##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

Form 10-K



---

|                                                         |  |                                                                                           
|-------------------------------------------------------- |  | ------------------------------------------------------------------------------------------
|þ                                                        |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
	15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934    
|                                                        
|For the fiscal year ended December 31,
	2001            
|                                                        
|o                                                        |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
	15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934
|                                                        
|For the transition period
	from           to           .

Commission File Number: 0-1100

Hawthorne Financial Corporation

(Exact name of registrant as specified in its
charter)


|                                                                |  |                                      
|--------------------------------------------------------------- |  | -------------------------------------
|Delaware                                                        |  | 95-2085671                           
|(State or other jurisdiction of
	incorporation or organization) |  | (I.R.S. Employer
	Identification No.)
|                                                               
|2381 Rosecrans Avenue, 2nd Floor
	El Segundo, California        |  | 90245                                
|(Address of principal executive
	offices)                       |  | (Zip Code)                           

Registrants telephone number, including
area code: (310) 725-5000

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

Securities registered pursuant to
Section 12(g) of the Act:

Common Stock, par value $0.01 per
share


(Title of class)


Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days.     Yes þ          No o

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 the
Form 10-K or any amendment to this
Form 10-K.     o

As of March 21, 2002, the aggregate market
value of voting stock held by nonaffiliates of the registrant
was approximately $126,975,140 (based upon the last reported
sales price of the Common Stock as reported by the Nasdaq
National Market). Shares of Common Stock held by each executive
officer, director, and shareholders with beneficial ownership of
greater than 10% of the outstanding Common Stock of the
registrant and persons or entities known to the registrant to be
affiliates of the foregoing have been excluded in that such
persons may be deemed to be affiliates. This assumption
regarding affiliate status is not necessarily a conclusive
determination for other purposes.

The number of shares of Common Stock, par value
$0.01 per share, of the Registrant outstanding as of
March 21, 2002 was 5,378,974 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Annual Report incorporates by
reference portions of the Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the
Registrants 2002 Annual Meeting of Stockholders.



---






---

TABLE OF CONTENTS



|             |                                                                                               |                                                |  |  |  |  |  | 
|------------ | --------------------------------------------------------------------------------------------- | ---------------------------------------------- |  |  |  |  |  | 
|PART I      
|             | Item 1. Business                                                                             
|             | Item 2. Properties                                                                           
|             | Item 3. Legal Proceedings                                                                    
|             | Item 4. Submission of Matters to a Vote of Security Holders                                  
|             | Item 4A. Executive Officers                                                                  
|PART II     
|             | Item 5. Market for Registrants Common Stock and Related Stockholder Matters                 
|             | Item 6. Selected Financial Data                                                              
|             | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|             | Item 7A. Quantitative and Qualitative Disclosure about Market Risks                          
|             | Item 8. Financial Statements and Supplementary Data                                          
|             | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III    
|             | Item 10. Directors and Executive Officers of the Registrant                                  
|             | Item 11. Executive Compensation                                                              
|             | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|             | Item 13. Certain Relationships and Related Transactions                                      
|PART IV     
|             | Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|             |                                                                                               | INDEPENDENT AUDITORS REPORT                  
|             |                                                                                               | CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
|             |                                                                                               | CONSOLIDATED STATEMENTS OF INCOME             
|             |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|EXHIBIT 4.15
|EXHIBIT 4.16
|EXHIBIT 4.17
|EXHIBIT 4.18
|EXHIBIT 4.19
|EXHIBIT 4.20
|EXHIBIT 4.21
|EXHIBIT 4.22
|EXHIBIT 10.1
|EXHIBIT 10.7
|EXHIBIT 21.1
|EXHIBIT 23.1



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION

ANNUAL REPORT ON FORM 10-K

|         |  |                                                                                        |  |      |    | 
|-------- |  | -------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                        |  | Page
|         |  |                                                                                        |  |     
|PART I  
|Item 1.  |  | Business                                                                               |  |      | 1  | 
|Item 2.  |  | Properties                                                                             |  |      | 27 | 
|Item 3.  |  | Legal Proceedings                                                                      |  |      | 28 | 
|Item 4.  |  | Submission of Matters to a Vote of Security
	Holders                                   |  |      | 28 | 
|Item 4A. |  | Executive Officers                                                                     |  |      | 29 | 
|        
|PART II 
|Item 5.  |  | Market for Registrants Common Equity and
	Related Stockholder Matters                 |  |      | 30 | 
|Item 6.  |  | Selected Financial Data                                                                |  |      | 31 | 
|Item 7.  |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations |  |      | 33 | 
|Item 7A. |  | Quantitative and Qualitative Disclosure about
	Market Risks                            |  |      | 52 | 
|Item 8.  |  | Financial Statements and Supplementary Data                                            |  |      | 53 | 
|Item 9.  |  | Changes in and Disagreements with Accountants on
	Accounting and Financial Disclosure  |  |      | 53 | 
|        
|PART III
|Item 10. |  | Directors and Executive Officers of the Registrant                                     |  |      | 54 | 
|Item 11. |  | Executive Compensation                                                                 |  |      | 54 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners
	and Management                        |  |      | 54 | 
|Item 13. |  | Certain Relationships and Related Transactions                                         |  |      | 54 | 
|        
|PART IV 
|Item 14. |  | Exhibits, Financial Statement Schedules and
	Reports on Form 8-K                       |  |      | 54 | 

i



---



##### Table of Contents



CAUTIONARY STATEMENT REGARDING FORWARD LOOKING
STATEMENTS

When used in this Form 10-K or future
filings by Hawthorne Financial Corporation (Company)
with the Securities and Exchange Commission (SEC),
in the Companys press releases or other public or
stockholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or
phrases will likely result, are expected
to, will continue, is anticipated,
estimate, project, believe
or similar expressions are intended to identify
forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. The Company
wishes to caution readers that all forward-looking statements
are necessarily speculative and not to place undue reliance on
any such forward-looking statements, which speak only as of the
date made. Also, the Company wishes to advise readers that
various risks and uncertainties could affect the Companys
financial performance and cause actual results for future
periods to differ materially from those anticipated or
projected. Specifically, the Company cautions readers that the
following important factors could affect the Companys
business and cause actual results to differ materially from
those expressed in any forward-looking statement made by, or on
behalf of, the Company:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Economic Conditions.The Companys results are strongly influenced by general
	economic conditions in its market area. Accordingly,
	deterioration in these conditions could have a material adverse
	impact on the quality of the Companys loan portfolio and
	the demand for its products and services. In particular, changes
	in economic conditions in the real estate industry or real
	estate values in our market may affect our performance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Interest Rate Risk.The Company realizes income principally from the differential or
	spread between the interest earned on loans, investments, and
	other interest earning assets, and the interest paid on deposits
	and borrowings. The volumes and yields on loans, deposits, and
	borrowings are affected by market interest rates. As of
	December 31, 2001, 90.62% of the Companys loan
	portfolio was tied to adjustable rate indices, such as COFI,
	Prime, CMT, MTA and LIBOR. Out of these adjustable rate loans,
	approximately 61.73%, or $1.0 billion, have reached their
	internal interest rate floors. Therefore, these loans have taken
	on fixed rate characteristics. The majority of the
	Companys deposits are time deposits with a stated maturity
	(generally one year or less) and a fixed rate of interest. As of
	December 31, 2001, 74.17% of the Companys borrowings
	from the FHLB are fixed rate, with remaining terms ranging from
	one to ten years (though such remaining terms are subject to
	early call provisions). The remaining 25.83% of the borrowings
	carry an adjustable interest rate, with 80% of the adjustable
	borrowings tied to the Prime Rate, maturing in February 2003.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Changes in the market level of interest rates
	directly and immediately affect the Companys interest
	spread, and therefore profitability. Sharp and significant
	changes to market rates can cause the interest spread to shrink
	or expand significantly in the near term, principally because of
	the timing differences between the adjustable rate loans and the
	maturities (and therefore repricing) of the deposits and
	borrowings.                               
|
| | Sharp decreases in interest rates have
	historically resulted in increased loan refinancings to fixed
	rate products. Due to the fact that the Bank is a variable rate
	lender and offers fixed rate products on a limited basis, this
	interest rate environment could negatively impact the
	Companys ability to grow the balance sheet and leverage
	off of the existing expense base. This could impede the
	Companys ability to improve the overall efficiency ratio.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Government Regulation And Monetary
	Policy.All forward-looking statements
	presume a continuation of the existing regulatory environment
	and United States government monetary policies. The
	banking industry is subject to extensive federal and state
	regulations, and significant new laws or changes in, or repeals
	of, existing laws may cause results to differ materially.
	Further, federal monetary policy, particularly as implemented
	through the Federal Reserve System, significantly affects credit
	conditions for the Company, primarily through open market
	operations in United States government securities, the discount
	rate for member bank borrowings and bank reserve requirements,
	and a material change in these conditions has had and is likely
	to continue to have a material impact on the Companys
	results.

ii



---



##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Competition.The
	Company competes with numerous other domestic and foreign
	financial institutions and non depository financial
	intermediaries. The Companys results may differ if
	circumstances affecting the nature or level of competition
	change, such as the merger of competing financial institutions
	or the acquisition of California institutions by out-of-state
	companies.                                                                                                                                                                                                                                                                                                                              
|
| |  | Credit Quality.A
	significant source of risk arises from the possibility that
	losses will be sustained because borrowers, guarantors and
	related parties may fail to perform in accordance with the terms
	of their loans. The Company has adopted underwriting and credit
	monitoring procedures and credit policies, including the
	establishment and review of the allowance for credit losses,
	that management believes are appropriate to minimize this risk
	by assessing the likelihood of nonperformance, tracking loan
	performance and diversifying its credit portfolio, but such
	policies and procedures may not prevent unexpected losses that
	could materially adversely affect the Companys results.
|
| |  | Other Risks.From
	time to time, the Company details other risks with respect to
	its business and/or financial results in press releases and
	filings with the SEC. Stockholders are urged to review the risks
	described in such releases and filings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

The risks highlighted herein should not be
assumed to be the only factors that could affect future
performance of the Company. The Company does not undertake, and
specifically disclaims any obligation, to publicly release the
result of any revisions that may be made to any forward-looking
statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such
statements.

iii



---



##### Table of Contents






PART I




Item 1.     Business

GENERAL

Organization

Hawthorne Financial Corporation (Hawthorne
Financial or Company), a Delaware corporation
organized in 1959, is a savings and loan holding company that
owns 100% of the stock of Hawthorne Savings, F.S.B.
(Hawthorne Savings or Bank). Hawthorne
Savings was incorporated in 1950 and commenced operations on
May 11, 1951.

The Company specializes in real estate secured
loans throughout Southern California, which are funded
predominately with retail deposits and advances from the Federal
Home Loan Bank of San Francisco (FHLB). As of
March 22, 2002, the Banks nine full service retail
offices, located in Southern California, include the Gardena
branch, which opened in March 2002.

Hawthorne Savings

Hawthorne Savings is a federally chartered stock
savings bank (referred to in applicable statutes and regulations
as a savings association) incorporated and licensed
under the laws of the United States. The Bank is a member of the
Federal Home Loan Bank of San Francisco (FHLB),
which is a member bank of the Federal Home Loan Bank System. The
Savings Association Insurance Fund (SAIF), which is
a separate insurance fund administered by the Federal Deposit
Insurance Corporation (FDIC), insures the
Banks deposit accounts up to the $100,000 maximum amount
currently allowable under federal laws. The Bank is subject to
examination and regulation by the Office of Thrift Supervision
(OTS) and the FDIC. Hawthorne Savings is further
subject to regulations of the Board of Governors of the Federal
Reserve System (Federal Reserve Board) concerning
reserves required to be maintained against deposits and certain
other matters.

General

The Companys only operating segment is the
Bank. The Bank offers a variety of consumer banking products
through its network of nine retail branches, which includes the
traditional range of checking and savings accounts, money market
accounts and certificates of deposit. The Banks primary
target market is the South Bay region of Southern California,
where it currently ranks fifth in terms of deposit market share
based on branch information provided to the FDIC as of
June 30, 2001. The Bank also has branches in the San
Fernando Valley and Westlake Village areas of Los Angeles County.

In connection with its principal business
activities, the Company generates revenues from the interest and
fees charged to customers and, to a much lesser extent, the
interest earned on its portfolio of overnight liquid
investments. The Companys costs include primarily interest
paid to depositors and to other providers of borrowed funds,
general and administrative expenses and other operating expenses.

In the coastal counties of Southern California,
the Company specializes in real estate secured loans in the
niche markets that it serves, including: (1) permanent
loans collateralized by single family residential property,
(2) permanent and construction loans secured by
multi-family residential and commercial real estate,
(3) loans for the construction of individual single family
residential homes and the acquisition and development of land
for the construction of such homes. See
Item 1  Business  Statistical
Financial Data  Loan Portfolio. The Company
funds its loans predominantly with retail deposits generated
through its full service retail offices and with advances from
the FHLB. The Company also offers consumer loans on a referral
fee basis through an unaffiliated financial institution. See
Item 1  Business  Statistical
Financial Data  Sources of Funds.

The Companys current loan origination
activities are governed by established policies and procedures
that mitigate the risks inherent to the types of collateral and
borrowers financed by the Company. The

1



---



##### Table of Contents



Companys primary competitive advantages,
which include (1) an effective, efficient and responsive
transaction execution, are consistent with the Companys
relatively flat organizational structure and its reliance upon
relatively few, highly-skilled lending professionals (including
loan officers, loan underwriters, processors and funders,
in-house appraisers, and in-house legal staff), and (2) a
strategy of holding in portfolio virtually all new loan
originations. Management believes that this combination of
competitive, organizational and strategic distinctions
contribute to the Companys success in attracting new
business and in its ability to receive a return believed by
management to be commensurate with the inherent and
transaction-specific risks assumed and value added to customers.


Market Area and Competition

The Company concentrates on marketing its
services throughout the coastal counties of Southern California.
The Companys operating results and its growth prospects
are directly and materially influenced by (1) the health
and vibrancy of the Southern California real estate markets and
the underlying economic forces which affect such markets,
(2) the overall complexion of the interest rate
environment, including the absolute level of market interest
rates and the volatility of such interest rates, (3) the
prominence of competitive forces which provide customers of the
Company with alternative sources of mortgage funds or
investments which compete with the Companys products and
services, and (4) regulations promulgated by authorities,
including those of the OTS, the FDIC and the FRB. The
Companys success in identifying trends in each of these
factors, and implementing strategies to exploit such trends,
significantly influence the Companys long-term results and
growth prospects.

