931              30,569,651
Other debt securities                           2,615,421                 6,773              16,205               2,605,989
                                           ---------------         ------------         ------------          --------------
                                              $62,767,464              $411,025            $104,486             $63,074,004
                                           ---------------         ------------         ------------          --------------
                                           ---------------         ------------         ------------          --------------
1996:
Available for Sale Securities:
U.S. Treasury securities                       $3,981,598               $26,867                   -              $4,008,464
U.S. Government and agency
    securities                                 19,893,604                27,101              63,559              19,857,146
                                           ---------------         ------------         ------------          --------------
                                              $23,875,202               $53,968             $63,559             $23,865,610
                                           ---------------         ------------         ------------          --------------
                                           ---------------         ------------         ------------          --------------
1996:
Held to Maturity Securities:
U.S. Treasury securities                       $4,798,202              $117,139              $2,915              $4,912,426
U.S. Government and agency
    securities                                 45,190,581                84,635             188,581              45,086,635
Obligations of states and
    political subdivisions                     15,294,241                     -               6,278              15,287,963
Other debt securities                           3,056,103                10,372              22,604               3,043,870
                                           ---------------         ------------         ------------          --------------
                                              $68,339,127              $212,146            $220,378             $68,330,894
                                           ---------------         ------------         ------------          --------------
                                           ---------------         ------------         ------------          --------------

</TABLE>

There were no gross realized gains or gross realized losses on sales of
available for sale securities. The Company does not expect to realize either
gains or losses shown in the above schedule. The Company fully expects to hold
these securities to maturity/call date at which time the amortized cost and
market value will be the same as the par value of the bond.

The Company has no derivative financial instruments as defined by SFAS No. 
119, "Disclosure About Derivative Financial Instruments and Fair Value of 
Financial Instruments."

At December 31, 1997, and 1996, investment securities having an amortized cost
of approximately $6,006,000 and $6,224,000 respectively, were pledged to secure
public deposits and for other purposes as required or permitted by law.

                                   40

<PAGE>

NOTE C - (CONTINUED)

The amortized cost and estimated market value of all debt securities as of
December 31, 1997, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.

<TABLE>
<CAPTION>

                                                    Held to Maturity                Available for Sale
                                                    ----------------                ------------------
                                                Amortized       Estimated        Amortized       Estimated
                                             ------------    ------------     ------------    ------------
<S>                                           <C>             <C>               <C>             <C>
Due in one year or less                       $15,754,095     $15,756,674       $9,133,101      $9,133,144
Due after one year to five years               36,331,320      36,473,327       36,866,806      37,009,990
Due after five years to ten years               9,342,945       9,490,224                -               -
Due after  ten years                            1,339,104       1,353,779                -               -
                                             ------------    ------------     ------------    ------------
           TOTAL                              $62,767,464     $63,074,004      $45,999,907     $46,143,134
                                             ------------    ------------     ------------    ------------
                                             ------------    ------------     ------------    ------------
</TABLE>




NOTE D - LOANS

The Company's loan portfolio consists primarily of loans to borrowers within
Santa Barbara and San Luis Obispo Counties. Although the Company seeks to avoid
concentrations of loans to a single industry, loans to the agricultural
community are listed separately, as in total they exceed 10% of all loans
outstanding as of December 31, 1997, and 1996. Concentrations also can occur
based upon a single class of collateral. Real estate and real estate associated
businesses are among the principal industries in the Company's market area and,
as a result, the Company's loan and collateral portfolios are to some degree
concentrated in those industries. Real estate related loans, net of deferred
fees and costs at December 31, 1997, and December 31, 1996, were as follows:

Real estate related:

<TABLE>
<CAPTION>

                                                      1997           1996
                                              ------------   ------------
         <S>                                   <C>           <C>
         Construction and land development     $16,778,000    $13,797,000
         Home equity credit lines               18,727,000     20,465,000
         Residential properties                 14,304,000     17,253,000
         Commercial properties                  49,099,000     42,057,000
         Farmland                               11,101,000      6,971,000
                                              ------------   ------------
                                              $110,009,000   $100,543,000
                                              ------------   ------------
                                              ------------   ------------

</TABLE>

                                     41

<PAGE>


NOTE D - (CONTINUED)

The Company also originates real estate loans for sale to governmental agencies
and institutional investors. At December 31, 1997, and at December 31, 1996, the
Company had approximately $1,200,000 and $1,400,000 held for sale respectively,
and was servicing approximately $36,900,000 and $39,600,000, respectively, in
loans previously sold.

A summary of the changes in the allowance for possible credit losses follows:
<TABLE>
<CAPTION>

                                                             1997                1996                1995
                                                    -------------         -----------         -----------
<S>                                                   <C>                  <C>                <C>
Balance at beginning of year                           $2,701,876          $2,801,396          $2,412,427
Additions to the allowance charged to expense              30,000             227,000             875,500
Recoveries on loans charged off                           106,300              97,476             106,149
Allowance on loans acquired from Citizens
      Bank - Note B                                             -             228,022                   -
                                                    -------------         -----------         -----------
Subtotal                                                2,838,176           3,353,894           3,394,076
Less loans charged off                                    723,692             652,018             592,680
                                                    -------------         -----------         -----------
     TOTAL                                             $2,114,484          $2,701,876          $2,801,396
                                                    -------------         -----------         -----------
                                                    -------------         -----------         -----------
</TABLE>


The following is a summary of the investment in impaired loans, the related
allowance for loan losses, and income recognized on a cash basis as of December
31:
<TABLE>
<CAPTION>

                                                             1997                1996
                                                      -----------         -----------
<S>                                                   <C>                 <C>
Recorded Investment in Impaired Loans                  $1,572,021          $1,390,561
                                                      -----------         -----------
                                                      -----------         -----------
Related Allowance for Loan Losses                      $  425,461          $  351,544
                                                      -----------         -----------
                                                      -----------         -----------
Average Recorded Investment in Impaired Loans          $1,733,151          $1,506,478
                                                      -----------         -----------
                                                      -----------         -----------
Interest Income Recognized for Cash Payments           $   61,569          $   39,128
                                                      -----------         -----------
                                                      -----------         -----------

</TABLE>

Loans having carrying value of $419,669, $1,151,581 and $698,909 were
transferred to other real estate owned in 1997, 1996, and 1995, respectively.
During 1997 and 1996, loans totaling $144,000 and $122,900 respectively, were
made to facilitate the sale of other real estate owned.


