For many years, the Company has included annual performance-based cash compensation as a component of overall compensation for executive officers to attract and retain talented executive officers and to provide them with added incentives to achieve various short-term performance goals by directly linking the achievement of such goals to their compensation. The Board of Directors has determined to formalize this performance-based compensation for its senior executive officers in the Company's Annual Senior Executive Officer Incentive Compensation Plan. The Board of Directors also has determined to obtain stockholder approval of the material terms of the plan in order for it to qualify as a performance-based plan under Section 162(m) of the Internal Revenue Code (the "Code") and thereby maximize the deductibility of awards paid to the Company's senior executive officers under the plan. Section 162(m) generally would disallow the Company a federal tax deduction for compensation in excess of $1 million paid in any fiscal year to any senior executive officer included in the Summary Compensation Table. This limitation on deductibility does not apply to payments of



"performance-based compensation." Awards of incentive payments to senior executive officers under the plan are designed to constitute "performance-based compensation."

        Under the terms of the plan, within the first 90 days of the Company's fiscal year (while the achievement of the performance objectives is substantially uncertain), the Compensation Committee establishes performance objectives for that fiscal year. The performance objectives for each covered senior executive officer are comprised of two elements: the achievement by the Company of a defined level of operating income, and the maintenance of the Company's asset quality as measured by the level of non-performing loans and other assets to total loans and other assets.

        All performance goals are expressed in terms of objective and measurable criteria that are defined at the time the performance goals are established. After the performance goals are established, discretion may not be used to modify award results, except as permitted under Section 162(m) of the Code. Incentive compensation is calculated as a percentage of the senior executive officer's annual salary at the beginning of the year and is paid in cash on a sliding scale tied to the degree to which the performance goals are attained. Annual incentive compensation targets established for eligible senior executive officers range from 25% to 30% of annual base salary.

        Participants under the plan are those senior executive officers of the Company designated by the Compensation Committee. During 2004, three senior executive officers of the Company participated in the plan. In 2005, three senior executive officers have been selected to participate in the plan. The Company expects a comparable number of senior executive officers will be selected for participation in the plan in future years.

        Incentive compensation is paid in the year following the year for which the compensation is earned, after the Compensation Committee has confirmed in writing the degree of attainment of the performance goals. A senior executive officer whose employment terminates due to death or disability prior to the last day of the fiscal year may receive a pro-rated incentive payment with respect to that fiscal year based on the amount of days the participant was employed in the fiscal year prior to and including the date of death or disability, provided, however, that the senior executive officer achieves on a pro-rata basis, as of the date of his or her last day of employment, the performance objectives established for that senior executive officer for the year. In the event of a change in control of the Company, the Compensation Committee as constituted immediately prior to the change in control has the sole discretion to determine whether and to what extent the performance objectives have been met for the fiscal year in which the change in control occurs. The Compensation Committee has no authority to increase the amount of any individual incentive compensation beyond that otherwise payable under the terms of the plan, but it has the discretion to decrease such compensation. As a result, the amounts payable to any senior executive officer are not yet determinable.

        The plan is administered by the Compensation Committee, which consists of four directors, all of whom are "non-employee directors" of the Company as that term is defined under Rule 16b-3 of the Securities Exchange Act of 1934, and all of whom are "outside directors" within the meaning of Section 162(m) and applicable regulations. The Compensation Committee has authority in all matters relating to the discharge of its duties and the exercise of its authority under the plan, and its actions with respect to the plan are binding and conclusive. Although the Compensation Committee generally has the right to amend the plan, any amendment that would (i) change the maximum award that might be payable to any eligible senior executive officer under the plan, or (ii) establish different performance objectives would be subject to stockholder approval in order for the awards of incentive payments to participants to continue to constitute "performance-based compensation" under Section 162(m).

        If our stockholders do not approve the plan, the plan will be rescinded and no payments will be made under the plan. However, the Company reserves the right to provide other forms of incentive payments to its senior executive officers that may not be deductible by the Company