The Bank faces significant competition in
California for new loans from commercial banks, savings and loan
associations, credit unions, credit companies, Wall Street
lending conduits, mortgage bankers, life insurance companies and
pension funds. Some of the largest savings and loans and banks
in the United States operate in California, and have extensive
branch systems and advertising programs, which the Bank does not
have. Large banks and savings and loans frequently also enjoy a
lower cost of funds than the Bank and can therefore charge less
than the Bank for loans. The Bank attempts to compensate for
competitive disadvantages that may exist by providing a higher
level of personal service to borrowers and hands on
involvement by senior officers to meet borrowers needs. A
475 basis point drop in interest rates impacted the
Companys net interest income during 2001. The resulting
interest rate environment produced compression in the net
interest margin during the first half of the year due to the
immediate repricing of adjustable rate assets and the lag in
liability repricing resulting from the six month weighted
average maturity of certificates of deposits.

The Company competes for deposit funds with other
Southern California-based financial companies, including banks,
savings associations and thrift and loans. These companies
generally compete with one another based upon price, convenience
and service. Though many of the Banks competitors offer
customers a larger spectrum of products than the Bank, the
Company, as part of its strategic plan, continues to enhance the
line of products and services offered to retail customers.
During 2001, the Bank introduced internet banking, which was
consistent with one aspect of the Companys strategic plan
of building franchise value by expanding the array of products
and increasing our presence and market share in the South Bay.
The Bank concentrates on providing superior customer service as
it continues to enhance the products and services offered to its
retail customers.

Because the Company does not have a critical mass
of retail banking facilities, and because its smaller size does
not afford it the economies of scale to advertise its basic
products to the extent of its principal competitors, the Company
primarily competes on service and convenience. The average
tenure of all households with the Bank is approximately five
years. The Company solicits deposits from the public and offers
lending products throughout its service area and attained a
cross-sell ratio (deposit and loan products per household) of
2.37 at December 31, 2001, compared with 1.78 at
December 31, 2000.

2



---



##### Table of Contents



SUPERVISION AND REGULATION



| |        
| | -------
| | General

Savings and loan holding companies and savings
associations are extensively regulated under both federal and
state law. This regulation is intended primarily for the
protection of depositors and the SAIF and not for the benefit of
stockholders of the Company. The following information describes
certain aspects of that regulation applicable to the Company and
the Bank, and does not purport to be complete. The discussion is
qualified in its entirety by reference to all particular
statutory or regulatory provisions.



| |                          
| | -------------------------
| | Regulation of the Company

General.The Company
is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, the Company is
required to register and file reports with the OTS and is
subject to regulation and examination by the OTS. In addition,
the OTS has enforcement authority over the Company and its
subsidiaries, which also permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the
subsidiary savings association.

Activities Restriction
Test.As a unitary savings and loan
holding company, the Company generally is not subject to
activity restrictions, provided the Bank satisfies the Qualified
Thrift Lender (QTL) test or meets the definition of
domestic building and loan association pursuant to the Internal
Revenue Code of 1986, as amended (the Code). The
Company presently intends to continue to operate as a unitary
thrift savings and loan holding company. Legislation terminated
the unitary thrift holding company exemption for all
companies that apply to acquire savings associations after
May 4, 1999. Since the Company is grandfathered, its
unitary thrift holding company powers and authorities were not
affected. See Financial Modernization Legislation.
However, if the Company acquires control of another savings
association as a separate subsidiary, it would become a multiple
savings and loan holding company, and the activities of the
Company and any of its subsidiaries (other than the Bank or any
other SAIF insured savings association) would become subject to
restrictions applicable to bank holding companies unless such
other associations each also qualify as a QTL or domestic
building and loan association and were acquired in a supervisory
acquisition. Furthermore, if the Company were in the future to
sell control of the Bank to any other company, such company
would not succeed to the Company grandfathered status under and
would be subject to the same business activity restrictions. See
 Regulation of the Bank  Qualified
Thrift Lender Test.

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

Federal law generally provides that no
person, acting directly or indirectly or through or
in concert with one or more other persons, may acquire
control, as that term is defined in OTS regulations,
of a federally insured savings association without giving at
least 60 days written notice to the OTS and providing the
OTS an opportunity to disapprove the proposed acquisition. In
addition, no company may acquire control of such an institution
without prior OTS approval. These provisions also prohibit,
among other things, any director or officer of a savings and
loan holding company, or any individual who owns or controls
more than 25% of the voting shares of a savings and loan holding
company, from acquiring control of any savings association not a
subsidiary of the savings and loan holding company, unless the
acquisition is approved by the OTS. For additional restrictions
on the acquisition of a unitary thrift holding company, see
 Financial Services Modernization
Legislation.



| |                        
| | -----------------------
| | USA Patriot Act of 2001

On October 26, 2001, President Bush signed
the USA Patriot Act of 2001. Enacted in response to the
terrorist attacks in New York, Pennsylvania and Washington, D.C.
on September 11, 2001, the Patriot Act is intended to
strengthen U.S. law enforcements and the intelligence
communities abilities to work cohesively

3



---



##### Table of Contents



to combat terrorism on a variety of fronts. The
potential impact of the Act on financial institutions of all
kinds is significant and wide ranging. The Act contains sweeping
anti-money laundering and financial transparency laws and
requires various regulations, including:




| |   |                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | due diligence requirements for financial
	institutions that administer, maintain, or manage private bank
	accounts or correspondent accounts for non-U.S. persons;                  
|
| |  | standards for verifying customer identification
	at account opening;                                                                                                                
|
| |  | rules to promote cooperation among financial
	institutions, regulators, and law enforcement entities in
	identifying parties that may be involved in terrorism or money
	laundering;
|
| |  | reports by nonfinancial trades and businesses
	filed with the Treasury Departments Financial Crimes
	Enforcement Network for transactions exceeding $10,000; and                   
|
| |  | filing of suspicious activities reports involving
	securities by brokers and dealers if they believe a customer may
	be violating U.S. laws and regulations.                        

The Company is not able to predict the impact of
such law on its financial condition or results of operations at
this time.



| |                                              
| | ---------------------------------------------
| | Financial Services Modernization
	Legislation

General.On
November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act of 1999 (the GLB). The GLB
repeals the two affiliation provisions of the Glass-Steagall Act:



| |   |                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Section 20, which restricted the affiliation
	of Federal Reserve Member Banks with firms engaged
	principally in specified securities activities; and                         
|
| |  | Section 32, which restricts officer,
	director, or employee interlocks between a member bank and any
	company or person primarily engaged in specified
	securities activities.

In addition, GLB also contains provisions that
expressly preempt any state law restricting the establishment of
financial affiliations, primarily related to insurance. The
general effect of the law is to establish a comprehensive
framework to permit affiliations among commercial banks,
insurance companies, securities firms, and other financial
service providers by revising and expanding the Bank Holding
Company Act framework to permit a holding company system to
engage in a full range of financial activities through a new
entity known as a Financial Holding Company.
Financial activities is broadly defined to include
not only banking, insurance, and securities activities, but also
merchant banking and additional activities that the Federal
Reserve Board, in consultation with the Secretary of the
Treasury, determines to be financial in nature, incidental to
such financial activities, or complementary activities that do
not pose a substantial risk to the safety and soundness of
depository institutions or the financial system generally.

GLB provides that no company may acquire control
of an insured savings association, unless that company engages,
and continues to engage, only in the financial activities
permissible for a Financial Holding Company, unless
grandfathered as a unitary savings and loan holding company. The
Financial Institution Modernization Act grandfathers any company
that was a unitary savings and loan holding company on
May 4, 1999 (or became a unitary savings and loan holding
company pursuant to an application pending on that date). Such a
company may continue to operate under present law as long as the
company continues to meet the two tests: it can control only one
savings institution, excluding supervisory acquisitions, and
each such institution must meet the QTL test. A grandfathered
unitary savings and loan holding company also must continue to
control at least one savings association, or a successor
institution, that it controlled on May 4, 1999.

GLB also permits national banks to engage in
expanded activities through the formation of financial
subsidiaries. A national bank may have a subsidiary engaged in
any activity authorized for national banks directly or any
financial activity, except for insurance underwriting, insurance
investments, real estate investment or development, or merchant
banking, which may only be conducted through a subsidiary of a

4



---



##### Table of Contents



Financial Holding Company. Financial activities
include all activities permitted under new sections of the Bank
Holding Company Act of 1956 (BHCA) or permitted by
regulation.


The Company and the Bank do not believe that GLB
will have a material adverse effect on the operations of the
Company and the Bank in the near-term. However, to the extent
that the act permits banks, securities firms, and insurance
companies to affiliate, the financial services industry may
experience further consolidation. GLB is intended to grant to
community banks certain powers as a matter of right that larger
institutions have accumulated on an ad hoc basis and which
unitary savings and loan holding companies already possess.
Nevertheless, this act may have the result of increasing the
amount of competition that the Company and the Bank face from
larger institutions and other types of companies offering
financial products, many of which may have substantially more
financial resources than the Company and the Bank. In addition,
because the Company may only be acquired by other unitary
savings and loan holding companies or Financial Holding
Companies, the legislation may have an anti-takeover effect by
limiting the number of potential acquirors or by increasing the
costs of an acquisition transaction by a bank holding company
that has not made the election to be a Financial Holding Company
under the new legislation.

Privacy.Under GLB,
federal banking regulators are required to adopt rules that will
limit the ability of banks and other financial institutions to
disclose non-public information about consumers to nonaffiliated
third parties. Pursuant to these rules, effective July 1,
2001, financial institutions must provide:



| |   |                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | initial notices to customers about their privacy
	policies, describing the conditions under which they may
	disclose nonpublic personal information to nonaffiliated third
	parties and affiliates;
|
| |  | annual notices of their privacy policies to
	current customers; and                                                                                                                                
|
| |  | a reasonable method for customers to opt
	out of disclosures to nonaffiliated third parties.                                                                                                     

These privacy provisions will affect how consumer
information is transmitted through diversified financial
companies and conveyed to outside vendors.



| |                       
| | ----------------------
| | Regulation of the Bank

As a federally chartered, SAIF insured savings
association, the Bank is subject to extensive regulation by the
OTS and the FDIC. Lending activities and other investments of
the Bank must comply with various statutory and regulatory
requirements. The Bank is also subject to certain reserve
requirements promulgated by the Federal Reserve Board.

The OTS, in conjunction with the FDIC, regularly
examines the Bank and prepares reports for the consideration of
the Banks Board of Directors on any deficiencies found in
the operations of the Bank. The relationship between the Bank
and depositors and borrowers is also regulated by federal and
state laws, especially in such matters as the ownership of
savings accounts and the form and content of mortgage documents
utilized by the Bank.

The Bank must file reports with the OTS and the
FDIC concerning its activities and financial condition, in
addition to obtaining regulatory approvals prior to entering
into certain transactions such as mergers with or acquisitions
of other financial institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the
protection of the SAIF and depositors. The regulatory structure
also gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan
loss allowance for regulatory purposes. Any change in such
regulations, whether by the OTS, the FDIC, or the Congress could
have a material adverse impact on the Company, the Bank, and
their operations.

Insurance of Deposit
Accounts.The SAIF, as administered by
the FDIC, insures the Banks deposit accounts up to the
maximum amount permitted by law. The FDIC may terminate
insurance of deposits upon a finding that the institution has
engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any
applicable law, regulation, rule, order, or condition imposed by
the FDIC or the institutions primary regulator.

5



---



##### Table of Contents



The FDIC charges an annual assessment for the
insurance of deposits based on the risk a particular institution
poses to its deposit insurance fund. Under this system as of
December 31, 2000, SAIF members pay within a range of
0 cents to 27 cents per $100 of domestic deposits,
depending upon the institutions risk classification. This
risk classification is based on an institutions capital
group and supervisory subgroup assignment. In addition, all FDIC
insured institutions are required to pay assessments to the FDIC
at an annual rate, adjusted quarterly. The current rate is
approximately $0.0184 per $100 of assessable deposits to fund
interest payments on bonds issued by the Financing Corporation
(FICO), an agency of the Federal government
established to recapitalize the predecessor to the SAIF. These
assessments will continue until the FICO bonds mature in 2017.

Proposed
Legislation.From time to time, new
laws are proposed that could have an effect on the financial
institutions industry. For example, deposit insurance reform
legislation has recently been introduced in the U.S. Senate
House of Representatives that would:



| |   |                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | merge the BIF and the SAIF;                                                                                                                                            
|
| |  | increase the current deposit insurance coverage
	limit for insured deposits to $130,000 and index future coverage
	limits to inflation;                                
|
| |  | increase deposit insurance coverage limits for
	municipal deposits;                                                                                                    
|
| |  | double deposit insurance coverage limits for
	individual retirement accounts; and                                                                                      
|
| |  | replace the current fixed 1.25 designated reserve
	ratio with a reserve range of 1-1.5%, giving the FDIC discretion
	in determining a level adequate within this range.

While we cannot predict whether such proposals
will eventually become law, they could have an effect on the
Banks operations and the way business is conducted.

Regulatory Capital
Requirements.OTS capital regulations
require savings associations to meet three capital standards:
(1) tangible capital equal to 1.5% of total adjusted
assets, (2) leverage capital (core capital) equal to 4.0%
of total adjusted assets for all but the most highly rated
institutions, and (3) risk-based capital equal to 8.0% of
total risk-based assets. The Bank must meet each of these
standards in order to be deemed in compliance with OTS capital
requirements. In addition, the OTS may require a savings
association to maintain capital above the minimum capital levels.