NOTE E -  PREMISES AND EQUIPMENT

A summary of premises and equipment follows:

<TABLE>
<CAPTION>
                                                           1997                  1996
                                                  -------------         -------------
<S>                                                <C>                   <C>
Land                                                 $3,349,597            $3,225,913
Buildings and improvements                            8,721,744             8,598,715
Leasehold improvements                                   12,210               109,199
Furniture, fixtures, and equipment                    7,581,153             7,162,786
                                                  -------------         -------------
     Subtotal                                        19,664,704            19,096,613
Less accumulated depreciation/amortization            6,955,577             6,448,406
                                                  -------------         -------------
     TOTAL                                          $12,709,127           $12,648,207
                                                  -------------         -------------
                                                  -------------         -------------
</TABLE>

                                       42

<PAGE>

NOTE F - STOCK OPTION PLAN

In 1996, the Company adopted a stock option plan under which the Company's
common shares may be issued to directors, officers and key employees of the
Company and its subsidiary, as well as consultants and business associates, at
not less than 100% of the fair market value at the date the options were
granted. Of the 892,542 shares available to be issued under the new plan,
159,400 were immediately issued to replace options outstanding under Bank of
Santa Maria's stock option plans.

The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions for 1997, 1996
and 1995, respectively: risk-free rates of 5.8%, 6.1%, and 5.4%; dividend yields
of 2.0%, 2.0%, and 2.0%; volatility of 20% for 1997, and 15% for 1996, and 1995.
A summary of the status of the Company's plan and the Bank's two expired fixed
stock option plans as of December 31, 1997, 1996, 1995, and changes during the
years ending on those dates, is presented below:

<TABLE>
<CAPTION>
                                                    1997                           1996                           1995
                                         -------------------------      -------------------------    ---------------------------
                                                          Weighted                       Weighted                       Weighted
                                                           Average                        Average                        Average
                                                          Exercise                       Exercise                       Exercise
                                          Shares             Price          Shares          Price        Shares            Price
                                         -------------------------      -------------------------    ---------------------------
<S>                                      <C>              <C>             <C>            <C>           <C>             <C>
Outstanding at beginning of year          158,400              $12         153,900            $11       153,300              $10
Granted                                     4,000               16          31,500             15        23,500               14
Exercised                                 (17,600)              10         (23,400)             9       (18,450)               9
Forfeited                                  (3,600)              15           3,600)             7        (4,450)              10
                                         --------                        ---------                    --------- 
Outstanding at end of year                141,200               12         158,400             12       153,900               11
                                         --------                        ---------                    --------- 
                                         --------                        ---------                    --------- 
Options exercisable at year-end            72,000                           59,500                       53,400
Weighted-average fair value of
     options granted during the year       $ 3.79                           $ 3.10                       $ 2.70
Options available for future grant        733,942              11           86,520             10        118,420               9

</TABLE>

The following table summarizes information about fixed stock options outstanding
at December 31, 1997:

<TABLE>
<CAPTION>

                                 Options Outstanding                         Options Exercisable
                  ------------------------------------------------------------------------------------------------
                                  Weighted-Average
 Exercise              Number         Remaining            Weighted Average         Number           Weighted
  Price             Outstanding    Contractual Life          Exercise Price       Exercisable       Exercise Price
------------------------------------------------------------------------------------------------------------------
<S>                 <C>           <C>                      <C>                    <C>               <C>
$6                     14,000         2 years                    $6                 12,500              $6
$10 to $12             72,400           1.3                      11                 44,600              11
$13 to $17             54,800           3.2                      14                 14,900              14
                    ---------                                                     -------- 
 $6 to $17            141,200           2.0                      12                 72,000              11
                    ---------                                                     -------- 
                    ---------                                                     -------- 

</TABLE>

                                      43

<PAGE>


NOTE G - RETIREMENT PLAN

The Company has a noncontributory retirement plan covering substantially all of
its employees. The plan is a defined contribution plan with annual contributions
established at the discretion of the Board of Directors. The retirement plan
expense was $425,000 for 1997, $380,000 for 1996, and $340,000 for 1995.

In 1988, the Company's subsidiary established a Profit Sharing and Salary
Deferral 401(K) Plan to allow employees to defer a portion of their current
compensation until retirement. Since 1991, the Board of Directors of the Bank,
at their discretion, have elected to make a matching contribution at a
predetermined percentage of deferred dollars up to 2% of the participant's gross
salary. In 1997, the Board increased the percentage to 3%. The expense of the
matching contribution was $111,000 for 1997, $79,000 for 1996, and $74,000 for
1995. As of December 31, 1997, there were $7,366,000 in funds held for the
benefit of Bank employees in the aforementioned plans.

The estimated annual benefit payable upon retirement for any participant is
dependent upon the participant's salary levels for each of the years until
retirement coupled with the election of the Bank's Board to make annual
contributions for any given year, as well as the returns generated by the
investment choices selected by the individual employee over the period prior to
retirement.


NOTE H - INCOME TAXES

The provisions for income taxes included in the Statements of Income consist of
the following:

<TABLE>
<CAPTION>
                                 1997                  1996                    1995
                          -----------          ------------             -----------
<S>                        <C>                  <C>                     <C>
Current:
     Federal               $1,617,000            $1,436,000              $1,480,900
     State                    683,000               607,800                 619,000
                          -----------          ------------             -----------
                            2,300,000             2,043,800               2,099,900
Deferred                      316,000               269,000                (215,000)
                          -----------          ------------             -----------
                           $2,616,000            $2,312,800              $1,884,900
                          -----------          ------------             -----------
                          -----------          ------------             -----------

</TABLE>

A comparison of the federal statutory income tax rates to the Company's
effective income tax rates follow:

<TABLE>
<CAPTION>
                                                1997                     1996                       1995
                                              Amount        Rate        Amount         Rate        Amount          Rate
                                          ----------     -------    -----------      ------    -----------      -------
<S>                                       <C>              <C>       <C>              <C>       <C>               <C> 
Federal tax rate                          $2,319,000       34.0%     $1,965,000       34.0%     $1,728,000        34.0%
California franchise taxes,
     net of federal tax benefit              500,000        7.3%        448,000        7.8%        379,000         7.6%
Tax savings from exempt
     loan and investment income             (273,000)      (4.0%)     (197,000)       (3.4%)      (166,000)       (3.3%)
Other items - net                             70,000        1.0%        96,800         1.6%        (56,100)       (1.2%)
                                          ----------     -------    -----------      ------    -----------      -------
                                          $2,616,000       38.3%     $2,312,800       40.0%     $1,884,900        37.1%
                                          ----------     -------    -----------      ------    -----------      -------
                                          ----------     -------    -----------      ------    -----------      -------

</TABLE>

                                       44

<PAGE>

NOTE H - (CONTINUED)

The following is a summary of the components of the net deferred tax asset and
liability accounts recognized in the accompanying Balance Sheets:

<TABLE>
<CAPTION>

                                                                        1997          1996
                                                                 -----------    ----------
<S>                                                                <C>           <C>
Deferred Tax Assets:
     Allowance for Credit Losses Due to Tax Limitations             $570,000      $855,000
     Other Assets/Liabilities                                        351,000       437,000
                                                                 -----------    ----------
                                                                     921,000     1,292,000
Deferred Tax Liability:
     Premises and Equipment Due to Depreciation
            Difference                                             (496,000)     (490,000)
                                                                 -----------    ----------
     Net Deferred Taxes                                             $425,000      $802,000
                                                                 -----------    ----------
                                                                 -----------    ----------

</TABLE>

NOTE I - EARNINGS PER SHARE (EPS)

The following is a reconciliation of net income and shares outstanding to the
income and number of shares used to compute EPS.

