Exhibit 10.3

INVESTMENT AND INTEREST RATE RISK ADVISORY AGREEMENT

This Investment and Interest Rate Risk Advisory Agreement, made and entered
into as of this 3 day of February, 1997, by and between LOS PADRES SAVINGS
BANK, FSB ("Customer") and SMITH BREEDEN ASSOCIATES, INC., a Kansas Corporation
("Smith Breeden" or "Advisor").

WHEREAS, Smith Breeden is engaged in the business of rendering investment
advice and has available the personnel, facilities and equipment necessary for
carrying on investment advisory and research functions; and

WHEREAS, Customer desires to appoint Smith Breeden and Smith Breeden desires to
accept such appointment to render such services to Customer on the terms and
conditions hereinafter set forth;

NOW, THEREFORE, in consideration of the mutual promises and the terms and
conditions set forth herein, the parties hereto agree as follows:

1. Appointment. Upon and subject to the terms and conditions of this
Agreement, Customer, being duly authorized, hereby appoints Smith
Breeden as investment advisor with respect to the management of certain
assets of Customer (the "Account"). The appointment of Smith Breeden as
investment advisor shall be effective as of the date of this agreement.

2. Authority and Services of Smith Breeden

(a) Smith Breeden will provide Customer with the following services: (i)
consulting services, (ii) investment advice, and (iii) securities
transactions services.

(i). Consulting Services: Smith Breeden will provide consulting
services related to asset/liability management and interest rate risk,
pricing strategies for assets and liabilities, and other areas on a
project basis as mutually agreed to by Smith Breeden and Customer. The
asset/liability management and interest rate risk consulting services
will include a monthly analysis of current market conditions by Smith
Breeden, the risk exposure of Customer's securities portfolio and
balance sheet, the performance of hedging strategies and recent
securities transactions, and analysis of investment transactions.
Consulting services related to asset and liability strategies will
include assistance in developing loan and deposit pricing strategies and
assistance in developing and maintaining computer based worksheets to
implement the strategies. Smith Breeden will provide consulting services
for Customer in other areas, such as acquisition analysis, on a project
basis. Both Smith Breeden and Customer must agree that the projects are
appropriate and Smith Breeden and Customer may negotiate additional fees
for such projects.

(ii). Investment Advice: Smith Breeden will offer investment
advice and recommendations with respect to the Account. As part of its
services, Smith Breeden may recommend the acquisition of investment
securities, including but not limited to, mortgage-backed securities,
Treasury securities and/or corporate bonds, and certain hedging
transactions to reduce the interest rate risk of the Account's
investments. Smith Breeden may also make recommendations regarding the
funding sources for these

investment securities, as well as of the other assets and liabilities of
the Customer. Smith Breeden may make either oral or written recommendations
with respect to the Account.

(iii). Securities Transactions Services: Pursuant to the limited
power of attorney herein granted to Smith Breeden by the Customer, Smith
Breeden may, as agent and attorney-in-fact with respect to the Account (a)
buy, sell, exchange and otherwise transact in mortgage-backed securities,
other investments, or hedging instruments, and (b) arrange for necessary
placement of orders, execution of transactions, purchases, sales and
conveyances with or through such brokers, dealers, or issuers as Smith
Breeden may select from the Customer's list of approved brokers, dealers
and issuers and establish the price and other such conditions of the
transaction. Customer shall approve all transactions prior to execution.
Brokers, dealers, or issuers selected by Smith Breeden must be from
Customer's list of approved brokers, dealers, and issuers. For each
transaction, Smith Breeden will provide Customer a trade sheet which
documents the rationale for the transaction and the cover prices obtained.
The trade sheet will provide written explanation for selection of any
broker, dealer, or issuer for a transaction that occurs at other than the
most favorable price of the prices obtained, or for which there were no
cover prices.

(b) In connection with and in furtherance of the services to be provided to
Customer by Smith Breeden hereunder, Customer hereby appoints Smith Breeden
as its agent and attorney-in-fact, in its name, place and stead, to effect
the transactions enumerated in paragraphs (a) of this Section 2, subject to
the prior approval and direction of Customer. Further, Customer agrees to
execute a limited power of attorney in substantially the form included as
Appendix A hereto.