These capital requirements are viewed as minimum
standards by the OTS, and most institutions are expected to
maintain capital levels well above the minimum. In addition, the
OTS regulations provide that minimum capital levels higher than
those provided in the regulations may be established by the OTS
for individual savings associations, upon a determination that
the savings associations capital is or may become
inadequate in view of its circumstances. The OTS regulations
provide that higher individual minimum regulatory capital
requirements may be appropriate in circumstances where, among
others: (1) a savings association has a high degree of
exposure to interest rate risk, prepayment risk, credit risk,
concentration of credit risk, certain risks arising from
nontraditional activities, or similar risks or a high proportion
of off-balance sheet risk; (2) a savings association is
growing, either internally or through acquisitions, at such a
rate that certain supervisory concerns may be presented that OTS
regulations do not address; and (3) a savings association
may be adversely affected by activities or condition of its
holding company, affiliates, subsidiaries, or other persons, or
savings associations with which it has significant business
relationships. The Bank has agreed to maintain minimum core
capital and risk-based capital ratios of 6.5% and 11.0%,
respectively.

6



---



##### Table of Contents



As follows, the Banks regulatory capital
exceeded all minimum regulatory capital requirements applicable
to it as of December 31, 2001.

|                               |                  |                  |           |              |  |                    |      |   |  |         |           |   |  |  |      |   |  |   |           |        |   |  |       |   | 
|------------------------------ | ---------------- | ---------------- | --------- | ------------ |  | ------------------ | ---- | - |  | ------- | --------- | - |  |  | ---- | - |  | - | --------- | ------ | - |  | ----- | - | 
|                               |                  |                  |           |              |  |                   
|                               |                  | Tangible Capital |           | Core Capital |  | Risk-based Capital
|                               |                  |                  |           |              |  |                   
|                               |                  | Balance          |           | %            |  | Balance            |      | % |  | Balance |           | %
|(Dollars in thousands)         |                  |                  |           |              |  |                    |      |   |  |         |           |  
|Stockholders equity           |                  | $                | 154,981   |              |  |                    |     |   |  | $       | 154,981   |   |  |  |     |   |  | $ | 154,981   |        |   |  |      |  
|Adjustments:                   |                  |                  |           |              |  |                    |      |   |  |         |           |   |  |  |      |   |  |   |           |        |   |  |       |  
|                               | General reserves |                  |           |             |  |                    |      |  |  |         |           |  |  |  |      |  |  |   |           | 16,787 |   |  |       |  | 
|                               | Other(1)         |                  |           |             |  |                    |      |  |  |         |           |  |  |  |      |  |  |   |           | (2,490 | ) |  |       |  | 
|                               |                  |                  |           |              |  |                    |      |   |  |         |           |   |  |  |      |   |  |   |           |        |   |  |       |  
|Regulatory capital             |                  |                  | 154,981   |              |  |                    | 8.36 | % |  |         | 154,981   |   |  |  | 8.36 | % |  |   | 169,278   |        |   |  | 12.70 | %
|Regulatory capital requirement |                  |                  | 27,807    |              |  |                    | 1.50 |   |  |         | 74,153    |   |  |  | 4.00 |   |  |   | 106,619   |        |   |  | 8.00  |  
|                               |                  |                  |           |              |  |                    |      |   |  |         |           |   |  |  |      |   |  |   |           |        |   |  |       |  
|Excess capital                 |                  | $                | 127,174   |              |  |                    | 6.86 | % |  | $       | 80,828    |   |  |  | 4.36 | % |  | $ | 62,659    |        |   |  | 4.70  | %
|                               |                  |                  |           |              |  |                    |      |   |  |         |           |   |  |  |      |   |  |   |           |        |   |  |       |  
|Adjusted assets(2)             |                  | $                | 1,853,831 |              |  |                    |      |   |  | $       | 1,853,831 |   |  |  |      |   |  | $ | 1,332,742 |        |   |  |       |  
|                               |                  |                  |           |              |  |                    |      |   |  |         |           |   |  |  |      |   |  |   |           |        |   |  |       |  



---



|    |                                                                                                                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes the portion of non-residential
	construction and land development loans that exceed a
	loan-to-value of 80%.                                                                                                                                                                                                    
|   
|(2) | The term adjusted assets refers to
	(i) the term adjusted total assets as defined
	in 12 C.F.R. Section 567.1 (a) for purposes of
	tangible and core capital requirements, and (ii) the term
	risk weighted assets as defined in 12 C.F.R.
	Section 567.5 (d) for purposes of the risk-based
	capital requirements.

The Home Owners Loan Act (HOLA)
permits savings associations not in compliance with the OTS
capital standards to seek an exemption from certain penalties or
sanctions for noncompliance. Such an exemption will be granted
only if certain strict requirements are met, and must be denied
under certain circumstances. If the OTS grants an exemption, the
savings association still may be subject to enforcement actions
for other violations of law or unsafe or unsound practices or
conditions.

Prompt Corrective
Action.The prompt corrective action
regulation of the OTS requires certain mandatory actions and
authorizes certain other discretionary actions to be taken by
the OTS against a savings association that falls within certain
undercapitalized capital categories specified in the regulation.

The regulation establishes five categories of
capital classification: well capitalized,
adequately capitalized,
undercapitalized, significantly
undercapitalized, and critically
undercapitalized. Under the regulation, the risk-based
capital, leverage capital, and tangible capital ratios are used
to determine an institutions capital classification. At
December 31, 2001, the Bank met the capital requirements of
a well capitalized institution under applicable OTS
regulations.

In general, the prompt corrective action
regulation prohibits an insured depository institution from
declaring any dividends, making any other capital distribution,
or paying a management fee to a controlling person if, following
the distribution or payment, the institution would be within any
of the three undercapitalized categories. In addition,
adequately capitalized institutions may accept Brokered Deposits
only with a waiver from the FDIC and are subject to restrictions
on the interest rates that can be paid on such deposits.
Undercapitalized institutions may not accept, renew, or
roll-over Brokered Deposits.

If the OTS determines that an institution is in
an unsafe or unsound condition, or if the institution is deemed
to be engaging in an unsafe and unsound practice, the OTS may,
if the institution is well capitalized, reclassify it as
adequately capitalized; if the institution is adequately
capitalized but not well capitalized, require it to comply with
restrictions applicable to undercapitalized institutions; and,
if the institution is undercapitalized, require it to comply
with certain restrictions applicable to significantly
undercapitalized institutions.

7



---



##### Table of Contents



As of December 31, 2001, the Bank is
categorized as well capitalized under the regulatory
framework for Prompt Corrective Action (PCA) Rules.
There are no conditions or events subsequent to
December 31, 2001, that management believes have changed
the Banks category. The following table compares the
Banks actual capital ratios to those required by
regulatory agencies to meet the minimum capital requirements
required by the OTS and to be categorized as well
capitalized under the PCA Rules for the periods indicated.

|                         |                                              |        |   |                   |  |                   |  |                   |   |            |   |         |  |  |  |      |   |  |   |         |  |  |  |       |  
|------------------------ | -------------------------------------------- | ------ | - | ----------------- |  | ----------------- |  | ----------------- | - | ---------- | - | ------- |  |  |  | ---- | - |  | - | ------- |  |  |  | ----- | -
|                         |                                              |        |   |                   |  |                   |  |                   |   |           
|                         |                                              |        |   |                   |  |                   |  |                   |   | To Be Well
|                         |                                              |        |   |                   |  |                   |  | Capitalized Under
|                         |                                              |        |   | For Capital       |  | Prompt Corrective
|                         |                                              | Actual |   | Adequacy Purposes |  | Action Provisions
|                         |                                              |        |   |                   |  |                  
|                         |                                              | Amount |   | Ratios            |  | Amount            |  | Ratios            |   | Amount     |   | Ratios 
|(Dollars in thousands)   |                                              |        |   |                   |  |                   |  |                   |   |            |   |        
|As of December 31, 2001: |                                              |        |   |                   |  |                   |  |                   |   |            |   |         |  |  |  |      |   |  |   |         |  |  |  |      
|                         | Total capital to risk weighted assets        |        | $ | 169,278           |  |                   |  | 12.70             | % |            | $ | 106,619 |  |  |  | 8.00 | % |  | $ | 133,274 |  |  |  | 10.00 | %
|                         | Core capital to adjusted tangible assets     |        |   | 154,981           |  |                   |  | 8.36              | % |            |   | 74,153  |  |  |  | 4.00 | % |  |   | 92,692  |  |  |  | 5.00  | %
|                         | Tangible capital to adjusted tangible assets |        |   | 154,981           |  |                   |  | 8.36              | % |            |   | 27,807  |  |  |  | 1.50 | % |  |   | n/a     |  |  |  | n/a   |  
|                         | Tier 1 capital to risk weighted assets       |        |   | 154,981           |  |                   |  | 11.63             | % |            |   | n/a     |  |  |  | n/a  |   |  |   | 79,965  |  |  |  | 6.00  | %
|As of December 31, 2000: |                                              |        |   |                   |  |                   |  |                   |   |            |   |         |  |  |  |      |   |  |   |         |  |  |  |      
|                         | Total capital to risk weighted assets        |        | $ | 151,914           |  |                   |  | 12.23             | % |            | $ | 99,407  |  |  |  | 8.00 | % |  | $ | 124,259 |  |  |  | 10.00 | %
|                         | Core capital to adjusted tangible assets     |        |   | 140,387           |  |                   |  | 8.01              | % |            |   | 70,078  |  |  |  | 4.00 | % |  |   | 87,598  |  |  |  | 5.00  | %
|                         | Tangible capital to adjusted tangible assets |        |   | 140,387           |  |                   |  | 8.01              | % |            |   | 26,279  |  |  |  | 1.50 | % |  |   | n/a     |  |  |  | n/a   |  
|                         | Tier 1 capital to risk weighted assets       |        |   | 140,387           |  |                   |  | 11.30             | % |            |   | n/a     |  |  |  | n/a  |   |  |   | 74,555  |  |  |  | 6.00  | %

Predatory Lending.The term predatory lending, much like the terms
safety and soundness and unfair and deceptive
practices, is far-reaching and covers a potentially broad
range of behavior. As such, it does not lend itself to a concise
or a comprehensive definition. But typically predatory lending
involves at least one, and perhaps all three, of the following
elements:



| |   |                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | making unaffordable loans based on the assets of
	the borrower rather than on the borrowers ability to repay
	an obligation (asset-based lending);
|
| |  | inducing a borrower to refinance a loan
	repeatedly in order to charge high points and fees each time the
	loan is refinanced (loan flipping); and 
|
| |  | engaging in fraud or deception to conceal the
	true nature of the loan obligation from an unsuspecting or
	unsophisticated borrower.                 

On December 14, 2001, the FRB amended its
regulations aimed at curbing such lending. Compliance is not
mandatory until October 1, 2002. The rule significantly
widens the pool of high-cost home-secured loans covered by the
Home Ownership and Equity Protection Act of 1994, a federal law
that requires extra disclosures and consumer protections to
borrowers. The following triggers coverage under the act:



| |   |                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | interest rates for first lien mortgage loans in
	excess of 8 percentage points above comparable Treasury
	securities;                                                                                                                                      
|
| |  | subordinate-lien loans of 10 percentage
	points above Treasury securities, and fees such as optional
	insurance and similar debt protection costs paid in connection
	with the credit transaction, when combined with points and fees
	if deemed excessive.

In addition, the regulation bars loan flipping by
the same lender or loan servicer within a year. Lenders also
will be presumed to have violated the law, which states loans
should not be made to individuals unable to repay them unless
the lenders document that the borrower has the ability to repay.
Lenders that violate the rules face cancellation of loans and
penalties equal to the finance charges paid.

The Company does not believe that it will be
impacted by these rule changes, as the Bank does not engage in
predatory lending practices.

Loans-to-One Borrower
Limitations.Savings associations
generally are subject to the lending limits applicable to
national banks. With certain limited exceptions, the maximum
amount that a savings association or a national bank may lend to
any borrower (including certain related entities of the
borrower) at one time

8



---



##### Table of Contents



may not exceed 15% of the unimpaired capital and
surplus of the institution, plus an additional 10% of unimpaired
capital and surplus for loans fully secured by readily
marketable collateral. Savings associations are additionally
authorized to make loans to one borrower, for any purpose, in an
amount not to exceed $500,000 or, by order of the Director of
OTS, in an amount not to exceed the lesser of $30,000,000 or 30%
of unimpaired capital and surplus to develop residential
housing, provided: (i) the purchase price of each single
family dwelling in the development does not exceed $500,000;
(ii) the savings association is in compliance with its
fully phased-in capital requirements; (iii) the loans
comply with applicable loan-to-value requirements, and
(iv) the aggregate amount of loans made under this
authority does not exceed 150% of unimpaired capital and
surplus. At December 31, 2001, the Banks
loans-to-one-borrower limit was $27.3 million based upon
the 15% of unimpaired capital and surplus measurement. At
December 31, 2001, the Banks largest relationships
consisted of one borrower with outstanding commitments of
$18.8 million, which consisted of approximately 5 loans,
with $9.5 million secured by commercial real estate in the
Banks lending area, $8.9 million secured by
non-residential collateral and one unsecured commercial loan.
All of these loans were performing in accordance with their
terms.


Qualified Thrift Lender Test.Savings associations must meet a QTL
test, which may be met either by maintaining a specified level
of assets in qualified thrift investments as specified in HOLA
or by meeting the definition of a domestic building and
loan association in the Code. Qualified thrift investments
are primarily residential mortgages and related investments,
including certain mortgage-related securities. The required
percentage of investments under HOLA is 65% of assets which the
Code requires investments of 60% of assets. An association must
be in compliance with the QTL test or the definition of domestic
building and loan association on a monthly basis in nine out of
every 12 months. Associations that fail to meet the QTL
test will generally be prohibited from engaging in any activity
not permitted for both a national bank and a savings
association. As of December 31, 2001, the Bank was in
compliance with its QTL requirements and met the definition of a
domestic building and loan association.

Affiliate Transactions.Transactions between a savings
association and its affiliates are quantitatively
and qualitatively restricted under the Federal Reserve Act.
Affiliates of a savings association include, among other
entities, the savings associations holding company and
companies that are under common control with the savings
association.

In general, a savings association or its
subsidiaries are limited in their ability to engage in certain
covered transactions with affiliates to an amount
equal to 10% of the associations capital and surplus, in
the case of covered transactions with any one affiliate, and to
an amount equal to 20% of such capital and surplus, in the case
of covered transactions with all affiliates. In addition, a
savings association and its subsidiaries may engage in covered
transactions and certain other transactions only on terms and
under circumstances that are substantially the same, or at least
as favorable to the savings association or its subsidiary, as
those prevailing at the time for comparable transactions with
nonaffiliated companies. A covered transaction
includes a loan or extension of credit to an affiliate; a
purchase of investment securities issued by an affiliate; a
purchase of assets from an affiliate, with certain exceptions;
the acceptance of securities issued by an affiliate as
collateral for a loan or extension of credit to any party; or
the issuance of a guarantee, acceptance, or letter of credit on
behalf of an affiliate.