<TABLE>
<CAPTION>
                                                       1997                          1996                           1995
                                              Income         Shares         Income          Shares         Income         Shares
                                         ------------    -----------     -----------    -----------   -------------     ----------
<S>                                       <C>              <C>            <C>            <C>            <C>              <C>
Net Income as Reported                     $4,204,967                     $3,467,734                     $3,198,664
Shares Outstanding at Year  End                            2,990,939                      2,973,631                      2,950,081
Impact of Weighting Shares
    Purchased During the Year                       -        (14,406)              -        (14,047)              -        (38,007)
                                         ------------    -----------     -----------    -----------   -------------     ----------
                   Used in Basic EPS        4,204,967      2,976,533       3,467,734      2,959,584       3,198,664      2,912,074
Dilutive Effect of Stock Options                    -         62,296               -         33,590               -         31,066
                                         ------------    -----------     -----------    -----------   -------------     ----------
                   Used in Dilutive EPS    $4,204,967      3,038,829      $3,467,734      2,993,174     $3,198,664       2,943,140
                                         ------------    -----------     -----------    -----------   -------------     ----------
                                         ------------    -----------     -----------    -----------   -------------     ----------

</TABLE>

NOTE J - FINANCIAL COMMITMENTS

In the normal course of business, the Company enters into financial commitments
to meet the financing needs of its customers. These financial commitments
include commitments to extend credit and standby letters of credit. Those
instruments involve, to varying degrees, elements of credit and interest rate
risk not recognized in the Company's financial statements.

The Company's exposure to credit loss in the event of nonperformance on
commitments to extend credit and standby letters of credit is represented by the
contractual amount of those instruments. The Company uses the same credit
policies in making commitments as it does for loans reflected in the financial
statements.

                                45

<PAGE>

NOTE J - (CONTINUED)

As of December 31, 1997, the Company had the following outstanding financial
commitments whose contractual amount represents credit risk:

<TABLE>
<CAPTION>
       <S>                                         <C>
       Commitments to extend credit                $ 53,823,796
       Standby letters of credit                      2,046,426
                                                  -------------
                                                   $ 55,870,222
                                                  -------------
                                                  -------------
</TABLE>

Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Standby
letters of credit are conditional commitments to guarantee the performance of a
Company customer to a third party. Since many of the commitments and standby
letters of credit are expected to expire without being drawn upon, the total
amounts do not necessarily represent future cash requirements. The Company
evaluates each customer's credit worthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Company, is based on
management's credit evaluation of the customer. The majority of the Company's
commitments to extend credit and standby letters of credit are secured by real
estate.


NOTE K - RELATED PARTY TRANSACTIONS

In the ordinary course of business, the Company has granted loans to certain
officers and directors and the companies with which they are associated. In the
Company's opinion, all loans and loan commitments to such parties are made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons. An
analysis of the activity with respect to such loans to related parties is as
follows:

<TABLE>
<CAPTION>
                                                1997                1996
                                            -----------        -------------
    <S>                                     <C>                 <C>
    Balance at Beginning of Year             $5,643,829           $5,677,776
    Advances                                  2,815,721            5,993,138
    Repayments                              (3,888,618)          (6,027,085)
                                            -----------        -------------
    Balance at End of Year                   $4,570,932           $5,643,829
                                            -----------        -------------
                                            -----------        -------------
</TABLE>

NOTE L - REGULATORY MATTERS

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

Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios of total and Tier 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). Management
believes, as of December 31, 1997, that the Company meets all capital adequacy
requirements to which it is subject.

                             46

<PAGE>

NOTE L - (CONTINUED)

The Company's actual capital amounts and ratios are presented in the following
table.

<TABLE>
<CAPTION>
                                                                                      Capital Needed
                                                                                      --------------
                                                                                                      To be Well
                                                                            For Capital           Capitalized Under
                                                                             Adequacy             Prompt Corrective
                                                    Actual                   Purposes                 Provisions
                                            -------------------        -------------------      --------------------
IN THOUSANDS                                   Amount    Ratio          Amount      Ratio        Amount        Ratio
-----------------------------               ---------  --------        -------    -------       -------       ------
<S>                                           <C>        <C>           <C>          <C>         <C>            <C>
BANCORP 
As of December 31, 1997:
Total Capital to Risk-Weighted Assets         $36,366     15.6%        $18,630        8.0%      $23,287        10.0%
Tier 1 Capital to Risk-Weighted Assets        $34,251     14.7%        $ 9,315        4.0%      $13,972         6.0%
Tier 1 Capital to Average Assets              $34,251     10.7%        $12,789        4.0%      $15,986         5.0%

BANK 
As of December 31, 1997:
Total Capital to Risk-Weighted Assets         $36,041     15.6%        $18,527        8.0%      $23,159        10.0%
Tier 1 Capital to Risk-Weighted Assets        $33,926     14.6%        $ 9,264        4.0%      $13,895         6.0%
Tier 1 Capital to Average Assets              $33,926     10.2%        $13,364        4.0%      $16,705         5.0%
BANK 
As of December 31, 1996:
Total Capital to Risk-Weighted Assets         $33,047     15.3%        $17,287        8.0%      $21,609        10.0%
Tier 1 Capital to Risk-Weighted Assets        $30,537     14.1%        $ 8,644        4.0%      $12,966         6.0%
Tier 1 Capital to Average Assets              $30,537      9.7%        $12,581        4.0%      $15,726         5.0%

</TABLE>

The California Financial Code provides that a bank may not make a cash
distribution to its shareholders in excess of the lessor of the Company's
undivided profits, or the Company's net income for its last three fiscal years;
less the amount of any distribution made by the Company to shareholders during
the same period. Under these restrictions, approximately $8,608,000 was
available for payment of dividends at December 31, 1997.

Banking regulations require that all banks maintain a percentage of their
deposits as reserves at the Federal Reserve Bank. During the year ended December
31, 1997, required reserves averaged approximately $2,281,000.