3. Duties of Customer.

(a) Customer shall provide, or shall cause the Custodian to provide,
Advisor with all of the information that Advisor may reasonably require
with respect to Customer or the Account including, without limitation,
such periodic reports on the status of the Account as Smith Breeden may
request.

(b) Customer shall provide all information required by Smith Breeden to
conduct its analysis. Customer will be solely responsible for collecting
such data, and for delivery to Smith Breeden of such information in the
format required by Smith Breeden. Customer shall be solely responsible for
the accuracy of such information.

(c) Customer shall cause the Custodian to receive and maintain at all
times custody and control of all property in the Account and to consummate
transactions as directed by Advisor by payment or delivery by the Custodian
of all funds, securities, instruments, assets or other properties due from
the Account and to receive all funds, securities, instruments, assets or
other properties due to the Account.

(d) Customer shall inform Smith Breeden in writing of the investment
objectives and restrictions of the Account through its periodically updated
investment policy and of any changes or modifications applicable thereto
and shall give prompt written notice if Customer deems any investments
proposed for the Account to be in violation of such objectives or
restrictions. Unless Customer notifies Smith Breeden in writing of specific
restrictions, the investments recommended for, or on behalf of, the Account
shall be

deemed not to be restricted under the current or future laws or regulations
of any state or by virtue of the terms of any other contract or instrument
purporting to bind Customer or Smith Breeden.

4. Transaction Procedures. All transactions will be consummated by payment to
or delivery by Customer, or such other party(ies) as Customer may designate
in writing (the "Custodian"), of all cash and/or securities due to or from
the Account. The Customer has sole authority to designate the custodian.
Smith Breeden shall not act as Custodian for the Account but is hereby
authorized to issue such instructions to the Customer as may be appropriate
in connection with the settlement of transactions initiated by Smith
Breeden pursuant to Section 2 hereof. Instructions of Smith Breeden to the
Customer need not be in writing. Smith Breeden will instruct all brokers
and dealers executing orders on behalf of the Account to forward
confirmations to Customer and/or the Custodian. Smith Breeden is not
authorized to direct delivery of securities or payments to itself but may
direct that additional copies of all confirmations of Account transactions
be sent to Smith Breeden. Smith Breeden will not be responsible for any
loss incurred by reason of any act or omission of any broker or dealer or
the Customer and/or Custodian; provided, however, that Smith Breeden will
make reasonable efforts to require that brokers and dealers recommended by
Smith Breeden perform their obligations with respect to the Account. The
physical possession of any and all property in the Account shall at all
times, except when securities are held by seller pending delivery to or in
the hands of a transfer agent, be held, controlled and administered by the
Customer and/or Custodian. Smith Breeden shall have no responsibility with
respect to the collection of income relating to the Account or physical
acquisition or the safekeeping of any property in the Account. All such
duties of collection, physical acquisition or safekeeping shall be the
sole obligation of the Customer and/or Custodian.

5. Review of Transaction Records. Customer or its agent and Customer's
primary federal regulator shall have the right to audit, examine, or review
the records of Smith Breeden that pertain to transactions conducted for the
Customer.

6. Proxies. Advisor will not be required to take any action or render any
advice with respect to the voting of proxies solicited by or with respect
to the issuers of securities in which assets of the Account may be invested
from time to time.

7. Scope of Services of Adviser. Smith Breeden will provide investment
advisory and related services only. Smith Breeden will not provide advice
concerning, and Customer will not rely upon any Smith Breeden statement
relating to, tax advice, regulatory compliance, accounting issues, or the
credit risk involved in any recommended transaction. Customer recognizes
the inherent market fluctuation risks that surround the investment and
reinvestment of monies and the use of hedge instruments. These risks and
the scope of Smith Breeden's services are detailed in the Disclosure
Statement in Appendix C to this agreement and have been previously
acknowledged by the Customer. By signing this agreement, Customer
acknowledges that it understands, and can bear, the risks involved in
implementing hedge and investment transactions as detailed in the
Disclosure Statement. Smith Breeden, or any of its officers, directors or
employees, shall be liable to Customer for acts or omissions arising out of
this agreement only if its conduct, or that of its officers, directors or
employees, was willful or grossly negligent. Nothing herein shall in any
way constitute a waiver or limitation of any rights that Customer may have
under any State or Federal Securities laws. It is agreed that Smith
Breeden, in connection with the

maintenance of records, does not assume responsibility for the accuracy of
information furnished by Customer or any other party.