In addition, under the OTS regulations, a savings
association may not make a loan or extension of credit to an
affiliate unless the affiliate is engaged only in activities
permissible for bank holding companies; a savings association
may not purchase or invest in securities of an affiliate other
than shares of a subsidiary; a savings association and its
subsidiaries may not purchase a low-quality asset from an
affiliate; and covered transactions and certain other
transactions between a savings association or its subsidiaries
and an affiliate must be on terms and conditions that are
consistent with safe and sound banking practices. With certain
exceptions, each loan or extension of credit by a savings
association to an affiliate must be secured by collateral with a
market value ranging from 100% to 130% (depending on the type of
collateral) of the amount of the loan or extension of credit.

The OTS regulation generally excludes all
non-bank and non-savings association subsidiaries of savings
associations from treatment as affiliates, except to the extent
that the OTS or the Federal Reserve Board

9



---



##### Table of Contents



decides to treat such subsidiaries as affiliates.
The regulation also requires savings associations to make and
retain records that reflect affiliate transactions in reasonable
detail, and provides that certain classes of savings
associations may be required to give the OTS prior notice of
affiliate transactions.


Capital Distribution
Limitations.OTS regulations impose
limitations upon all capital distributions by savings
associations, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of
another institution in a cash-out merger and other distributions
charged against capital. The OTS recently adopted an amendment
to these capital distribution limitations. Under the new rule, a
savings association in some circumstances may be required to
file an application and await approval from the OTS before it
makes a capital distribution, may be required to file a notice
30 days prior to the capital distribution, or may be
permitted to make the capital distribution without notice or
application to the OTS.

An application is required (1) if the
savings association is not eligible for expedited treatment of
its other applications under OTS regulations; (2) the total
amount of all capital distributions (including the proposed
capital distribution) for the applicable calendar year exceeds
its net income for that year to date plus retained net income
for the preceding two years; (3) the savings association
would not be at least adequately capitalized, under the prompt
corrective action regulations of the OTS following the
distribution; or (4) the savings associations
proposed capital distribution would violate a prohibition
contained in any applicable statute, regulation, or agreement
between the savings association and the OTS (or the FDIC), or
violate a condition imposed on the savings association in an
OTS-approved application or notice.

A notice of a capital distribution is required if
a savings association is not required to file an application,
but: (1) would not be well capitalized under the prompt
corrective action regulations of the OTS following the
distribution; (2) the proposed capital distribution would
reduce the amount of or retire any part of your common or
preferred stock or retire any part of debt instruments such as
notes or debentures included in capital (other than regular
payments required under a debt instrument approved by the OTS);
or (3) the savings association is a subsidiary of a savings
and loan holding company.

If neither the savings association nor the
proposed capital distribution meet any of the above listed
criteria, no application or notice is required for the savings
association to make a capital distribution. The OTS may prohibit
the proposed capital distribution that would otherwise be
permitted if the OTS determines that the distribution would
constitute an unsafe or unsound practice. Further, a savings
association like the Bank cannot distribute regulatory capital
that is needed for its liquidity.

Activities of Subsidiaries.A savings association seeking to
establish a new subsidiary, acquire control of an existing
company or conduct a new activity through a subsidiary must
provide 30 days prior notice to the FDIC and the OTS and
conduct any activities of the subsidiary in compliance with
regulations and orders of the OTS. The OTS has the power to
require a savings association to divest any subsidiary or
terminate any activity conducted by a subsidiary that the OTS
determines to pose a serious threat to the financial safety,
soundness or stability of the savings association or to be
otherwise inconsistent with sound banking practices.

Community Reinvestment Act and the Fair
Lending Laws.Savings associations
have a responsibility under the Community Reinvestment Act
(CRA) and related regulations of the OTS to help
meet the credit needs of their communities, including low- and
moderate-income neighborhoods. In addition, the Equal Credit
Opportunity Act and the Fair Housing Act (together, the
Fair Lending Laws) prohibit lenders from
discriminating in their lending practices on the basis of
characteristics specified in those statutes. An
institutions failure to comply with the provisions of CRA
could, at a minimum, result in regulatory restrictions on its
activities and the denial of certain applications. In addition,
an institutions failure to comply with the Fair Lending
Laws could result in enforcement actions by the OTS, as well as
other federal regulatory agencies and the Department of Justice.

Effective January 1, 2002, the OTS raised
the dollar amount limit in the definition of small business
loans from $500,000 to $2.0 million, if used for
commercial, corporate, business or agricultural purposes.
Furthermore, the rule raises the aggregate level that a thrift
can invest directly in community development funds, community
centers and economic development initiatives in its communities
from the greater of a quarter of 1% percent of total capital, or
$100,000, to 1% of total capital, or $250,000.

10



---



##### Table of Contents



Federal Home Loan Bank System.The Bank is a member of the FHLB
system. Among other benefits, each FHLB serves as a reserve or
central bank for its members within its assigned region. Each
FHLB is financed primarily from the sale of consolidated
obligations of the FHLB system. Each FHLB makes available to
members loans (i.e., advances) in accordance with the policies
and procedures established by the Board of Directors of the
individual FHLB.

As a FHLB member, the Bank is required to own
capital stock in a FHLB in an amount equal to the greater of:
(i) 1% of its aggregate outstanding principal amount of its
residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each calendar year, or
(ii) 5% of its FHLB advances (borrowings). At
December 31, 2001, the Bank had $24.4 million in FHLB
stock, which was in compliance with this requirement.

The Gramm-Leach-Bliley Act made significant
reforms to the FHLB system, including:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Expanded Membership  (i) expands
	the uses for, and types of, collateral for advances;
	(ii) eliminates bias toward QTL lenders; and
	(iii) removes capital limits on advances using real estate
	related collateral (e.g., commercial real estate and home equity
	loans).                                                                                                                                                                                                 
|
| |  | New Capital Structure  each FHLB is
	allowed to establish two classes of stock: Class A is
	redeemable within six months of notice; and Class B is
	redeemable within five years notice. Class B is valued at
	1.5 times the value of Class A stock. Each FHLB will
	be required to maintain minimum capital equal to 5% of equity.
	Each FHLB, including our FHLB of San Francisco, submitted
	capital plans for review and approval by the Federal Housing
	Finance Board.
|
| |  | Voluntary Membership  federally
	chartered savings associations, such as the Bank, are no longer
	required to be members of the system.                                                                                                                                                                                                                                                                                                                                     
|
| |  | REFCorp Payments  changes the amount
	paid by the system on debt incurred in connection with the
	thrift crisis in the late 1980s from a fixed amount to 20% of
	net earnings after deducting certain expenses.                                                                                                                                                                                                                                                             

At this time it is not possible to predict the
impact, if any, such changes or capital plans will have on the
Banks financial condition or results of operation.

Federal Reserve System.The Federal Reserve Board requires all
depository institutions to maintain a noninterest bearing
allowance at specified levels against their transaction accounts
(primarily checking, NOW, and Super NOW checking accounts) and
non-personal time deposits. At December 31, 2001, the Bank
was in compliance with these requirements.



| |                                    
| | -----------------------------------
| | Other Real Estate Lending Standards

The OTS and the other federal banking agencies
have jointly adopted uniform rules on real estate lending and
related Interagency Guidelines for Real Estate Lending Policies.
The uniform rules require that associations adopt and maintain
comprehensive written policies for real estate lending. The
policies must reflect consideration of the Interagency
Guidelines and must address relevant lending procedures, such as
loan-to-value limitations, loan administration procedures,
portfolio diversification standards and documentation, approval
and reporting requirements. Although the final rule did not
impose specific maximum loan-to-value ratios, the related
Interagency Guidelines state that such ratio limits established
by an individual associations board of directors should
not exceed levels set forth in the Guidelines, which range from
a maximum of 65% for loans secured by raw land to 85% for
improved property. No limit is set for single family residence
loans, but the guideline states that such loans exceeding a 95%
loan-to-value ratio should have private mortgage insurance or
some other form of credit enhancement. The Guidelines further
permit a limited amount of loans that do not conform to these
criteria.

11



---



##### Table of Contents



EMPLOYEES

The Company employed 271 full time equivalent
persons at December 31, 2001. A union or collective
bargaining group does not represent employees and the Company
considers its employee relations to be satisfactory.

STATISTICAL FINANCIAL DATA



| |               
| | --------------
| | Loan Portfolio



| |                 
| | ----------------
| | Loans Receivable

The Companys loan portfolio is almost
exclusively secured by real estate, concentrated primarily in
the coastal counties of Southern California. The Banks
principal lending activities consist of single family
residential, single family construction and income property
lending. The composition of the net growth in loans, from
$1.6 billion at December 31, 2000, to
$1.7 billion at December 31, 2001, includes increases
in single family residential loans of $29.4 million, income
property loans of $90.9 million and land loans of
$3.3 million.

The table below sets forth the composition of the
Companys loan portfolio as of the dates indicated.

|                            |                                |              |           |          |   |         |        |       |  |         |           |          |   |         |        |       |  |         |           |          |   |  |        |       |  |   |           |          |   |  |        |       |  |   |         |          |   |  |        |       | 
|--------------------------- | ------------------------------ | ------------ | --------- | -------- | - | ------- | ------ | ----- |  | ------- | --------- | -------- | - | ------- | ------ | ----- |  | ------- | --------- | -------- | - |  | ------ | ----- |  | - | --------- | -------- | - |  | ------ | ----- |  | - | ------- | -------- | - |  | ------ | ----- | 
|                            |                                |             
|                            |                                | December 31,
|                            |                                |             
|                            |                                |              |           |          |   |         |        |       |  |        
|                            |                                | 2001         |           | 2000     |   | 1999    |        | 1998  |  | 1997   
|                            |                                |              |           |          |   |         |        |       |  |        
|                            |                                | Balance      |           | %        |   | Balance |        | %     |  | Balance |           | %        |   | Balance |        | %     |  | Balance |           | %       
|(Dollars in thousands)      |                                |              |           |          |   |         |        |       |  |         |           |          |   |         |        |       |  |         |           |         
|Single family residential   |                                | $            | 918,877   |          |   |         | 49.12  | %     |  | $       | 888,416   |          |   |         | 49.17  | %     |  | $       | 683,250   |          |   |  | 40.99  | %     |  | $ | 576,032   |          |   |  | 35.88  | %     |  | $ | 396,629 |          |   |  | 41.00  | %    
|Income property:            |                                |              |           |          |   |         |        |       |  |         |           |          |   |         |        |       |  |         |           |          |   |  |        |       |  |   |           |          |   |  |        |       |  |   |         |          |   |  |        |      
|                            | Multi-family(1)                |              |           | 255,183  |   |         |        | 13.64 |  |         |           | 253,039  |   |         |        | 14.00 |  |         |           | 222,616  |   |  |        | 13.36 |  |   |           | 250,876  |   |  |        | 15.62 |  |   |         | 225,738  |   |  |        | 23.33 | 
|                            | Commercial(1)                  |              |           | 248,092  |   |         |        | 13.26 |  |         |           | 200,372  |   |         |        | 11.09 |  |         |           | 232,938  |   |  |        | 13.98 |  |   |           | 222,558  |   |  |        | 13.86 |  |   |         | 111,893  |   |  |        | 11.57 | 
|                            | Development(2)                 |              |           | 227,190  |   |         |        | 12.14 |  |         |           | 203,894  |   |         |        | 11.28 |  |         |           | 148,092  |   |  |        | 8.88  |  |   |           | 78,425   |   |  |        | 4.88  |  |   |         | 7,310    |   |  |        | 0.76  | 
|Single family construction: |                                |              |           |          |   |         |        |       |  |         |           |          |   |         |        |       |  |         |           |          |   |  |        |       |  |   |           |          |   |  |        |       |  |   |         |          |   |  |        |      
|                            | Single family residential(3)   |              |           | 159,224  |   |         |        | 8.51  |  |         |           | 195,983  |   |         |        | 10.85 |  |         |           | 274,697  |   |  |        | 16.48 |  |   |           | 275,888  |   |  |        | 17.18 |  |   |         | 107,989  |   |  |        | 11.16 | 
|                            | Tract                          |              |           |         |   |         |        |      |  |         |           | 3,495    |   |         |        | 0.19  |  |         |           | 24,056   |   |  |        | 1.44  |  |   |           | 85,942   |   |  |        | 5.35  |  |   |         | 68,653   |   |  |        | 7.10  | 
|Land(4)                     |                                |              | 50,984    |          |   |         | 2.72   |       |  |         | 46,520    |          |   |         | 2.57   |       |  |         | 59,095    |          |   |  | 3.55   |       |  |   | 69,581    |          |   |  | 4.33   |       |  |   | 39,475  |          |   |  | 4.08   |      
|Other                       |                                |              | 11,482    |          |   |         | 0.61   |       |  |         | 15,390    |          |   |         | 0.85   |       |  |         | 22,053    |          |   |  | 1.32   |       |  |   | 46,615    |          |   |  | 2.90   |       |  |   | 9,698   |          |   |  | 1.00   |      
|                            |                                |              |           |          |   |         |        |       |  |         |           |          |   |         |        |       |  |         |           |          |   |  |        |       |  |   |           |          |   |  |        |       |  |   |         |          |   |  |        |      
|Gross loans receivable(5)   |                                |              | 1,871,032 |          |   |         | 100.00 | %     |  |         | 1,807,109 |          |   |         | 100.00 | %     |  |         | 1,666,797 |          |   |  | 100.00 | %     |  |   | 1,605,917 |          |   |  | 100.00 | %     |  |   | 967,385 |          |   |  | 100.00 | %    
|                            |                                |              |           |          |   |         |        |       |  |         |           |          |   |         |        |       |  |         |           |          |   |  |        |       |  |   |           |          |   |  |        |       |  |   |         |          |   |  |        |      
|Less:                       |                                |              |           |          |   |         |        |       |  |         |           |          |   |         |        |       |  |         |           |          |   |  |        |       |  |   |           |          |   |  |        |       |  |   |         |          |   |  |        |      
|                            | Undisbursed funds              |              |           | (137,484 | ) |         |        |       |  |         |           | (171,789 | ) |         |        |       |  |         |           | (196,249 | ) |  |        |       |  |   |           | (256,096 | ) |  |        |       |  |   |         | (108,683 | ) |  |        |       | 
|                            | Deferred (fees) and costs, net |              |           | 6,337    |   |         |        |       |  |         |           | 2,197    |   |         |        |       |  |         |           | (1,295   | ) |  |        |       |  |   |           | (5,919   | ) |  |        |       |  |   |         | (7,177   | ) |  |        |       | 
|                            | Allowance for credit losses    |              |           | (30,602  | ) |         |        |       |  |         |           | (29,450  | ) |         |        |       |  |         |           | (24,285  | ) |  |        |       |  |   |           | (17,111  | ) |  |        |       |  |   |         | (13,274  | ) |  |        |       | 
|                            |                                |              |           |          |   |         |        |       |  |         |           |          |   |         |        |       |  |         |           |          |   |  |        |       |  |   |           |          |   |  |        |       |  |   |         |          |   |  |        |      
|Net loans receivable        |                                | $            | 1,709,283 |          |   |         |        |       |  | $       | 1,608,067 |          |   |         |        |       |  | $       | 1,444,968 |          |   |  |        |       |  | $ | 1,326,791 |          |   |  |        |       |  | $ | 838,251 |          |   |  |        |      
|                            |                                |              |           |          |   |         |        |       |  |         |           |          |   |         |        |       |  |         |           |          |   |  |        |       |  |   |           |          |   |  |        |       |  |   |         |          |   |  |        |      