NOTE M - FAIR VALUE OF FINANCIAL INSTRUMENTS

The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of Financial Accounting Standards No.
107, "Disclosures About Fair Value of Financial Instruments". For financial
instruments, whether or not recognized in the Balance Sheets, the Company is
required to disclose the fair value of those instruments for which it is
practicable to estimate that value. In addition, the Company is required to
disclose the methods and significant assumptions used to estimate those fair
values.

Considerable judgment is necessarily required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts the Company could realize in a
current market exchange. This disclosure of the fair value of financial
instruments should not be viewed as equivalent to the valuation of the Company
as a whole.

Fair value estimates, methods, and assumptions are set forth below:


CASH, DUE FROM BANKS, AND FED FUNDS SOLD
For these short-term instruments, the carrying amount approximates fair value.

                              47

<PAGE>

NOTE M - (CONTINUED)

INVESTMENT SECURITIES

For investment securities, fair value equals quoted market prices where
available, or, if unavailable, the fair value is based upon similar securities.


LOANS

For those loans with floating interest rates, it is presumed that estimated fair
value generally approximates the carrying value. The fair value of other types
of loans is estimated by discounting the future cash flows using the current
rates at which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities.

The fair value of non-accrual loans with a recorded book value of $963,000 was
not estimated because it was not practicable to reasonably estimate the amount
or timing of future cash flows for such loans.


DEPOSITS

The fair value of demand deposits, savings, and money market accounts is the
amount payable on demand at the reporting date. The fair value of fixed-maturity
certificates of deposit is estimated using rates currently offered for deposits
of similar remaining maturities.


COMMITMENTS TO EXTEND CREDIT AND LETTERS OF CREDIT

Commitments to extend credit and letters of credit are written at current market
rates. The Company does not anticipate any interest rate or credit factors that
would materially affect the fair value of these commitments or letters of credit
outstanding at December 31, 1997.

   
The estimated fair values of the Company's financial instruments at December 31,
1997 and December 31, 1996, are as follows (dollar amounts in thousands):
    

   
<TABLE>
<CAPTION>

                                                         1997                 1997                1996                 1996    
                                                      Carrying                                 Carrying                        
                                                        Amount             Fair Value            Amount             Fair Value 
                                                    ----------         --------------        ----------         -------------- 
<S>                                                   <C>                    <C>               <C>                    <C>      
Financial Assets:                                                                                                              
     Cash and Due from banks                           $18,473                $18,473           $17,644                $17,644 
     Fed funds sold                                      7,461                  7,461            13,920                 13,920 
     Investment securities                             108,911                109,217            92,205                 92,198 
                                                                                                                               
     Loans                                             192,136                190,394           180,372                179,037 
     Less:  Non-Accruals                                  (790)                  (790)             (981)                  (981)
               Allowance for losses                     (2,115)                (2,115)           (2,702)                (2,702)
                                                    ----------         --------------        ----------         -------------- 
     Net Loans                                        $189,231               $187,489          $176,689               $175,354 
                                                                                                                               
Financial Liabilities:                                                                                                         
     Deposits                                         $306,292               $306,167          $286,278               $286,556 

</TABLE>
    

                                48

<PAGE>

NOTE N - PARENT COMPANY FINANCIAL INFORMATION


Condensed financial information of BSM Bancorp (parent only) follows:


BSM BANCORP


Condensed Balance Sheet
December 31, 1997, and 1996

<TABLE>

                                                        1997            1996
--------------------------------------------------------------------------------
<S>                                               <C>              <C>
ASSETS 
Cash in Bank of Santa Maria                       $     185,140    $     17,136
Investment in Bank of Santa Maria                    35,739,148               -
Investment in BSM Merger Company                              -             200
Other assets                                            151,440          54,106
                                                  -------------    ------------
    Total assets                                  $  36,075,728    $     71,442
                                                  -------------    ------------
                                                  -------------    ------------
LIABILITIES & SHAREHOLDERS' EQUITY
Short-term note payable                           $           -    $     40,000
Accrued liabilities                                      13,500          30,742
                                                  -------------    ------------
    Total liabilities                                    13,500          70,742
    
Shareholders' equity                                 36,062,228             700
                                                  -------------    ------------
    Total liabilities and shareholders' equity    $  36,075,728    $     71,442
                                                  -------------    ------------
                                                  -------------    ------------
</TABLE>

                                     49

<PAGE>


NOTE N - (CONTINUED)


BSM BANCORP


Condensed Statements of Income
Years Ended December 31, 1997, and 1996

<TABLE>

                                                        1997            1996
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<S>                                               <C>              <C>
INCOME:
   Cash Dividends from Bank of Santa Maria        $     850,000    $          -
EXPENSES:
   Operating Expenses                                   174,057               -
                                                  -------------    ------------
Earnings before income taxes and equity in
   undistributed net earnings of 
   Bank of Santa Maria                                  675,943               -
Provision (Income tax benefit)                          (67,000)              -
                                                  -------------    ------------
Earnings before equity in undistributed 
   net earnings of Bank of Santa Maria                  742,943               -
Equity in undistributed net earnings of
   Bank of Santa Maria                                3,462,024               -
Equity in undistributed net loss of BSM Merger
   Company                                                    -            (800)
                                                  -------------    ------------
Net earnings (loss)                               $   4,204,967     $      (800)
                                                  -------------    ------------
                                                  -------------    ------------
</TABLE>

                                     50

<PAGE>


NOTE N - (CONTINUED)


BSM BANCORP


Condensed Statements of Cash Flows
Years Ended December 31, 1997, and 1996

<TABLE>

                                                        1997            1996
--------------------------------------------------------------------------------
<S>                                               <C>              <C>
Cash flows from operation activities:
   Net income (loss)                              $   4,204,967    $       (800)
Adjustments to reconcile net income to net cash
      provided by operating activities:
   Undistributed net (income) loss of consolidated   (3,462,024)            800
subsidiaries                        
   Amortization of organizational expenses               14,829               -
   Other                                               (129,405)        (23,364)
                                                  -------------    ------------
        Net cash provided by operating activities       628,367         (23,364)
                                                  -------------    ------------
Cash flows from investing activities:
   Decrease (increase) of investment in 
subsidiaries                                                200          (1,000)
                                                  -------------    ------------
        Net cash provided by (used in) 
          investing activities                              200          (1,000)
                                                  -------------    ------------
Cash flows from financing activities:
   Net change in short-term note payable                (40,000)         40,000
   Proceeds from the issuance of 
     organizational stock                                     -           1,500
   Proceeds from the exercise of stock options          176,925               -
   Payment to redeem organizational stock                (1,500)              -
   Dividends paid                                      (595,988)              -
                                                  -------------    ------------
        Net cash provided by (used in) 
          financing activities                         (460,563)         41,500
                                                  -------------    ------------
Net increase in cash                                    168,004          17,136
Cash, beginning of year                                  17,136               -
                                                  -------------    ------------
Cash, end of year                                 $     185,140    $     17,136
                                                  -------------    ------------
                                                  -------------    ------------
</TABLE>