8. Limitation on Liability and Indemnification. Subject to the second
paragraph of Section 7 above, Customer shall indemnify Smith Breeden and
save it harmless from all suits, actions, debts, accounts, damages, costs,
losses, expenses, and other proceedings, sustained, brought, prosecuted, or
threatened to be brought or prosecuted in connection with this agreement by
any shareholder of Customer, creditor of Customer, or any other person or
entity that is not a party to this contract.

9. Confidential Relationship. All information and advice furnished by either
party to the other hereunder, including their agents and employees, except
such information that is publicly available or has been properly obtained
from other sources, shall be treated as confidential and shall not be
disclosed to third parties except as required by law.

10. Service To Other Clients. It is understood that Smith Breeden performs
investment advisory and management services for various clients. Customer
agrees that Smith Breeden may give advice and take action with respect to
any of its other clients or its own accounts that may differ from advice
given or the timing or nature of action taken with respect to the Account,
so long as it is Smith Breeden's practice, to the extent practical, to
allocate investment opportunities to the Account over a period of time on a
fair and equitable basis relative to other clients.

11. Conflicts of Interest. It is understood and agreed by the parties that
Smith Breeden and/or its principals, affiliates or employees expect to
purchase interests in thrifts and other financial institutions (which may
include the Customer) and may invest in securities of the type recommended
for investment in or invested in by Customer. Nothing in this Agreement
shall be deemed to impose upon Smith Breeden any obligation to purchase,
sell or recommend for Customer any security or other property that Smith
Breeden, and/or its principals, affiliates or employees may purchase or
sell for its or their own accounts. In addition, nothing in this Agreement
shall be deemed to impose upon Smith Breeden any restrictions on the
purchase or sale by Smith Breeden, and/or its principals, affiliates or
employees of securities also invested in by Customer.

12. Fees. Fees are as provided in the attached appendix B. Provided, however,
that with respect to the month during which this agreement is terminated,
Smith Breeden will receive a fee in an amount equal to the pro-rated amount
of its monthly fee calculated to the day of dismissal or resignation. Smith
Breeden will have the right to increase or otherwise modify its fees upon
thirty (30) days written notice thereof to Customer.

13. Reimbursement of Travel Expenses. Customer shall reimburse Smith Breeden
for all reasonable travel and lodging expenses incurred to meet with
Customer's personnel.

14. Representations and Warranties of Customer. Customer hereby represents and
warrants to Smith Breeden that, except as otherwise specifically disclosed
to Smith Breeden in writing concurrently with the execution of the
Agreement, (i) it is a Corporation duly organized and existing in good
standing under the laws of California; (ii) that all necessary corporate
action has been taken by Customer to authorize the execution, delivery and
performance of this Agreement and the transactions contemplated hereby;
(iii) that it has

the power and authority and the legal right to execute, deliver and perform
its obligations under this Agreement and to enter into the transactions
contemplated by this Agreement; (iv) that no authorization, consent,
approval, filing or registration with any court, governmental agency or
regulatory authority (Federal, state or local) which has not already been
obtained is required in connection with the execution, delivery and
performance by Customer of this Agreement or in connection with the
transactions contemplated hereby, provided, however, that the foregoing
shall not limit or negate the power of the Office of Thrift Supervision, as
the primary regulator of the Customer, to take action under applicable law
to terminate the Customer's obligations under this Agreement or to compel
the Customer to terminate such obligations; (v) that this Agreement
constitutes the legal and binding obligation of Customer enforceable
against Customer in accordance with its terms, except as enforcement may be
limited by laws concerning creditors' rights and by general principles of
equity; and (vi) that neither this Agreement nor the consummation of the
transactions contemplated hereby will violate any provisions of its
articles of incorporation or bylaws or any lien, lease, agreement,
instrument, order, judgment, decree, law, rule, regulation or any other
restriction of any kind or character to which Customer or the assets
included in the Account are subject.