---



|    |                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Predominantly term loans secured by improved
	properties, with respect to which the properties cash
	flows are sufficient to service the Companys loan.                                          
|   
|(2) | Predominantly loans to finance the construction
	of income producing improvements. Also includes loans to finance
	the renovation of existing improvements.                                        
|   
|(3) | Predominantly loans for the construction of
	individual and custom homes.                                                                                                                          
|   
|(4) | The Company expects that a majority of these
	loans will be converted into construction loans, and the land
	secured loans repaid with the proceeds of these construction
	loans, within 12 months.
|   
|(5) | Gross loans receivable includes the principal
	balance of loans outstanding, plus outstanding but unfunded loan
	commitments, predominantly in connection with construction loans.                 

12



---



##### Table of Contents



The table below sets forth the Companys
loan portfolio diversification by size.

|                                      |                             |                                 |    |            |    |        |           |            |           |   |    |   |    |   |           |        |           |  
|------------------------------------- | --------------------------- | ------------------------------- | -- | ---------- | -- | ------ | --------- | ---------- | --------- | - | -- | - | -- | - | --------- | ------ | --------- | -
|                                      |                             |                                
|                                      |                             | Year Ended December 31,        
|                                      |                             |                                
|                                      |                             |                                 |    |           
|                                      |                             | 2001                            |    | 2000      
|                                      |                             |                                 |    |           
|                                      |                             | No. of                          |    | Gross      |    | No. of |           | Gross     
|                                      |                             | Loans                           |    | Commitment |    | Loans  |           | Commitment
|(Dollars in thousands)                |                             |                                 |    |            |    |        |           |           
|Loans in excess of $10.0 million:     |                             |                                 |    |            |    |        |           |            |           |   |    |   |    |   |           |       
|                                      | Income property:            |                                 |    |            |    |        |           |            |           |   |    |   |    |   |           |        |          
|                                      |                             | Commercial                      |    |            | 2  |        |           | $          | 22,699    |   |    |   | 2  |   |           | $      | 22,027    |  
|                                      |                             | Development                     |    |            | 5  |        |           |            | 56,477    |   |    |   | 5  |   |           |        | 59,707    |  
|                                      |                             |                                 |    |            |    |        |           |            |           |   |    |   |    |   |           |       
|                                      |                             |                                 | 7  |            |    | $      | 79,176    |            |           |   | 7  |   |    | $ | 81,734    |       
|                                      |                             |                                 |    |            |    |        |           |            |           |   |    |   |    |   |           |       
|                                      |                             | Percentage of total gross loans |    |            |    |        |           |            | 4.23      | % |    |   |    |   |           |        | 4.52      | %
|Loans between $5.0 and $10.0 million: |                             |                                 |    |            |    |        |           |            |           |   |    |   |    |   |           |       
|                                      | Single family residential   |                                 |    | 4          |    |        | $         | 25,036     |           |   |    | 5 |    |   | $         | 33,073 |          
|                                      | Income property:            |                                 |    |            |    |        |           |            |           |   |    |   |    |   |           |        |          
|                                      |                             | Multi-family                    |    |            | 1  |        |           |            | 7,651     |   |    |   |   |   |           |        |          |  
|                                      |                             | Commercial                      |    |            | 10 |        |           |            | 74,078    |   |    |   | 8  |   |           |        | 55,568    |  
|                                      |                             | Development                     |    |            | 12 |        |           |            | 76,545    |   |    |   | 13 |   |           |        | 90,672    |  
|                                      | Single family construction: |                                 |    |            |    |        |           |            |           |   |    |   |    |   |           |        |          
|                                      |                             | Single family residential       |    |            | 2  |        |           |            | 12,915    |   |    |   | 2  |   |           |        | 14,300    |  
|                                      | Land                        |                                 |    | 2          |    |        |           | 11,200     |           |   |    | 1 |    |   |           | 6,501  |          
|                                      | Other                       |                                 |    |           |    |        |           |           |           |   |    | 1 |    |   |           | 7,500  |          
|                                      |                             |                                 |    |            |    |        |           |            |           |   |    |   |    |   |           |       
|                                      |                             |                                 | 31 |            |    | $      | 207,425   |            |           |   | 30 |   |    | $ | 207,614   |       
|                                      |                             |                                 |    |            |    |        |           |            |           |   |    |   |    |   |           |       
|                                      |                             | Percentage of total gross loans |    |            |    |        |           |            | 11.09     | % |    |   |    |   |           |        | 11.49     | %
|Loans less than $5.0 million          |                             |                                 |    |            |    | $      | 1,584,431 |            |           |   |    |   |    | $ | 1,517,761 |       
|                                      |                             |                                 |    |            |    |        |           |            |           |   |    |   |    |   |           |       
|                                      |                             | Gross loans receivable          |    |            |    |        |           | $          | 1,871,032 |   |    |   |    |   |           | $      | 1,807,109 |  
|                                      |                             |                                 |    |            |    |        |           |            |           |   |    |   |    |   |           |       

The table below sets forth the Companys net
loan portfolio composition, excluding net deferred fees and
costs, as of the dates indicated.

|                            |                           |                   |         |                   |         |           |       |         |      |        |         |         |        |           |       |       |      |        |  
|--------------------------- | ------------------------- | ----------------- | ------- | ----------------- | ------- | --------- | ----- | ------- | ---- | ------ | ------- | ------- | ------ | --------- | ----- | ----- | ---- | ------ | -
|                            |                           |                   |         |                  
|                            |                           | December 31, 2001 |         | December 31, 2000
|                            |                           |                   |         |                  
|                            |                           | Balance           |         | Percent           |         | Balance   |       | Percent
|(Dollars in thousands)      |                           |                   |         |                   |         |           |       |        
|Single family residential   |                           | $                 | 913,255 |                   |         |           | 52.68 | %       |      | $      | 883,814 |         |        |           | 54.04 | %    
|Income property:            |                           |                   |         |                   |         |           |       |         |      |        |         |         |        |           |       |      
|                            | Multi-family              |                   |         | 254,530           |         |           |       | 14.68   | %    |        |         | 251,995 |        |           |       | 15.41 | %   
|                            | Commercial                |                   |         | 235,156           |         |           |       | 13.57   | %    |        |         | 187,680 |        |           |       | 11.48 | %   
|                            | Development               |                   |         |                   |         |           |       |         |      |        |         |         |        |           |       |       |     
|                            |                           | Multi-family      |         |                   | 102,682 |           |       |         | 5.92 | %      |         |         | 70,999 |           |       |       | 4.34 | %     
|                            |                           | Commercial        |         |                   | 68,431  |           |       |         | 3.95 | %      |         |         | 59,264 |           |       |       | 3.63 | %     
|Single family construction: |                           |                   |         |                   |         |           |       |         |      |        |         |         |        |           |       |      
|                            | Single family residential |                   |         | 104,158           |         |           |       | 6.01    | %    |        |         | 127,630 |        |           |       | 7.80  | %   
|Land                        |                           |                   | 48,719  |                   |         |           | 2.81  | %       |      |        | 45,450  |         |        |           | 2.78  | %    
|Other                       |                           |                   | 6,617   |                   |         |           | 0.38  | %       |      |        | 8,488   |         |        |           | 0.52  | %    
|                            |                           |                   |         |                   |         |           |       |         |      |        |         |         |        |           |       |      
|                            |                           |                   | Total   |                   | $       | 1,733,548 |       |         |      | 100.00 | %       |         | $      | 1,635,320 |       |       |      | 100.00 | %
|                            |                           |                   |         |                   |         |           |       |         |      |        |         |         |        |           |       |      

13



---



##### Table of Contents





| |                                
| | -------------------------------
| | Single Family Residential Loans

The Bank offers first mortgage loans secured by
single family (one-to-four unit) residential properties located
in the Banks primary lending area of the coastal counties
of Southern California. At December 31, 2001,
$918.9 million, or 49.12% of the total gross loan portfolio
was secured by single family residential properties with an
average loan size of $0.6 million, compared with
$888.4 million, or 49.17% of the total gross loan portfolio
and an average loan size of $0.5 million, at
December 31, 2000.

The Company originates single family residential
loans principally through contact with, and submissions by,
independent mortgage brokers. The Company pays a fee, generally
ranging from 0.5% to 2.0% of the loan amount, to mortgage
brokers in connection with its funding of certain loans. The
practice and pricing are common for single family-secured loans
originated throughout the Companys market area.



| |                                                   
| | --------------------------------------------------
| | Income Property Multi-family and Commercial
	Loans

The Company originates loans secured by
multi-family properties and commercial properties, such as
office buildings, retail properties, industrial properties and
various special purpose properties. The Company generates at
least half of its new income property loans through existing
customer relationships with the remainder through its network of
approved brokers. The Company competes for such loans by
providing highly responsive transaction execution, specialized
market knowledge and expertise and a high customer service
orientation. Multi-family and commercial loans accounted for
$255.2 million, or 13.64%, and $248.1 million, or
13.26%, respectively, of the Banks total gross loan
portfolio at December 31, 2001. The average loan size of
the income producing properties portfolio was $0.8 million
and $3.0 million during 2001 and 2000, respectively. At
December 31, 2000, multi-family and commercial real estate
loans consisted of $253.0 million, or 14.00%, and
$200.4 million, or 11.09% of the Banks total gross
loan portfolio, respectively.



| |                                     
| | ------------------------------------
| | Income Property  Development
	Loans

During 2001, the Bank continued to emphasize its
strategic niche as a provider of bridge loans to both apartment
owners and income property investors. The Companys
experienced construction management group allows the Bank to
manage risk appropriately, while providing a valuable source of
funding to investors who want to renovate and upgrade their
properties. At December 31, 2001, income property
development loans accounted for $227.2 million, or 12.14%
of the Banks total gross loan portfolio, compared with
$203.9 million, or 11.28% of the Banks total gross
loan portfolio at December 31, 2000.



| |                           
| | --------------------------
| | Single Family Construction

The Company provides individual home construction
financing, primarily to local builders and, to a lesser extent,
homeowners. Generally, the Company finances the construction of
luxury custom homes throughout the coastal region of Southern
California and elsewhere within the Companys market area.
A majority of the Companys single family construction
residential loans are originated through standing relationships
between the Companys loan officers and local builders,
however, the Bank also maintains a small network of mortgage
brokers for its loan production.

The Companys loan commitments generally
include provisions for a portion of the cost of the acquired
land and all of the costs of construction (including financing
costs). Generally, the Companys loan commitments cover
between 70.0% and 75.0% of the total costs of construction
(including the cost of land acquisition, the cost to construct
the planned improvements and financing costs), with the borrower
providing the remainder of the funds required at the date the
Company records its financing commitment.

The Companys single family construction
residential loans have initial terms of twelve to twenty-four
months, with an option for the borrower to extend the loan for
up to six months, subject to the Companys then current
evaluation of the status of construction, costs to and at
completion, the as-completed valuation of the property, and
other factors. Single family construction residential homes
accounted for $159.2 million, or 8.51% of the total gross
loan portfolio at December 31, 2001, with an average loan
size of $1.6 million,

14



---



##### Table of Contents



compared with $196.0 million, or 10.85% of
the total gross loan portfolio, and an average loan size of
$1.4 million, at December 31, 2000.


In 2001, the Company introduced a new
construction to permanent loan program for owner-occupied
properties. This program provides the Bank with a competitive
edge in cross-selling additional loan products to our customers
as well as enhancing the Banks relationships with these
clients.



| |                                          
| | -----------------------------------------
| | Single Family Construction  Tract
	Loans

In the past, the Company provided financing to
small-to-medium-sized developers of residential subdivisions
located throughout Southern California. Generally, the
Companys tract loans financed land acquisition, site
development and home construction.

At December 31, 2001, there were no tract
loans, compared with $3.5 million, or 0.19%, of the
Banks total gross loan portfolio at December 31,
2000. The decrease in tract loans reflects the Banks
decision to cease the origination of such loans for its
portfolio, which was announced during the fourth quarter of 1998.



| |                 
| | ----------------
| | Consumer Lending

During 2001, the Bank launched an overdraft
protection program for its checking account customers. At
December 31, 2001, the outstanding overdraft protection
lines totaled $0.4 million. The Bank also offers a consumer
lending product which includes automobile, recreational vehicle
and boat loans, personal unsecured loans and personal unsecured
lines of credit to its retail customers through a correspondent
lending relationship and receives fee income based upon
originations.