NOTE O - INTENT TO MERGE AND PROPOSED CHANGE OF CONTROL



On January 29, 1998, the Company jointly announced with Mid-State Bank that they
have entered into an Agreement to Merge and Plan of Reorganization dated January
29, 1998, whereby the Bank of Santa Maria and Mid-State Bank would merge
together under BSM Bancorp. Upon consummation, which is anticipated to occur in
the third quarter of 1998, BSM Bancorp is expected to change its name to Mid
State Bancshares and Mid-State Bank would become the surviving bank. Under the
merger terms, existing Mid-State Bank stock would be exchanged for shares of the
Holding Company in a ratio based upon a value of $29.37 for each share of BSM
Bancorp and the fair market value of Mid-State Bank stock just prior to the
close of the merger. It is estimated that Mid-State Bank shareholders will own
approximately 70% and the BSM Bancorp shareholders will own approximately 30% of
the holding company following the consummation of the merger.

                                     51

<PAGE>


NOTE O - (CONTINUED)


This transaction is subject to the approval by holders of a majority of the
outstanding shares of the Company's common stock and by regulatory authorities.
All unexercised stock options of BSM Bancorp will become exercisable in full in
the event that this proposed transaction is consummated. In addition, as part of
the Agreement with Mid-State, the Company's mid-year cash dividend, if any, is
limited to a maximum of $.10 per share.


ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
FINANCIAL DISCLOSURES


None



                                     52

<PAGE>


PART III


ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT


                                    DIRECTORS


The following table sets forth as to each of the persons who are currently
directors of the Bancorp, such person's age as of February 17, 1998, principal
occupation during the past five (5) years, and the period during which such
person has served as a director of the Bancorp and also the Bank, its
wholly-owned subsidiary.

<TABLE>
<CAPTION>                                                                                  YEAR FIRST          YEAR FIRST
                                                            BUSINESS EXPERIENCE          APPOINTED AS       ELECTED AS BANK
              NAME AND OFFICE HELD          AGE         DURING THE PAST FIVE YEARS      BANCORP DIRECTOR        DIRECTOR
---------------------------------------------------------------------------------------------------------------------------    
<S>                                         <C>        <C>                              <C>                 <C>

Armand R. Acosta                            72               Retailer, Retired                 1996              1977

Richard E. Adam                             67                    Farmer                       1996              1977

Fred L. Crandall, Jr., DDS                  69                    Dentist                      1996              1978

A J. Diani                                  76                 Construction                    1996              1977
   Chairman of the Board
   Bank of Santa Maria
   BSM Bancorp

William A. Hares                            63              Commercial Banking                 1996              1981
   President and CEO
   Bank of Santa Maria
   BSM Bancorp

Roger A. Ikola, MD                          66                 Pediatrician                    1996              1977

Toshiharu Nishino                           71               Wholesale Produce                 1996              1977

Joseph Sesto, Jr.                           85             Investments, Retired                1996              1977

William L. Snelling                         66         Business Manager, Consultant            1996              1977
   Secretary
   Bank of Santa Maria
   BSM Bancorp

Mitsuo Taniguchi                            71          Wholesale Produce, Retired             1996              1977

Joseph F. Ziemba, MD                        80              Physician, Retired                 1996              1978
</TABLE>

                                     53

<PAGE>

Upon consummation of the acquisition of Bank of Santa Maria, (see Item
I-Business-Acquisition by Mid-State Bank), all but three of the above directors
have agreed to resign as directors of the Company and its subsidiary. The three
directors who will remain as a part of Mid-State Bancshares are Messieurs Diani,
Hares and Snelling. The seven directors of Mid-State Bank will then be appointed
to fill the vacancies at both the Bank and Company level and the number of
directors of the Company will be reduced to ten. The names of the directors to
be appointed to both the Company and the Bank's Board following the consummation
of the merger are as follows:

                                 Gracia B. Bello
                                Clifford H. Clark
                                 Daryl L. Flood
                                 Raymond E Jones
                                Albert L Maguire
                                Gregory R. Morris
                                 Carrol R Pruett

                               EXECUTIVE OFFICERS


The following table sets forth as to each of the persons who are currently
executive officers of the Bancorp, such person's age as of February 17, 1998,
principal occupation during the past five (5) years, and the period during which
such person has served as a director of the Bancorp and also the Bank, its
wholly-owned subsidiary.

<TABLE>
<CAPTION>
                                                                    BUSINESS EXPERIENCE                    YEAR FIRST APPOINTED
   NAME                                     AGE                   DURING PAST FIVE YEARS                   AS EXECUTIVE OFFICER
---------------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>          <C>                                               <C>
   William A. Hares                         63             President and Chief Executive Officer                   1996
                                                           of the Bancorp since November, 1996.
                                                           President and Chief Executive Officer
                                                                  of the Bank since 1981

   Carol Bradfield(1)                       43                Executive Vice President of the                      1996
                                                               Bancorp since November, 1996
                                                          Executive Vice President/Administration
                                                                  of the Bank since 1996

   F. Dean Fletcher                         50                 Executive Vice President and                        1996
                                                              Chief Financial Officer of the
                                                               Bancorp since November, 1996
                                                               Executive Vice President and
                                                              Chief Financial Officer of the
                                                                      Bank since 1991

   Susan Forgnone (2)                       36                Executive Vice President of the                      1996
                                                               Bancorp since November, 1996.
                                                               Executive Vice President and
                                                                 Loan Administrator of the
                                                                      Bank since 1994

   James D. Glines                          55                Executive Vice President of the                      1996
                                                               Bancorp since November, 1996.
                                                                 Executive Vice President-
                                                                Branch Administrator of the
                                                                      Bank since 1997
                                                            Executive Vice President since 1992
                                                         Manager-Santa Maria Way Branch since 1983
</TABLE>

                                     54

<PAGE>

(1) Ms. Bradfield joined the Bank in April, 1988.  She was formally Senior 
Vice President - Human Resources prior to her appointment as an executive 
officer of the Bank.

(2) Ms. Forgnone joined the Bank in October, 1988. She has worked in various
aspects of lending with the Bank prior to her appointment as an executive
officer.

None of the directors, nominees or executive officers of the Bancorp were
selected pursuant to any arrangement or understanding, other than with the
directors and executive officers of the Bancorp, acting within their capacities
as such. There are no family relationships between the directors and executive
officers of the Bancorp, except between Director Nishino and Director Taniguchi
who are brothers-in-law, and none of the directors or executive officers of the
Bancorp serve as directors of any company which has a class of securities
registered under, or which is subject to the periodic reporting requirements of,
the Securities Exchange Act of 1934 or any investment company registered under
the Investment Company Act of 1940, as amended, although all of the directors
and executive officers hold similar positions with the Bank, which, until
acquired by the Bancorp, was subject to the above periodic reporting
requirements.