15. Representations and Warranties of Advisor. Advisor hereby represents and
warrants to Customer that, except as otherwise specifically disclosed to
Customer in writing concurrently with the execution of the Agreement, (i)
it is a corporation duly organized and existing in good standing under the
laws of the State of Kansas; (ii) that all necessary corporate action has
been taken by Advisor to authorize the execution, delivery and performance
of this Agreement and the transactions contemplated hereby; (iii) that it
has the power and authority and the legal right to execute, deliver and
perform its obligations under this Agreement and to enter into transactions
contemplated hereby; (iv) that no authorization, consent, approval, filing
or registration with any court, governmental agency or regulatory authority
(Federal, state or local) which has not already been obtained is required
in connection with the execution, delivery and performance by Advisor of
this Agreement or in connection with the transactions contemplated hereby;
(v) that this Agreement constitutes the legal and binding obligation of
Advisor enforceable against Advisor in accordance with its terms, except as
enforcement may be limited by laws concerning creditors' rights and by
general principles of equity; (vi) that it is an investment advisor, duly
registered as such under the Investment Advisers Act of 1940, as amended,
and a commodity trading advisor duly registered as such under the Commodity
Exchange Act, as amended; and (vii) that neither this Agreement nor the
consummation of the transactions contemplated hereby will violate any
provisions of its articles of incorporation or bylaws or any lien, lease,
agreement, instrument, order, judgment, decree, law rule, regulations or
any other restriction of any kind or character to which Advisor is subject.

16. Bond. If required by law, Customer agrees to obtain and maintain for the
period of this Agreement a bond in the amount as required by law and to
include among those covered by such bond Smith Breeden and any of its
officers, directors or employees required by law to be so covered.

17. Termination. This Agreement may be terminated by either party giving
thirty (30) days written notice of termination to the other party hereto
with no contractual obligations by either party thereafter, except for
payment to Smith Breeden of unpaid accrued fees under Sections 12 and 13.

18. Assignment. The rights and obligations of the parties under this Agreement
may not be assigned by either party hereto.

19. Notices. Unless otherwise specified herein, all notices, instructions and
advice with respect to transactions or any other matters contemplated by this
Agreement shall be deemed duly given when received in writing by either party
at the address set forth below, or on the fifth day after deposit by certified
mail return receipt requested at the address set forth below, or at such other
address or addresses as shall be specified by either party in a notice
similarly given. Either party may rely upon any notice from the other party or
other communication reasonably believed by it to be genuine.

If to Customer:
Los Padres Savings Bank, FSB
610 Alamo Pintado at Highway 246
Solvang, CA 93463
Attn: William D. Ross, President

If to Smith Breeden:
Smith Breeden Associates, Inc.
100 Europa Drive, Suite 200
Chapel Hill, NC 27514
Attention: Ms. Marianthe S. Mewkill, Treasurer

20. Governing Law. This Agreement, and all rights and obligations of the
parties hereunder, shall be governed by, and construed in accordance with, the
laws of the State of Kansas.

21. Exemption from Commodities Future Trading Commission. PURSUANT TO AN
EXEMPTION FROM THE COMMODITY FUTURES TRADING COMMISSION IN CONNECTION WITH
ACCOUNTS OF QUALIFIED ELIGIBLE CLIENTS. THIS AGREEMENT IS NOT REQUIRED TO BE,
AND HAS NOT BEEN, FILED WITH THE COMMISSION. THE COMMODITY FUTURES TRADING
COMMISSION DOES NOT PASS UPON THE MERITS OF PARTICIPATING IN AN ADVISORY
PROGRAM OR UPON THE ADEQUACY OR ACCURACY OF THE COMMODITY TRADING ADVISOR
DISCLOSURE. CONSEQUENTLY, THE COMMODITY FUTURES TRADING COMMISSION HAS NOT
REVIEWED OR APPROVED THIS ADVISORY PROGRAM OR THIS AGREEMENT.