15



---



##### Table of Contents



NEW BUSINESS GENERATION

The Company extends credit pursuant to its
lending policies covering loan applications, borrower financial
information and legal and corollary agreements which support the
vesting of title to the Companys collateral, title
policies, fire and extended liability coverage casualty
insurance, credit reports, and other documents necessary to
support each extension of credit. The real property collateral
that secures the Companys loans is appraised either by an
independent fee appraiser or by one of the Companys staff
appraisers. The Companys staff appraisers and the
Companys Chief Appraiser generally review independent fee
appraisals. With few exceptions, all of the principal legal
documents that support each extension of credit are prepared or
reviewed by the Companys in house legal staff or outside
attorneys.

The following table sets forth the approximate
composition of the Companys gross new loan commitments,
net of internal refinances, for the periods indicated, in
dollars and as a percentage of total loans originated.

|                             |       |                              |              |         |        |        |       |        |       |        |         |         |         |        |       |        |       |       |         |         |         |        |       |        |       |      | 
|---------------------------- | ----- | ---------------------------- | ------------ | ------- | ------ | ------ | ----- | ------ | ----- | ------ | ------- | ------- | ------- | ------ | ----- | ------ | ----- | ----- | ------- | ------- | ------- | ------ | ----- | ------ | ----- | ---- | 
|                             |       |                             
|                             |       | Year Ended December 31,     
|                             |       |                             
|                             |       |                              |              |         |        |       
|                             |       | 2001                         |              | 2000    |        | 1999  
|                             |       |                              |              |         |        |       
|                             |       | Amount                       |              | %       |        | Amount |       | %      |       | Amount |         | %      
|(Dollars in thousands)       |       |                              |              |         |        |        |       |        |       |        |         |        
|Single family residential(1) |       | $                            | 322,114      |         |        |        | 47.00 | %      |       | $      | 361,034 |         |         |        | 47.36 | %      |       | $     | 293,600 |         |         |        | 42.03 | %     
|Income property:             |       |                              |              |         |        |        |       |        |       |        |         |         |         |        |       |        |       |       |         |         |         |        |       |       
|                             |       | Multi-family(2)              |              |         | 82,779 |        |       |        | 12.08 |        |         |         | 63,366  |        |       |        | 8.32  |       |         |         | 21,800  |        |       |        | 3.12  |     
|                             |       | Commercial(3)                |              |         | 62,475 |        |       |        | 9.12  |        |         |         | 66,118  |        |       |        | 8.68  |       |         |         | 61,400  |        |       |        | 8.79  |     
|                             |       | Development(4)               |              |         |        |        |       |        |       |        |         |         |         |        |       |        |       |       |         |         |         |        |       |        |       |     
|                             |       |                              | Multi-family |         |        | 43,962 |       |        |       | 6.41   |         |         |         | 93,462 |       |        |       | 12.27 |         |         |         | 61,500 |       |        |       | 8.80 | 
|                             |       |                              | Commercial   |         |        | 46,732 |       |        |       | 6.82   |         |         |         | 22,661 |       |        |       | 2.97  |         |         |         | 24,900 |       |        |       | 3.57 | 
|Single family construction:  |       |                              |              |         |        |        |       |        |       |        |         |         |         |        |       |        |       |       |         |         |         |        |       |       
|                             |       | Single family residential(5) |              |         | 91,445 |        |       |        | 13.34 |        |         |         | 121,279 |        |       |        | 15.92 |       |         |         | 164,100 |        |       |        | 23.49 |     
|                             |       | Tract(6)                     |              |         |       |        |       |        |      |        |         |         |        |        |       |        |      |       |         |         | 12,100  |        |       |        | 1.73  |     
|Land(7)                      |       |                              | 35,849       |         |        |        | 5.23  |        |       |        | 34,063  |         |         |        | 4.47  |        |       |       | 51,500  |         |         |        | 7.37  |       
|Other(8)                     |       |                              | 14           |         |        |        | 0.00  |        |       |        | 49      |         |         |        | 0.01  |        |       |       | 7,700   |         |         |        | 1.10  |       
|                             |       |                              |              |         |        |        |       |        |       |        |         |         |         |        |       |        |       |       |         |         |         |        |       |       
|                             | Total |                              | $            | 685,370 |        |        |       | 100.00 | %     |        | $       | 762,032 |         |        |       | 100.00 | %     |       | $       | 698,600 |         |        |       | 100.00 | %    
|                             |       |                              |              |         |        |        |       |        |       |        |         |         |         |        |       |        |       |       |         |         |         |        |       |       



---



|    |                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes unfunded commitments of
	$0.8 million, $0.3 million and $0.4 million at
	December 31, 2001, 2000 and 1999, respectively.                                      
|   
|(2) | Includes unfunded commitments of
	$0.3 million and $0.5 million at December 31,
	2001 and 2000, respectively. There were no unfunded commitments
	at December 31, 1999.
|   
|(3) | Includes unfunded commitments of
	$1.5 million, $0.9 million and $13.1 million at
	December 31, 2001, 2000 and 1999, respectively.                                     
|   
|(4) | Includes unfunded commitments of
	$38.4 million, $64.9 million and $40.2 million
	December 31, 2001, 2000 and 1999, respectively.                                      
|   
|(5) | Includes unfunded commitments of
	$44.9 million, $64.8 million and $72.3 million at
	December 31, 2001, 2000 and 1999, respectively.                                   
|   
|(6) | There were no unfunded commitments at
	December 31, 2001 and 2000. Includes unfunded commitments
	of $2.5 million at December 31, 1999                                 
|   
|(7) | Includes unfunded commitments of
	$2.0 million $0.4 million and $4.0 million at
	December 31, 2001, 2000 and 1999, respectively.                                       
|   
|(8) | There were no unfunded commitments at
	December 31, 2001 and 2000. Includes unfunded commitments
	of $7.5 million at December 31, 1999.                                

16



---



##### Table of Contents



The table below summarizes the maturities for
fixed rate loans and the repricing intervals for adjustable rate
loans as of December 31, 2001.

|                       |                    |                        |   |                 |         |       |   |           |           |  |   |           |           | 
|---------------------- | ------------------ | ---------------------- | - | --------------- | ------- | ----- | - | --------- | --------- |  | - | --------- | --------- | 
|                       |                    |                       
|                       |                    | Principal Balance     
|                       |                    |                       
|                       |                    | Fixed Rate             |   | Adjustable Rate |         | Total
|(Dollars in thousands) |                    |                        |   |                 |         |      
|Interval:              |                    |                        |   |                 |         |       |   |           |           |  |   |          
|                       | <3 months          |                        | $ | 26,585          |         |       | $ | 1,326,057 |           |  | $ | 1,352,642 |          
|                       | >3 to 6 months     |                        |   | 1,733           |         |       |   | 357,980   |           |  |   | 359,713   |          
|                       | >6 to 12 months    |                        |   | 5,179           |         |       |   | 21,831    |           |  |   | 27,010    |          
|                       | >1 to 2 years      |                        |   | 2,152           |         |       |   |          |           |  |   | 2,152     |          
|                       | >2 to 5 years      |                        |   | 8,303           |         |       |   |          |           |  |   | 8,303     |          
|                       | >5 to 10 years     |                        |   | 19,526          |         |       |   |          |           |  |   | 19,526    |          
|                       | >10 to 20 years    |                        |   | 14,876          |         |       |   |          |           |  |   | 14,876    |          
|                       | More than 20 years |                        |   | 86,810          |         |       |   |          |           |  |   | 86,810    |          
|                       |                    |                        |   |                 |         |       |   |           |           |  |   |          
|                       |                    | Gross loans receivable |   | $               | 165,164 |       |   | $         | 1,705,868 |  |   | $         | 1,871,032 | 
|                       |                    |                        |   |                 |         |       |   |           |           |  |   |          

At December 31, 2001, the Banks
loans-to-one-borrower limit was $27.3 million based upon
the 15.0% of unimpaired capital and surplus measurement. At
December 31, 2001, the Banks largest relationships
consisted of one borrower with outstanding commitments of
$18.8 million, which consisted of approximately 5 loans,
with $9.5 million secured by commercial real estate in the
Banks lending area, $8.9 million secured by
non-residential collateral and one unsecured commercial loan.
All of these loans were performing in accordance with their
terms.

Approximately 97.8% and 97.4% of the Banks
loan portfolio were concentrated in Southern California at
December 31, 2001 and 2000, respectively.

The table below sets forth, by contractual
maturity, the Companys loan portfolio at December 31,
2001. The table below is based on contractual loan maturities
and does not consider amortization and prepayments of loan
principal.

|                            |                                       |              |         |            |  |            |         |           |  |            |         |         |  |   |         |         |  |   |           |          |  
|--------------------------- | ------------------------------------- | ------------ | ------- | ---------- |  | ---------- | ------- | --------- |  | ---------- | ------- | ------- |  | - | ------- | ------- |  | - | --------- | -------- | -
|                            |                                       |             
|                            |                                       | Maturing in:
|                            |                                       |             
|                            |                                       |              |         | Over       |  | Over       |         |          
|                            |                                       |              |         | One Year   |  | Five Years |         |           |  | Total     
|                            |                                       | Less than    |         | Through    |  | Through    |         | Over      |  | Loans     
|                            |                                       | One Year     |         | Five Years |  | Ten Years  |         | Ten Years |  | Receivable
|(Dollars in thousands)      |                                       |              |         |            |  |            |         |           |  |           
|Single family residential   |                                       | $            | 1,579   |            |  | $          | 31,529  |           |  | $          | 148,059 |         |  | $ | 737,710 |         |  | $ | 918,877   |         
|Income property:            |                                       |              |         |            |  |            |         |           |  |            |         |         |  |   |         |         |  |   |           |         
|                            | Multi-family                          |              |         | 12,481     |  |            |         | 42,960    |  |            |         | 86,166  |  |   |         | 113,576 |  |   |           | 255,183  |  
|                            | Commercial                            |              |         | 41,639     |  |            |         | 85,887    |  |            |         | 117,419 |  |   |         | 3,147   |  |   |           | 248,092  |  
|                            | Development                           |              |         | 160,566    |  |            |         | 66,624    |  |            |         |        |  |   |         |        |  |   |           | 227,190  |  
|Single family construction: |                                       |              |         |            |  |            |         |           |  |            |         |         |  |   |         |         |  |   |           |         
|                            | Single family residential             |              |         | 125,235    |  |            |         | 33,989    |  |            |         |        |  |   |         |        |  |   |           | 159,224  |  
|                            | Tract                                 |              |         |           |  |            |         |          |  |            |         |        |  |   |         |        |  |   |           |         |  
|Land                        |                                       |              | 29,414  |            |  |            | 18,959  |           |  |            | 2,409   |         |  |   | 202     |         |  |   | 50,984    |         
|Other                       |                                       |              | 4,310   |            |  |            | 3,076   |           |  |            |         |         |  |   | 4,096   |         |  |   | 11,482    |         
|                            |                                       |              |         |            |  |            |         |           |  |            |         |         |  |   |         |         |  |   |           |         
|Gross loans receivable(1)   |                                       | $            | 375,224 |            |  | $          | 283,024 |           |  | $          | 354,053 |         |  | $ | 858,731 |         |  |   | 1,871,032 |         
|                            |                                       |              |         |            |  |            |         |           |  |            |         |         |  |   |         |         |  |   |           |         
|Less:                       |                                       |              |         |            |  |            |         |           |  |            |         |         |  |   |         |         |  |   |           |         
|                            | Undisbursed funds                     |              |         |            |  |            |         |           |  |            |         |         |  |   |         |         |  |   |           | (137,484 | )
|                            | Deferred (fees) and costs, net        |              |         |            |  |            |         |           |  |            |         |         |  |   |         |         |  |   |           | 6,337    |  
|                            | Allowance for estimated credit losses |              |         |            |  |            |         |           |  |            |         |         |  |   |         |         |  |   |           | (30,602  | )
|                            |                                       |              |         |            |  |            |         |           |  |            |         |         |  |   |         |         |  |   |           |         
|Net loans receivable        |                                       |              |         |            |  |            |         |           |  |            |         |         |  |   |         |         |  | $ | 1,709,283 |         
|                            |                                       |              |         |            |  |            |         |           |  |            |         |         |  |   |         |         |  |   |           |         



---



| | 
| | 
| | 



|    |                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Gross loans receivable includes the principal
	balance of loans outstanding plus outstanding but unfunded loan
	commitments, predominantly in connection with construction loans.

17



---



##### Table of Contents



ASSET QUALITY

The Company has an asset review and
classification system to establish specific and general
allowances for credit losses and to classify assets and groups
of assets. The Companys problem asset classifications are
discussed below.

Nonaccrual Loans

The Company generally ceases to accrue interest
on any loan with respect to which the loans contractual
payments are more than 90 days delinquent, as well as loans
classified substandard for which interest payment reserves were
established from loan funds rather than borrower funds. In
addition, interest is not recognized on any loan for which
management has determined that collection of the Companys
investment in the loan is not reasonably assured. A nonaccrual
loan may be restored to accrual status when delinquent principal
and interest payments are brought current, the loan is paying in
accordance with its payment terms for a period, typically
between three to six months, and future monthly principal and
interest payments are expected to be collected.

Classified Assets

OTS regulations require insured institutions to
classify their assets in accordance with established policies
and procedures. A classified asset is an asset classified
substandard, doubtful or loss. Loans that are not classified are
categorized as pass or special mention. The severity of an
assets classification is dependent upon, among other
things, the institutions risk of loss, the borrowers
performance, the characteristics of the institutions
security, and the local market conditions, among other factors.

The Company automatically classifies as
substandard (1) real estate owned (REO),
(2) loans delinquent 90 or more days, and (3) other
loans that have been adversely classified pursuant to OTS
regulations and guidelines (performing/classified).
Performing loans are classified consistent with the
Companys classification policies.