None of the directors or executive officers of the Bancorp have, during the last
five years, been involved in any legal proceedings that are material to an
evaluation of the ability or integrity of any director or executive officer of
the Company.

ITEM 11: DIRECTORS AND EXECUTIVE OFFICER COMPENSATION


During 1997, the Bancorp did not pay any cash compensation to its executive
officers nor were the directors compensated for their attendance at Bancorp
meetings.

   
The following Summary Compensation Table shows compensation earned from the Bank
for services rendered during fiscal years 1997, 1996, and 1995 by each of the
Bank's executive officers whose salaries and bonuses exceeded $100,000 in 1997.
    


                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                                                                                Long-term
                                                            Annual                            Compensation 
                                                        Compensation(1)                          Awards
                                             ----------------------------------------------------------------------------------
<S>                                      <C>         <C>               <C>                   <C>                    <C>
                                                                                                Securities             All Other
                                                          Salary              Bonus             Underlying          Compensation
Name and Principal Position              Year            ($)(2)              ($)(4)            Options(#)(5)                ($)(3)
--------------------------------------------------------------------------------------------------------------------------------
William A. Hares                         1997        $  185,000          $  190,000                                  $    18,285
        President and Chief              1996           170,000             165,000                                       17,750
        Executive Officer                1995           160,000             150,000                 10,000                16,843

Carol Bradfield                          1997            90,000              70,000                                       17,715
        Executive Vice President         1996            68,104              35,000                  5,000                11,051
        Administration                   1995               N/A                 N/A                    N/A                   N/A

F. Dean Fletcher                         1997           100,000              80,000                                       17,135
        Executive Vice President         1996            96,000              60,000                      -                13,776
        and Chief Financial Officer      1995            93,000              45,000                      -                15,223

Susan Forgnone                           1997            95,000              70,000                                       15,041
        Executive Vice President         1996            85,000              50,000                      -                12,767
        and Loan Administrator           1995            80,000              45,000                      -                 9,241

James D. Glines                          1997            95,000              70,000                                       17,311
        Executive Vice President         1996            89,000              50,000                      -                14,614
        Branch Administrator             1995            85,000              45,000                      -                12,025

</TABLE>

                                     55

<PAGE>

(1) The column for other annual compensation has been omitted since the only 
items reportable thereunder for the named persons are perquisites, which did 
not exceed the lessor of $50,000 or 10% of salary and bonus for any of the 
named persons. 

(2) Includes all contributions to the Bank's 401(k) Plan, and the Bank's 
Flexible Spending Account for medical and child care expenditures made 
through salary reductions and deferrals. 

(3) All employees of the Bank who have at least one year of service having 
worked at least 1,000 hours during that year and are at least 18 years of age 
are eligible to participate in the Bank's Profit Sharing and the 401(k) 
Salary Deferral Plan. The Salary Deferral Plan is a self funded voluntary 
plan that offers certain tax savings with tax deferred investment earnings. 
The amount contributed by the participants is fully vested from the date of 
deposit. The directors of the Bank at their discretion may elect to match an 
amount equal to $.50 for every $1.00 the 401(k) participant invests, not to 
exceed 2% of their gross compensation. This contribution is made as of June 
30th and December 31st of each year. All matching contributions follows a 
seven year vesting schedule. Contribution to the Bank's Profit Sharing Plan 
are also at the discretion of the Bank's directors. Any amount that is 
contributed is allocated to accounts established for each participating 
employee, and is based on a percentage of their gross income. These are 
subject to a seven year vesting schedule with 100% vesting occurring after 
seven years of service. Funding for the plan always occurs in January of each 
year. Participants contributions toward the 401(k) are included in amounts 
shown as "Salary," above. The Bank's matching contributions are as well as 
the Profit Sharing contribution are aggregated and included under "All Other 
Compensation," above. 

(4) Cash bonuses are reported in the year earned and may be paid in that year 
or in January of the following year at the discretion of the officer. Bonuses 
are recommended by the Compensation Committee of the Board and are approved 
by the full board at the December meeting. Bonuses are discretionary, but are 
generally based upon the operating results of the Bank. 

(5) Options shown were issued under the Bank's Incentive Stock Option Plans. 
These plans are administered by the Compensation Committee. Options granted 
have an exercise price equal to the fair market value on the date of grant, 
vest over a term of 5 years, and expire 5 years from the date of grant unless 
otherwise noted.

STOCK OPTION GRANTS IN 1997
   
There were no grants of stock options to any of the named persons during 1997.
    

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION 
VALUES 

The following table sets forth the number of shares acquired by any of the 
named persons upon exercise of stock options in 1997, the value realized 
through the exercise of such options, and the number of unexercised options 
held by the such person, including both those which are presently 
exercisable, and those which are not presently exercisable.

<TABLE>
                             Shares                                   Number of
                            Acquired                              Share Underlying                    Value of Unexercised
                              Upon                                   Unexercised                             In-the
                             Option          Value                     Options                           Money Options
Name                      Exercise (#)    Realized($)              at 12-31-97 (#)                     at 12-31-97 ($)(1)
----                      ------------    -----------     ---------------------------------    -----------------------------------
<S>                       <C>             <C>             <C>                   <C>              <C>                   <C>
                                                                                 Not                                    Not
                                                           Exercisable          Exercisable      Exercisable           Exercisable
                                                          ------------         ------------      -----------           ----------- 
William A. Hares                1,000     $   19,625            19,500                9,500      $   355,563           $   139,437
Carol Bradfield                 2,500         38,125             1,000                4,000           12,750                51,000
F. Dean Fletcher
Susan Forgnone                                                   5,000                2,500           74,750                37,125
James D. Glines                 5,000         41,500 


</TABLE>


(1) Potential unrealized value is determined by multiplying the number of shares
by the net of the fair market value at fiscal year end ($26.50) less the option
exercise price.

COMPENSATION FOR NON-EMPLOYEE DIRECTORS There were no fees paid to directors of
the Bancorp.

During 1997, each non-officer director received $900 for each Board of Directors
meeting attended. The Chairman of the Board and the Secretary received an
additional $900 and $300 respectively each month. Members of the Executive
Committee received $900 per month no matter how many meetings held per month.
Members of all other committees received $300 for each committee meeting
attended.

                                     56

<PAGE>

CONTRACTS WITH EXECUTIVE OFFICERS
In March, 1997, the Board of Directors of both the Bancorp and the Bank approved
severance pay agreements for their executive officers which would be triggered
by a change in control of either the Bancorp or the Bank, for valid reasons as
defined in the agreements. The principal purposes of these agreements are to
help assure that key executives give impartial consideration in evaluating and
negotiating a potential business combination which is in the best interest of
BSM Bancorp's shareholders, but which may result in the loss of, or reduction
in, the executive's job.