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

SMITH BREEDEN ASSOCIATES, INC. LOS PADRES SAVINGS BANK, FSB

By: /s/ M.S. Mewkill By: /s/ William D. Ross
----------------------------- ----------------------------

Title: V.P. Title: President
-------------------------- -------------------------

APPENDIX A

POWER OF ATTORNEY LIMITED TO PURCHASES
AND SALES OF SECURITIES AND COMMODITIES

The undersigned ("Customer") hereby appoints Smith Breeden Associates,
Inc. as its agent and attorney-in-fact in its name, place and stead to buy and
sell (including short sales) securities, futures, commodities, options and/or
engage in off-balance sheet transactions, including interest rate swaps and
caps, on margin or otherwise for the undersigned's account and risk, subject to
prior approval of Customer as described in Section 2 of the Investment and
Interest Rate Risk Advisory Agreement between Customer and Smith Breeden
Associates, Inc.

Except as herein otherwise provided, the undersigned hereby authorizes
Smith Breeden Associates, Inc. to act for the undersigned in the same manner
and with the same force and effect as the undersigned might or could do with
respect to such purchases and sales as well as with respect to all other things
necessary or incidental thereto, except that Smith Breeden Associates, Inc. is
not authorized to withdraw any money, securities, or other property either in
the name of the undersigned or otherwise.

IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney on
the 28 day of Jan, 1997.

By:

/s/ Willaim D. Ross
----------------------

PRESIDENT
----------------------
Title

ACKNOWLEDGEMENT

State of California )
) ss:
County of Santa Barbara )

The foregoing instrument was acknowledged before me this 28 day of Jan,
1997, by Grace R. Horn.
--------------------------------
(Name and Title) Notary Public

/s/ Grace R. Horn
----------------------
Notary Public

[NOTARY GRACE R HORN ] My Commission Expires:
[ SEAL COMM. #1120411 ] 1-18-2001
[ NOTARY PUBLIC-CALIFORNIA ]
[ SANTA BARBARA COUNTY ]
[ MY COMM. EXP JAN. 18, 2001]

CALIFORNIA ALL-PURPOSE ACKNOWLEDGMENT
- --------------------------------------------------------------------------------

State of California
__________

County of Santa Barbara
______________

On 1/28/97 before me, Grace R. Horn
______ ___________________________________________________________
Date Name and Title of Officer (e.g., "Jane Doe, Notary Public")

personally appeared William D. Ross
___________________________________________________________
Name(s) of Signer(s)

[ ] personally known to me -- OR -- [X] proved to me on the basis of
satisfactory evidence to be the person(s) whose name(s) is/are subscribed to
--
the within instrument and acknowledged to me that he/she/they executed the same
--
in his/her/their authorized capacity(ies), and that by his/her/their
--- ---
signature(s) on the instrument the person(s), or the entity upon behalf of
which the person(s) acted, executed the instrument.

WITNESS my hand and official seal.

- ---------------------------------------
GRACE R. HORN
[NOTARY COMM. #1120411
SEAL] NOTARY PUBLIC-CALIFORNIA /s/ Grace R. Horn
SANTA BARBARA COUNTY _________________________________
MY COMM. EXP. JAN. 18, 2001 Signature of Notary Public
- ---------------------------------------

- ----------------------------------- OPTIONAL -----------------------------------
Though the information below is not required by law, it may prove valuable to
persons relying on the document and could prevent fraudulent removal and
reattachment of this form to another document.