18



---



##### Table of Contents



The table below sets forth information concerning
the Companys risk elements as of the dates indicated.
Classified assets include REO, nonaccrual loans and performing
loans which have been adversely classified pursuant to the
Companys classification policies and OTS regulations and
guidelines (performing/classified loans).

|                                                                           |                                                                                                                          |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |         |        |        | 
|-------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------ | --------------------------------- | --------- | ------ | ------ | ---- | --------- | ------ | ------ | ---- | --------- | ------ | ------ | - | --------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                                           |                                                                                                                          |                                  
|                                                                           |                                                                                                                          | December 31,                     
|                                                                           |                                                                                                                          |                                  
|                                                                           |                                                                                                                          | 2001                              |           | 2000   |        | 1999 |           | 1998   |        | 1997
|(Dollars in thousands)                                                     |                                                                                                                          |                                   |           |        |        |      |           |        |        |     
|Risk elements:                                                             |                                                                                                                          |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |         |       
|                                                                           | Nonaccrual loans(1)                                                                                                      |                                   | $         | 20,666 |        |      | $         | 31,601 |        |      | $         | 44,031 |        |   | $         | 47,688 |        |   | $       | 15,396 |       
|                                                                           | Real estate owned, net                                                                                                   |                                   |           | 1,312  |        |      |           | 2,859  |        |      |           | 5,587  |        |   |           | 4,070  |        |   |         | 9,859  |       
|                                                                           |                                                                                                                          |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |         |       
|                                                                           |                                                                                                                          |                                   | 21,978    |        |        |      | 34,460    |        |        |      | 49,618    |        |        |   | 51,758    |        |        |   | 25,255  |       
|                                                                           | Performing loans classified substandard or
	lower(2)                                                                     |                                   |           | 37,341 |        |      |           | 40,642 |        |      |           | 25,646 |        |   |           | 45,397 |        |   |         | 35,845 |       
|                                                                           |                                                                                                                          |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |         |       
|                                                                           |                                                                                                                          | Total classified assets           |           | $      | 59,319 |      |           | $      | 75,102 |      |           | $      | 75,264 |   |           | $      | 97,155 |   |         | $      | 61,100 | 
|                                                                           |                                                                                                                          |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |         |       
|                                                                           |                                                                                                                          | Total classified loans            |           | $      | 58,007 |      |           | $      | 72,243 |      |           | $      | 69,677 |   |           | $      | 93,085 |   |         | $      | 51,241 | 
|                                                                           |                                                                                                                          |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |         |       
|Loans restructured and paying in accordance with
	modified terms(3)        |                                                                                                                          | $                                 | 4,506     |        |        | $    | 14,933    |        |        | $    | 15,394    |        |        | $ | 27,334    |        |        | $ | 25,631  |       
|                                                                           |                                                                                                                          |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |         |       
|Gross loans before allowance for credit losses                             |                                                                                                                          | $                                 | 1,739,885 |        |        | $    | 1,637,517 |        |        | $    | 1,469,253 |        |        | $ | 1,343,902 |        |        | $ | 851,525 |       
|                                                                           |                                                                                                                          |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |         |       
|Loans receivable, net of specific allowance and
	deferred (fees) and costs |                                                                                                                          | $                                 | 1,736,310 |        |        | $    | 1,631,721 |        |        | $    | 1,468,445 |        |        | $ | 1,338,718 |        |        | $ | 847,647 |       
|                                                                           |                                                                                                                          |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |         |       
|Delinquent loans                                                           |                                                                                                                          |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |         |       
|                                                                           | 30 - 89 days                                                                                                             |                                   | $         | 2,742  |        |      | $         | 12,407 |        |      | $         | 9,063  |        |   | $         | 37,308 |        |   | $       | 4,435  |       
|                                                                           | 90+ days                                                                                                                 |                                   |           | 4,982  |        |      |           | 14,509 |        |      |           | 14,916 |        |   |           | 13,832 |        |   |         | 10,793 |       
|                                                                           |                                                                                                                          |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |         |       
|                                                                           |                                                                                                                          | Total delinquent loans            |           | $      | 7,724  |      |           | $      | 26,916 |      |           | $      | 23,979 |   |           | $      | 51,140 |   |         | $      | 15,228 | 
|                                                                           |                                                                                                                          |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |         |       
|Allowance for credit losses:                                               |                                                                                                                          |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |         |       
|                                                                           | General                                                                                                                  |                                   | $         | 27,027 |        |      | $         | 23,654 |        |      | $         | 23,477 |        |   | $         | 11,927 |        |   | $       | 9,396  |       
|                                                                           | Specific(4)                                                                                                              |                                   |           | 3,575  |        |      |           | 5,796  |        |      |           | 808    |        |   |           | 5,184  |        |   |         | 3,878  |       
|                                                                           |                                                                                                                          |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |         |       
|                                                                           |                                                                                                                          | Total allowance for credit losses |           | $      | 30,602 |      |           | $      | 29,450 |      |           | $      | 24,285 |   |           | $      | 17,111 |   |         | $      | 13,274 | 
|                                                                           |                                                                                                                          |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |         |       
|                                                                           | Total allowance for credit losses to loans
	receivable, net of specific allowance and deferred
	(fees) and costs         |                                   |           | 1.76   | %      |      |           | 1.80   | %      |      |           | 1.65   | %      |   |           | 1.28   | %      |   |         | 1.57   | %     
|                                                                           |                                                                                                                          |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |         |       
|                                                                           | Total general allowance for credit losses to
	loans receivable, net of specific allowance and deferred
	(fees) and costs |                                   |           | 1.56   | %      |      |           | 1.45   | %      |      |           | 1.60   | %      |   |           | 0.89   | %      |   |         | 1.11   | %     
|                                                                           |                                                                                                                          |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |         |       
|Core capital                                                               |                                                                                                                          | $                                 | 154,981   |        |        | $    | 140,387   |        |        | $    | 127,160   |        |        | $ | 108,673   |        |        | $ | 69,906  |       
|                                                                           |                                                                                                                          |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |         |       
|Risk-based capital                                                         |                                                                                                                          | $                                 | 169,278   |        |        | $    | 151,914   |        |        | $    | 139,815   |        |        | $ | 119,400   |        |        | $ | 78,454  |       
|                                                                           |                                                                                                                          |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |         |       
|Ratio of classified assets to:                                             |                                                                                                                          |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |         |       
|                                                                           | Loans receivable, net of specific allowance and
	deferred (fees) and costs                                               |                                   |           | 3.42   | %      |      |           | 4.60   | %      |      |           | 5.13   | %      |   |           | 7.26   | %      |   |         | 7.21   | %     
|                                                                           |                                                                                                                          |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |         |       
|                                                                           | Bank core capital and general allowance for
	credit losses                                                               |                                   |           | 32.59  | %      |      |           | 45.78  | %      |      |           | 49.96  | %      |   |           | 80.56  | %      |   |         | 77.05  | %     
|                                                                           |                                                                                                                          |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |         |       
|                                                                           | Core capital                                                                                                             |                                   |           | 38.28  | %      |      |           | 53.50  | %      |      |           | 59.19  | %      |   |           | 89.40  | %      |   |         | 87.40  | %     
|                                                                           |                                                                                                                          |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |         |       
|                                                                           | Risk-based capital                                                                                                       |                                   |           | 35.04  | %      |      |           | 49.44  | %      |      |           | 53.83  | %      |   |           | 81.37  | %      |   |         | 77.88  | %     
|                                                                           |                                                                                                                          |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |         |       



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The interest income recognized on loans that were
	on nonaccrual status at December 31, 2001, 2000, 1999, 1998
	and 1997 was $0.2 million, $1.7 million, $2.3 million,
	$3.3 million and $0.9 million, respectively. If these
	loans had been performing for the entire year, the income
	recognized would have been $1.8 million, $3.3 million,
	$4.5 million, $4.9 million and $1.4 million for
	2001, 2000, 1999, 1998 and 1997, respectively.                                                                                                                       
|   
|(2) | Excludes nonaccrual.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(3) | Troubled debt restructured loans
	(TDRs) not classified and not on nonaccrual.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(4) | In December 2000, a $5.2 million specific
	allowance was identified for one nonaccrual commercial loan,
	whose major tenant filed for Chapter 11 bankruptcy
	protection. The required allowance was reclassified from general
	allowance to specific allowance. A 51% controlling interest in
	this tenant was acquired by a strong investor during 2001.
	During the third quarter, the tenant ratified a renegotiated
	lease, which enabled the Bank to revise its internal valuation
	and consequently, reduce the specific allowance for this loan to
	$3.0 million.

19



---



##### Table of Contents



Nonaccrual loans totaled $20.7 million at
December 31, 2001 (or 1.11% of total assets), compared with
nonaccrual loans of $31.6 million (or 1.80% of total
assets) at December 31, 2000. Included in nonaccrual loans
at December 30, 2001, were two single family residential
loans with balances of $1.0 million or more representing
$5.5 million, or 26.40% of total nonaccrual loans. The
average loan to value (LTV) for these two loans was
58.10%. Nonaccrual loans also consisted of one income property
construction loan with a balance of $11.5 million, or
55.50% of total nonaccrual loans. In December 2000, a
$5.2 million specific allowance was identified for one
nonaccrual commercial loan, whose major tenant filed for
Chapter 11 bankruptcy protection. The required allowance
was reclassified from general allowance to specific allowance. A
51% controlling interest in this tenant was acquired by a strong
investor during 2001. During the third quarter, the tenant
ratified a renegotiated lease, which enabled the Bank to revise
its internal valuation and consequently, reduce the specific
allowance for this loan to $3.0 million. Other classified
loans were $37.3 million at December 31, 2001,
compared with $40.6 million at December 31, 2000.
Delinquent loans totaled $7.7 million at December 31,
2001, compared with $26.9 million at December 31, 2000.

The table below sets forth information concerning
the Companys gross classified loans, by category, as of
December 31, 2001.

|                            |                           |            |       |                  |  |       |       |        |  |   |        |        | 
|--------------------------- | ------------------------- | ---------- | ----- | ---------------- |  | ----- | ----- | ------ |  | - | ------ | ------ | 
|                            |                           | Nonaccrual |       | Other            |  |      
|                            |                           | Loans      |       | Classified Loans |  | Total
|(Dollars in thousands)      |                           |            |       |                  |  |      
|Single family residential   |                           | $          | 6,438 |                  |  | $     | 8,857 |        |  | $ | 15,295 |       
|Income property:            |                           |            |       |                  |  |       |       |        |  |   |        |       
|                            | Commercial                |            |       |                 |  |       |       | 16,123 |  |   |        | 16,123 | 
|                            | Development               |            |       | 11,469           |  |       |       | 8,498  |  |   |        | 19,967 | 
|Single family construction: |                           |            |       |                  |  |       |       |        |  |   |        |       
|                            | Single family residential |            |       | 2,187            |  |       |       | 2,499  |  |   |        | 4,686  | 
|Land                        |                           |            | 572   |                  |  |       | 1,364 |        |  |   | 1,936  |       
|                            |                           |            |       |                  |  |       |       |        |  |   |        |       
|                            | Gross classified loans    |            | $     | 20,666           |  |       | $     | 37,341 |  |   | $      | 58,007 | 
|                            |                           |            |       |                  |  |       |       |        |  |   |        |       

Allowance for Credit Losses

In accordance with the SEC Staff Accounting
Bulletin No. 102, Selected Loan Loss Allowance
Methodology and Documentation Issues, and the newly
released Federal Financial Institutions Examination Council
(FFIEC) guidelines, management establishes specific
allowances for credit losses on individual loans when it has
determined that recovery of the Companys gross investment
is not probable and when the amount of loss can be reasonably
determined. On a quarterly basis, management completes a loan
loss allowance analysis that provides for an adequate balance in
the allowance for credit losses. Management evaluates the
allowance for credit losses in accordance with accounting
principles generally accepted in the United States of America
(GAAP), within the guidance established by SFAS
No. 5, Accounting for Contingencies, and SFAS
No. 114, as amended by SFAS No. 118, Accounting
by Creditors for Impairment of a Loan, as well as
standards established by regulatory Interagency Policy
Statements on the Allowance for Loan and Lease Losses
(ALLL). In making this determination, management
considers (1) the status of the asset, (2) the
probable future status of the asset, (3) the value of the
asset or underlying collateral and (4) managements
intent with respect to the asset. In quantifying the loss, if
any, associated with individual loans and REO, management
utilizes external sources of information (i.e., appraisals,
price opinions from real estate professionals, comparable sales
data and internal estimates). In establishing specific
allowances for impaired loans, in accordance with SFAS
No. 114, management estimates the revenues expected to be
generated from disposal of the Companys collateral or
owned property, less construction and renovation costs (if any),
holding costs and transaction costs. Other methods can be used
to estimate impairment (market price or present value of
expected future cash flows discounted at the loans
original interest rate).

The Company maintains an allowance for credit
losses, which is not tied to individual loans or properties
(General Valuation Allowances, or GVA). GVAs are
maintained for each of the Companys principal loan

20



---



##### Table of Contents



segments and supplemented by periodic additions
through provisions for credit losses. In measuring the adequacy
of the Companys GVA, management considers (1) the
Companys historical loss experience for each loan
portfolio segment and in total, (2) the historical
migration of loans within each portfolio segment and in total
(i.e., from performing to nonperforming, from nonperforming to
REO), (3) observable trends in the performance of each loan
portfolio segment, (4) observable trends in the
regions economy and in its real property markets, and
(5) additional analyses to validate the reasonableness of
the estimate of credit losses. The GVA level, based on the OTS
Examiner Benchmark and review of peer information, is used to
establish a range, which supports the reasonableness of the
Banks GVA balance. The GVA includes an unallocated amount.
The unallocated allowance is based upon managements
evaluation of various conditions, the effects of which are not
directly measured in the determination of the formula and
specific allowances. The evaluation of the inherent loss with
respect to these conditions is subject to a higher degree of
uncertainty because they are not identified with specific
problem credits or portfolio segments. The conditions evaluated
in connection with the unallocated allowance include other
general economic and business conditions affecting our key
lending areas. See Item 7 
Managements Discussion and Analysis of Financial Condition
and Results of Operations, Critical Accounting Policies.