The benefits under these agreements are triggered if, within one year following
a change in control, the executive officer's employment is terminated without
cause or the executive officer resigns for reasons such as a substantial
reduction in the officer's responsibilities, an assignment of responsibilities
inconsistent with the executive officer's former responsibilities, a reduction
in the executive officer's annual salary or benefits, or a job relocation of
more than 50 miles.

Severance benefits payable to executive officers covered by Agreements are
determined by multiplying base monthly salary by a component of 24 months for
the President and by 18 months for the other four executive officers. The sum is
payable in monthly installments, or at the discretion of the executive officer,
in one lump sum. In addition, the executive officers are entitled certain fringe
benefits including health and other medical benefits for either the 18 or 24
month period.

Generally, a "change in control" will be deemed to have occurred in any of the
following circumstances:

   -   A merger or consolidation where the Bank and/or the Bancorp is not the
       surviving corporation.

   -   A transfer of all or substantially all of the assets of the Bank and/or
       the Bancorp.

   -   An acquisition of more than 25% of the outstanding stock coupled with or
       followed by a change in the majority of the directors of either the Bank
       or the Bancorp.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Bank's Compensation Committee is comprised of A. J. Diani, Carol Bradfield, 
William A. Hares, Roger A. Ikola, Joseph Sesto, Jr. and William L.
Snelling.  Both Mr. Hares and Ms. Bradfield served as Executive Officers of the 
Bank during 1997.  All of the above directors have had loans from the
Bank during 1997.

Neither Ms. Bradfield nor Mr. Hares participated in the discussion of their 
respective compensation or performance when such matters were addressed by
the committee.

COMPENSATION COMMITTEE REPORT
The compensation committee meets annually to review the salaries and bonuses of
all officers of the Bank. Upon their recommendation, the Bank's full board then
approves salary modifications and bonuses, if any, for all Bank officers. While
all officers are reviewed, particular emphasis is placed upon the salaries paid
to executive officers.

The goal of the compensation program is to align compensation with business
objective and performance, and to enable the Bank to attract and reward
executive officers whose contributions are critical to the long-term success of
the Bank. The Bank is committed to maintaining a pay program that helps attract
and retain the best people in the industry. To ensure that pay is competitive,
the Bank regularly compares its pay practices with those of other leading
independent banks and sets its pay parameters based upon this review.

Executive officers are rewarded based upon corporate performance, and individual
contribution. Bank performance is evaluated by reviewing the extent to which
strategic and business plan goals have been met. Individual contribution is
evaluated by reviewing the progress of the Bank against set objectives in the
individuals area of responsibility.

                                     57

<PAGE>

CEO COMPENSATION
William A. Hares has been President and Chief Executive Officer ("CEO") of the
Bank since January 1982, and President and CEO of the Company since it was
formed in November of 1996. In setting Mr. Hares' compensation, the Compensation
Committee made an overall assessment of Mr. Hares' leadership in achieving the
Company's long-term strategic and business goals. During 1997, particular
emphasis was placed on enhancing shareholders' value. The Committee paid
specific attention to variation in budget projections and well as executive
compensation surveys from the California Banking Association, Department of
Financial Institutions and banks headquartered in the Company's local market
area. Mr. Hares' salary reflects a consideration of both competitive forces and
the Company's performance.

COMPENSATION COMMITTEE
A. J. Diani, Chairmen
Carol Bradfield
William A. Hares
Roger A. Ikola
Joseph Sesto, Jr.
William L. Snelling

                                     58

<PAGE>


                                PERFORMANCE GRAPH



The chart shown below compares Mid-State Bank's cumulative five-year total
shareholder return with both the S & P 500 Index and an index developed by SNL
Securities that represents Southern California banks.


                 COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN

              AMONG BSM BANCORP, S & P 500 INDEX AND INDUSTRY INDEX



                                   BSM BANCORP



                                      CHART

<TABLE>
<CAPTION>
                                                                            Period  Ending
Index                                  12/13/92        12/13/93       12/13/94            12/13/95         12/13/96       12/13/97
----------------------------------------------------------------------------------------------------------------------------------
<S>                                    <C>             <C>            <C>                 <C>              <C>            <C>
BSM Bancorp/Bank of Santa Maria          100.00          110.00         115.99              138.57           167.88         287.05
S & P                                    100.00          110.08         111.53              153.44           188.52         251.44
Southern California Proxy                100.00          122.27         139.49              176.91           267.07         510.65

</TABLE>

                                      59

<PAGE>

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



Management of the Bancorp does not know of any person who owns beneficially or
of record more than 5% of the Bancorp's outstanding common stock. The following
table sets forth certain information as of March 18, 1998, concerning the
beneficial ownership of the Bancorp's outstanding common stock by each of the
directors of the Bancorp and by all directors and executive officers of the
Bancorp as a group. As noted in "Item 1 - Business", the proposed merger with
Mid-State Bank would result in a change of control for the Company.

As used throughout this Form 10-K, the term "executive officer" means the
President and Chief Executive Officer of the Bancorp, and the four Executive
Vice Presidents of the Bancorp.

Neither the Chairman of the Board or the Secretary of the Bancorp are treated as
executive officers.

<TABLE>
<CAPTION>
           TITLE OF                 NAME OF BENEFICIAL                             AMOUNT OF                           PERCENT OF
           CLASS                    OWNER AND TITLE                        BENEFICIAL OWNERSHIP (1)                   OF CLASS (2)
<S>                                 <C>                                    <C>                                        <C>
           Common                   Armand R. Acosta, Director                     24,220(3)                               .8%

           Common                   Richard E. Adam, Director                     100,734(3)                              3.3%

           Common                   Fred L. Crandall, Jr., Director                82,176(3)                              2.7%

           Common                   A. J. Diani, Chairman                          86,588(3)                              2.9%

           Common                   William A. Hares, President/CEO                50,310(4)                              1.7%

           Common                   Roger A. Ikola, Director                       74,408(3)                              2.5%

           Common                   Toshiharu Nishino, Director                    92,674(3)                              3.1%

           Common                   Joseph Sesto, Jr.                              14,000(3)                               .5%

           Common                   William L. Snelling, Secretary                 81,140(3)                              2.7%

           Common                   Mitsuo Taniguchi, Director                     74,524(3)                              2.5%

           Common                   Joseph F. Ziemba, Director                     46,956(3)                              1.6%

           Common                   All Directors and Executive
                                    Officers (15 in number)                       785,133(5)                             25.6%
</TABLE>

(1) Beneficial owner of a security includes any person who, directly or
indirectly, through any contract, arrangement, understanding, relationship, or
otherwise has or shares: (a) voting power, which includes the power to vote, or
to direct the voting of such security; and/or (b) investment power which
includes the power to dispose, or to direct the disposition of such security.
Beneficial owner also includes any person who has the right to acquire
beneficial ownership of such security as defined above within 60 days of the
date specified.