DESCRIPTION OF ATTACHED DOCUMENT

Title or Type of Document: _____________________________________________________

Document Date: ____________________________________ Number of Pages:___________

Signer(s) Other Than Named Above: ______________________________________________

CAPACITY(IES) CLAIMED BY SIGNER(S)

Signer's Name: ______________________ Signer's Name: ______________________

[ ] Individual [ ] Individual
[ ] Corporate Officer [ ] Corporate Officer
Title(s): _______________________ Title(s): _______________________
[ ] Partner - [ ] Limited [ ] General [ ] Partner - [ ] Limited [ ] General
[ ] Attorney-in-Fact [ ] Attorney-in-Fact
[ ] Trustee [ ] Trustee
[ ] Guardian or Conservator [ ] Guardian or Conservator
[ ] Other: ________________ [ ] Other: ________________
_______________________ _______________________
Signer is Representing: Signer is Representing:
___________________________ ___________________________
___________________________ ___________________________

RIGHT THUMBPRINT RIGHT THUMBPRINT
OF SIGNER OF SIGNER
Top of thumb here Top of thumb here

_________________ _________________
- --------------------------------------------------------------------------------

FEE SCHEDULE
INVESTMENT ADVISORY

ASSETS (MM) ANNUAL FEES PAYABLE MONTHLY
- ----------- ---------------------------

(less than or
equal to) $100 $90,000 plus 5 basis points on Total Assets
$100 to $400 $140,000 plus 4 basis points on Total Assets greater than $100 MM
$400 to $1,000 $260,000 plus 2 basis points on Total Assets greater than $400 MM
over $1,000 $380,000 plus 1.5 basis points on Total Assets greater than $1 Billion
</Table>

One-twelfth of the annual fees will be due and payable in advance on the first
day of each month (the "monthly fee"). For purposes of the fee calculation,
Total Assets is defined as the value of the total assets in the Account as of
the last business day of the most recent month end or as of the last business
day of the month prior to the most recent month-end, depending on which
information is readily available.

APPENDIX C
DISCLOSURE STATEMENT

SMITH BREEDEN DOES NOT PREDICT GENERAL MOVEMENTS IN INTEREST RATES. Smith
Breeden does not provide advice to Customers based on whether Smith Breeden
believes interest rates will generally rise or fall. Smith Breeden also does
not believe Customer should attempt to predict general movements in interest
rates.

HEDGING TRANSACTIONS. For some Customers, Smith Breeden analyzes the extent to
which the economic value of Customer's assets and liabilities may change if
interest rates change in the future. Smith Breeden may then recommend to
Customer transactions to hedge the identified interest rate risk. The purpose
of Smith Breeden's hedging recommendations is to protect Customer from risk of
loss because of movements in interest rates. An effective hedge transaction,
when analyzed independent of the assets and liabilities being hedged, may lose
money. Nevertheless, a hedge transaction may still be effective in reducing a
Customer's interest rate risk even if any losses on the hedge, transaction
costs paid for that hedge, and Smith Breeden's fees are not offset by gains in
the value of the assets and liabilities being hedged.

As interest rates fluctuate, the economic value of Customer's assets and
liabilities may rise or fall. If interest rate fluctuations cause Customer's
assets and liabilities to increase in value and Customer has decided to hedge
its interest rate risk, the cost of, and any loss on, those hedge transactions
themselves will likely erode at least a portion of the appreciation in value or
profit Customer would receive on the underlying assets and liabilities. Thus,
by entering into a hedge transaction, Customer may sacrifice future gains on
its interest rate sensitive assets and liabilities. By accepting Smith
Breeden's hedging recommendations, Customer is sacrificing such potential
profits in order to achieve a more stable interest rate risk profile.

INVESTMENT ADVICE. For some Customers, Smith Breeden may identify certain
assets and liabilities that, in Smith Breeden's opinion, provide potential
profit opportunities on a hedged basis. Smith Breeden may then recommend to
Customer the acquisition of such assets or assumption of such liabilities
combined with an appropriate hedge transaction to help reduce the interest rate
risk that such assets or liabilities might have. While Smith Breeden has
identified profitable investment opportunities in the past, Smith Breeden's
past performance is not a guarantee of future profitability. Because Smith
Breeden cannot guarantee profitability, a Customer risks losing all or some of
any investment it undertakes upon the advice of Smith Breeden.