(2) Shares subject to options held by directors and executive officers that were
exercisable within 60 days after March 18, 1998 ("vested"), are treated as
issued and outstanding for the purpose of computing the percentage of class
owned by such person (or group) but not for the purpose of computing the
percentage of class owned by any other individual person.

(3) Includes 4,000 vested shares from the 1997 Bancorp stock option plan.

                                      60

<PAGE>

(4) Includes 8,000 vested shares from the 1997 Bancorp stock option plan and 
7,237 shares over which Mr. Hares has sole investment powers.

(5) Includes 6,000 vested shares and 23,750 shares owned directly and 34,890
shares whose voting powers can be exercised by the executive officers not listed
individually.

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



Some of the Company's Directors and executive officers and their immediate
families, as well as the companies with which they are associated, are customers
of, or have had banking transactions with, the Bank in the ordinary course of
the Bank's business, and the Bank expects to have banking transactions with such
persons in the future. In management's opinion, all loans and commitments to
lend included in such transactions were made in the ordinary course of business,
in compliance with applicable laws on substantially the same terms, including
interest rates and collateral, as those prevailing for comparable transactions
with other persons of similar creditworthiness and, in the opinion of
management, did not involve more than a normal risk of collectibility or present
other unfavorable features.


PART IV



ITEM 14: EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K


(A)        Financial Statements

           See Item # 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, which is 
           part of this Form 10-K.

(B)        Reports on Form 8-K

           During the fourth quarter of 1997, the Company did not file any 
           Current Reports on Form 8-K

           During the first quarter of 1998, the Company filed two Current 
           Reports on Form 8-K, one as of January 16, 1998 and the second as of
           February 3, 1998.

(C)        Exhibits

   
<TABLE>
<CAPTION>
    EXHIBIT NO.
    -----------
    <S>               <C>
        2.1           Plan of Reorganization and Merger Agreement dated
                      November 20, 1996 - Annex 1 of Written Consent
                      Statement/Prospectus*
        2.2           Plan of Reorganization and Merger Agreement dated
                      January 29, 1997***
        3.1           Articles of Incorporation of Registrant*
        3.2           Amendment to Articles of Incorporation of Registrant*
        3.3           Amendment to Articles of Incorporation of Registrant*
        3.4           Bylaws of the Registrant*
        10.1          Form of Indemnification Agreement*
        10.2          BSM Bancorp 1996 Stock Option agreement as approved by
                      California Department of Corporations**
        10.3          Form of Written Consent*
        10.4          Nipomo Branch Land Lease*
        10.5          Lompoc Branch Lease*
        10.6          Form of "Change in Control" Employment Contract**
        10.7          Plan of Reorganization and Merger Agreement dated
                      January 29, 1998***
         21           Subsidiary of Registrant
                      Registrant has one subsidiary, Bank of Santa Maria,
                      a California State Chartered Bank
         23           Consent of Independent Accountants
         27           Financial Data Schedule (for SEC use only)
         27.3         Financial Data Schedule (for SEC use only)

</TABLE>
    

*Incorporated by reference to the Registration Statement of the Company
filed on Form S-4 (Commission File No 333-16951). The effective date was
January 29, 1997

                                      61

<PAGE>

**This exhibit is contained in the Company's Quarterly Report on Form 10-Q 
for the period ended March 31, 1997. filed with the Commission on May 15, 
1997 (Commission File No. 333-16951), and incorporated by reference.

***This exhibit is contained in the Company's Current Report on Form 8-K as of
February 3, 1998 and incorporated by reference.

(D)        Financial Statements-Other

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



SIGNATURE


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



   
Dated: May 7, 1998                                    BSM BANCORP
       --------------
                                                      (Registrant)
    
                                                      By:/s/ F. Dean Fletcher
                                                      -----------------------
                                                      F. Dean Fletcher
                                                      Executive Vice President
                                                      Chief Financial Officer

                                      62

<PAGE>

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.

   
<TABLE>

<S>                                       <C>                     <C>                                        <C>
/s/ William A. Hares                       5/7/98                 /s/ Susan D. Forgnone                      5/7/98
---------------------------------         -------                 ---------------------------                -------
  William A. Hares                          Date                   Susan D. Forgnone                          Date
  President/CEO/Director                                           Executive Vice President,
                                                                   Loan Administrator
/s/ F. Dean Fletcher                       5/7/98                 /s/ James D. Glines                        5/7/98
---------------------------------         -------                 ---------------------------                -------
 F. Dean Fletcher                           Date                   James D. Glines                            Date
 Executive Vice President/CFO                                      Executive Vice President
                                                                   Branch Administrator
/s/ Carol Bradfield                        5/7/98                 /s/ Mata L. Landry                         5/7/98
---------------------------------         -------                 ---------------------------                -------
  Carol Bradfield                           Date                   Mata L. Landry                             Date
  Executive Vice President,                                        Assistant Vice President,
  Administration                                                   Controller
/s/ Armand Acosta                          5/7/98                 /s/ Richard E. Adam                        5/7/98
---------------------------------         -------                 ---------------------------                -------
  Armand Acosta                             Date                   Richard E. Adam                            Date
  Director                                                         Director
/s/ Fred L. Crandall, Jr., D.D.S.          5/7/98                  /s/ A. J. Diani                           5/7/98
---------------------------------         -------                 ---------------------------                -------
  Fred L. Crandall, Jr., D.D.S.             Date                   A. J. Diani                                Date
  Director                                                         Chairman, Board of Directors
/s/ Roger A. Ikola, M.D.                   5/7/98                  /s/ Toshiharu Nishino                     5/7/98
---------------------------------         -------                 ---------------------------                -------
  Roger A. Ikola, M.D.                      Date                   Toshiharu Nishino                          Date
  Director                                                         Director
/s/ Joseph Sesto, Jr.                      5/7/98                  /s/ William L. Snelling                   5/7/98
---------------------------------         -------                 ---------------------------                -------
  Joseph Sesto, Jr.                         Date                   William L. Snelling                        Date
  Director                                                         Director
/s/ Mitsuo Taniguchi                       5/7/98                 /s/ Joseph F. Ziemba, M.D.                 5/7/98
---------------------------------         -------                 ---------------------------                -------
  Mitsuo Taniguchi                          Date                   Joseph F. Ziemba, M.D.                     Date
  Director                                                         Director

</TABLE>
    

                                      63