SMITH BREEDEN'S ADVICE DEPENDS ON ACCURATE INFORMATION FROM CUSTOMER. In
determining the extent to which Customer has interest rate risk, Smith Breeden
depends upon information obtained from the Customer. As a result, the quality
of Smith Breeden's corresponding hedge recommendations depends on the accuracy
of the information obtained from the Customer. Smith Breeden is not responsible
for any errors or omissions in the information provided by the Customer.

BASIS RISK IN HEDGING TRANSACTIONS. The market value of Customer's assets and
liabilities are subject to change because of fluctuating interest rates. The
purpose of Smith Breeden's hedging recommendations is to recommend hedges that
will change in value in reaction to fluctuating interest rates so as to
generally offset changes in the value of the assets and liabilities being
hedged. No hedge, however, could ever totally protect Customer against such
interest rate risk. Every attempt to hedge interest rate risk leaves a residual
risk known as "basis risk". Basis risk is

the risk that changes in the value of the hedge transaction will not completely
offset changes in the value of the assets and liabilities being hedged.

Basis risk may occur in many ways. For example, a hedge transaction may rise in
value by $100 in response to higher interest rates. At the same time,
Customer's assets may decline in value by $102 in response to the same market
factor--higher interest rates-- and other factors unique to those assets
including credit risks that might be reflected in the assets' value. The hedge
would therefore not fully cover the loss in value of Customer's assets caused
by higher rates since a $2 differential would exist between the gain in value
on the hedge and the assets' loss in value. The $2 differential reflects basis
risk. Despite that basis risk, the hedge transaction has been successful in
reducing Customer's exposure to losing value on its assets due to higher
interest rates.

Basis risk can manifest itself in other ways; for example when a small change
in interest rates occurs. In that context, both the hedge transaction and the
hedged assets could decline in value, although by different amounts, following
an interest rate change. This possibility also reflects basis risk.

Smith Breeden designs its hedging recommendations not only to mitigate interest
rate risk but also to reduce basis risk when possible. Nevertheless, it is
impossible to remove basis risk completely from any hedging transaction.
Customer should understand that basis risk similar to that outlined in the
previous two paragraphs is possible under Smith Breeden's hedging strategies.

OTHER RISKS IN HEDGING TRANSACTIONS. Customer faces risks of losses in its
hedging transactions from many risks other than interest rate risk. Smith
Breeden's hedging recommendations are not designed to protect Customer against
any risk of loss other than interest rate risk.

TAX ADVICE. Smith Breeden's investment and hedging recommendations may or may
not have tax consequences for Customer. Smith Breeden believes it is informed
with respect to certain of the tax consequences of its recommendations.
However, Smith Breeden is not an expert on taxation and Customer should not
rely on written or oral statements Smith Breeden makes with respect to the tax
effects of its hedging or investment advice. Customer should consult with its
accountants and lawyers on any tax implications of Smith Breeden's investment
and hedging recommendations.

ACCOUNTING ADVICE. Smith Breeden's investment and hedging recommendations may
or may not have accounting consequences for Customer. Smith Breeden believes it
is informed with respect to certain of the accounting consequences of its
recommendations. However, Smith Breeden is not an accounting firm and Customer
should not rely on written or oral statements Smith Breeden makes with respect
to the accounting effects of its hedging or investment advice. Customer should
consult with its accountants on any accounting implications of Smith Breeden's
investment and hedging recommendations.

LEGAL AND REGULATORY ADVICE. Smith Breeden's investment and hedging
recommendations may or may not have legal or regulatory consequences for
Customer. Smith Breeden believes it is informed with respect to certain of the
legal and regulatory consequences of its recommendations. However, Smith Breeden
is not a law firm and Customer should not rely on written or oral statements
Smith Breeden makes with respect to the legal or regulatory effects of its
hedging or investment advice. Customer should consult with its lawyers on any
legal or regulatory implications of Smith Breeden's investment and hedging
recommendations.

IN WITNESS WHEREOF, the undersigned has executed this Disclosure Statement on
the 28th day of Jan., 1997.

LOS PADRES SAVINGS

By:

/s/ William D. Ross
-------------------------------------

President
-------------------------------------
Title