21



---



##### Table of Contents



The table below summarizes the Companys
allowance for credit losses by category for the periods
indicated.

|                                                             |                             |                           |       |       |       |        |   |       |       |        |   |       |       |        |   |       |       |        |   |       |       |        |  
|------------------------------------------------------------ | --------------------------- | ------------------------- | ----- | ----- | ----- | ------ | - | ----- | ----- | ------ | - | ----- | ----- | ------ | - | ----- | ----- | ------ | - | ----- | ----- | ------ | -
|                                                             |                             |                          
|                                                             |                             | December 31,             
|                                                             |                             |                          
|                                                             |                             | 2001                      |       | 2000  |       | 1999   |   | 1998  |       | 1997  
|(Dollars in thousands)                                       |                             |                           |       |       |       |        |   |       |       |       
|Dollars:                                                     |                             |                           |       |       |       |        |   |       |       |        |   |       |       |        |   |       |       |        |   |      
|                                                             | Single family residential   |                           | $     | 9,878 |       |        | $ | 8,075 |       |        | $ | 7,095 |       |        | $ | 7,836 |       |        | $ | 6,671 |      
|                                                             | Income property:            |                           |       |       |       |        |   |       |       |        |   |       |       |        |   |       |       |        |   |       |      
|                                                             |                             | Multi-family              |       |       | 2,009 |        |   |       | 906   |        |   |       | 646   |        |   |       | 1,063 |        |   |       | 2,000 |       
|                                                             |                             | Commercial                |       |       | 4,531 |        |   |       | 4,236 |        |   |       | 6,907 |        |   |       | 4,334 |        |   |       | 2,252 |       
|                                                             |                             | Development               |       |       | 8,420 |        |   |       | 7,877 |        |   |       | 2,067 |        |   |       | 354   |        |   |       |      |       
|                                                             | Single family construction: |                           |       |       |       |        |   |       |       |        |   |       |       |        |   |       |       |        |   |       |      
|                                                             |                             | Single family residential |       |       | 2,679 |        |   |       | 4,382 |        |   |       | 3,946 |        |   |       | 789   |        |   |       | 503   |       
|                                                             |                             | Tract                     |       |       |      |        |   |       | 693   |        |   |       | 855   |        |   |       | 1,092 |        |   |       | 817   |       
|                                                             | Land                        |                           |       | 1,818 |       |        |   | 1,914 |       |        |   | 1,470 |       |        |   | 293   |       |        |   | 162   |      
|                                                             | Other                       |                           |       | 144   |       |        |   | 260   |       |        |   | 311   |       |        |   | 1,082 |       |        |   | 226   |      
|                                                             | Unallocated                 |                           |       | 1,123 |       |        |   | 1,107 |       |        |   | 988   |       |        |   | 268   |       |        |   | 643   |      
|                                                             |                             |                           |       |       |       |        |   |       |       |        |   |       |       |        |   |       |       |        |   |      
|                                                             |                             |                           | Total |       | $     | 30,602 |   |       | $     | 29,450 |   |       | $     | 24,285 |   |       | $     | 17,111 |   |       | $     | 13,274 |  
|                                                             |                             |                           |       |       |       |        |   |       |       |        |   |       |       |        |   |       |       |        |   |      
|Percentage of year end allowance:                            |                             |                           |       |       |       |        |   |       |       |        |   |       |       |        |   |       |       |        |   |      
|                                                             | Single family residential   |                           |       | 32.28 | %     |        |   | 27.42 | %     |        |   | 29.22 | %     |        |   | 45.80 | %     |        |   | 50.26 | %    
|                                                             | Income property:            |                           |       |       |       |        |   |       |       |        |   |       |       |        |   |       |       |        |   |       |      
|                                                             |                             | Multi-family              |       |       | 6.57  |        |   |       | 3.08  |        |   |       | 2.66  |        |   |       | 6.21  |        |   |       | 15.07 |       
|                                                             |                             | Commercial                |       |       | 14.80 |        |   |       | 14.38 |        |   |       | 28.44 |        |   |       | 25.33 |        |   |       | 16.97 |       
|                                                             |                             | Development               |       |       | 27.52 |        |   |       | 26.75 |        |   |       | 8.51  |        |   |       | 2.07  |        |   |       |      |       
|                                                             | Single family construction: |                           |       |       |       |        |   |       |       |        |   |       |       |        |   |       |       |        |   |       |      
|                                                             |                             | Single family residential |       |       | 8.75  |        |   |       | 14.88 |        |   |       | 16.25 |        |   |       | 4.61  |        |   |       | 3.79  |       
|                                                             |                             | Tract                     |       |       |      |        |   |       | 2.35  |        |   |       | 3.52  |        |   |       | 6.38  |        |   |       | 6.15  |       
|                                                             | Land                        |                           |       | 5.94  |       |        |   | 6.50  |       |        |   | 6.05  |       |        |   | 1.71  |       |        |   | 1.22  |      
|                                                             | Other                       |                           |       | 0.47  |       |        |   | 0.88  |       |        |   | 1.28  |       |        |   | 6.32  |       |        |   | 1.70  |      
|                                                             | Unallocated                 |                           |       | 3.67  |       |        |   | 3.76  |       |        |   | 4.07  |       |        |   | 1.57  |       |        |   | 4.84  |      
|                                                             |                             |                           |       |       |       |        |   |       |       |        |   |       |       |        |   |       |       |        |   |      
|                                                             |                             |                           | Total |       |       | 100.00 | % |       |       | 100.00 | % |       |       | 100.00 | % |       |       | 100.00 | % |       |       | 100.00 | %
|                                                             |                             |                           |       |       |       |        |   |       |       |        |   |       |       |        |   |       |       |        |   |      
|Percentage of reserves to total gross
	loans(1) by category: |                             |                           |       |       |       |        |   |       |       |        |   |       |       |        |   |       |       |        |   |      
|                                                             | Single family residential   |                           |       | 1.08  | %     |        |   | 0.91  | %     |        |   | 1.04  | %     |        |   | 1.36  | %     |        |   | 1.68  | %    
|                                                             | Income property:            |                           |       |       |       |        |   |       |       |        |   |       |       |        |   |       |       |        |   |       |      
|                                                             |                             | Multi-family              |       |       | 0.79  |        |   |       | 0.36  |        |   |       | 0.29  |        |   |       | 0.42  |        |   |       | 0.89  |       
|                                                             |                             | Commercial                |       |       | 1.83  |        |   |       | 2.11  |        |   |       | 2.97  |        |   |       | 1.95  |        |   |       | 2.01  |       
|                                                             |                             | Development               |       |       | 3.71  |        |   |       | 3.86  |        |   |       | 1.40  |        |   |       | 0.45  |        |   |       |      |       
|                                                             | Single family construction: |                           |       |       |       |        |   |       |       |        |   |       |       |        |   |       |       |        |   |       |      
|                                                             |                             | Single family residential |       |       | 1.68  |        |   |       | 2.24  |        |   |       | 1.44  |        |   |       | 0.29  |        |   |       | 0.47  |       
|                                                             |                             | Tract                     |       |       |      |        |   |       | 19.83 |        |   |       | 3.55  |        |   |       | 1.27  |        |   |       | 1.19  |       
|                                                             | Land                        |                           |       | 3.57  |       |        |   | 4.11  |       |        |   | 2.49  |       |        |   | 0.42  |       |        |   | 0.41  |      
|                                                             | Other                       |                           |       | 1.25  |       |        |   | 1.69  |       |        |   | 1.41  |       |        |   | 2.32  |       |        |   | 2.33  |      
|                                                             |                             |                           | Total |       |       | 1.64   | % |       |       | 1.63   | % |       |       | 1.46   | % |       |       | 1.07   | % |       |       | 1.37   | %

22



---



##### Table of Contents





---



|    |                                                                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Percent of allowance for credit losses to gross
	loan commitments, which include the outstanding but undisbursed
	portion of such commitments. The change in the percentage of
	allowance to total loans by category is a result of different
	levels of classified assets within each category.

The table below summarizes the activity of the
Companys allowance for credit losses for the periods
indicated.

|                                                                         |                             |                           |           |        |     |      |           |      |      |      |           |        |      |   |           |        |        |   |         |        |        |  
|------------------------------------------------------------------------ | --------------------------- | ------------------------- | --------- | ------ | --- | ---- | --------- | ---- | ---- | ---- | --------- | ------ | ---- | - | --------- | ------ | ------ | - | ------- | ------ | ------ | -
|                                                                         |                             |                          
|                                                                         |                             | Year Ended December 31,  
|                                                                         |                             |                          
|                                                                         |                             | 2001                      |           | 2000   |     | 1999 |           | 1998 |      | 1997
|(Dollars in thousands)                                                   |                             |                           |           |        |     |      |           |      |      |     
|Average loans outstanding                                                |                             | $                         | 1,696,785 |        |     | $    | 1,547,206 |      |      | $    | 1,411,697 |        |      | $ | 1,081,382 |        |        | $ | 745,197 |       
|                                                                         |                             |                           |           |        |     |      |           |      |      |      |           |        |      |   |           |        |        |   |         |       
|Total allowance for credit losses at beginning of
	period                |                             | $                         | 29,450    |        |     | $    | 24,285    |      |      | $    | 17,111    |        |      | $ | 13,274    |        |        | $ | 13,515  |       
|Provision for credit losses                                              |                             |                           | 3,400     |        |     |      | 6,000     |      |      |      | 12,000    |        |      |   | 7,135     |        |        |   | 5,137   |       
|Charge-offs:                                                             |                             |                           |           |        |     |      |           |      |      |      |           |        |      |   |           |        |        |   |         |       
|                                                                         | Single family residential   |                           |           | (2,289 | )   |      |           | (354 | )    |      |           | (1,910 | )    |   |           | (1,178 | )      |   |         | (3,472 | )     
|                                                                         | Income property:            |                           |           |        |     |      |           |      |      |      |           |        |      |   |           |        |        |   |         |        |       
|                                                                         |                             | Multi-family              |           |        | (26 | )    |           |      |     |      |           |        | (186 | ) |           |        | (1,038 | ) |         |        | (1,745 | )
|                                                                         |                             | Commercial                |           |        |    |      |           |      | (573 | )    |           |        | (512 | ) |           |        | (815   | ) |         |        |       |  
|                                                                         | Single family construction: |                           |           |        |     |      |           |      |      |      |           |        |      |   |           |        |        |   |         |        |       
|                                                                         |                             | Single family residential |           |        | (43 | )    |           |      |     |      |           |        |     |   |           |        | (267   | ) |         |        |       |  
|                                                                         |                             | Tract                     |           |        |    |      |           |      | (147 | )    |           |        |     |   |           |        |       |   |         |        |       |  
|                                                                         | Land                        |                           |           |       |     |      |           |     |      |      |           | (1,140 | )    |   |           |       |        |   |         | (150   | )     
|                                                                         | Other                       |                           |           |       |     |      |           | (10  | )    |      |           | (1,124 | )    |   |           |       |        |   |         | (11    | )     
|Recoveries:                                                              |                             |                           |           |        |     |      |           |      |      |      |           |        |      |   |           |        |        |   |         |       
|                                                                         | Single family residential   |                           |           |       |     |      |           |     |      |      |           |       |      |   |           |       |        |   |         |       |       
|                                                                         | Income property:            |                           |           |        |     |      |           |      |      |      |           |        |      |   |           |        |        |   |         |        |       
|                                                                         |                             | Multi-family              |           |        |    |      |           |      |     |      |           |        |     |   |           |        |       |   |         |        |       |  
|                                                                         |                             | Commercial                |           |        |    |      |           |      |     |      |           |        |     |   |           |        |       |   |         |        |       |  
|                                                                         | Single family construction: |                           |           |        |     |      |           |      |      |      |           |        |      |   |           |        |        |   |         |        |       
|                                                                         |                             | Single family residential |           |        |    |      |           |      |     |      |           |        |     |   |           |        |       |   |         |        |       |  
|                                                                         |                             | Tract                     |           |        |    |      |           |      |     |      |           |        |     |   |           |        |       |   |         |        |       |  
|                                                                         | Land                        |                           |           |       |     |      |           |     |      |      |           |       |      |   |           |       |        |   |         |       |       
|                                                                         | Other                       |                           |           | 110    |     |      |           | 249  |      |      |           | 46     |      |   |           |       |        |   |         |       |       
|                                                                         |                             |                           |           |        |     |      |           |      |      |      |           |        |      |   |           |        |        |   |         |       
|Net charge-offs                                                          |                             |                           | (2,248    | )      |     |      | (835      | )    |      |      | (4,826    | )      |      |   | (3,298    | )      |        |   | (5,378  | )     
|                                                                         |                             |                           |           |        |     |      |           |      |      |      |           |        |      |   |           |        |        |   |         |       
|Total allowance for credit losses at end of period                       |                             | $                         | 30,602    |        |     | $    | 29,450    |      |      | $    | 24,285    |        |      | $ | 17,111    |        |        | $ | 13,274  |       
|                                                                         |                             |                           |           |        |     |      |           |      |      |      |           |        |      |   |           |        |        |   |         |       
|Ratio of net charge-offs to average loans
	outstanding during the period |                             |                           | 0.13      | %      |     |      | 0.05      | %    |      |      | 0.34      | %      |      |   | 0.30      | %      |        |   | 0.72    | %     
|Ratio of allowance to average loans outstanding                          |                             |                           | 1.80      | %      |     |      | 1.90      | %    |      |      | 1.72      | %      |      |   | 1.58      | %      |        |   | 1.78    | %     

Real Estate Owned

Real estate acquired in satisfaction of loans is
transferred to real estate owned at estimated fair values, less
any estimated disposal costs. The difference between the fair
value of the real estate collateral and the loan balance at the
time of transfer is recorded as a loan charge off if fair value
is lower. Any subsequent declines in the fair value of the REO
after the date of transfer were recorded through a write-down of
the asset. Prior to 2000, any subsequent declines in the fair
value of the REO after the date of transfer were

23



---



##### Table of Contents



recorded through the establishment of, or
additions to allowance. The Companys investment in REO
decreased from $2.9 million to $1.3 million, or
54.11%, from December 31, 2000 to 2001, respectively.


The table below summarizes the composition of the
Companys portfolio of real estate owned properties as of
the dates indicated.

|                          |                      |              |       |      |  |      |       |   |  |   |       |     |  
|------------------------- | -------------------- | ------------ | ----- | ---- |  | ---- | ----- | - |  | - | ----- | --- | -
|                          |                      |             
|                          |                      | December 31,
|                          |                      |             
|                          |                      | 2001         |       | 2000 |  | 1999
|(Dollars in thousands)    |                      |              |       |      |  |     
|Single family residential |                      | $            | 1,312 |      |  | $    | 2,859 |   |  | $ | 1,218 |    
|Land                      |                      |              |      |      |  |      |      |   |  |   | 4,398 | (1)
|                          |                      |              |       |      |  |      |       |   |  |   |       |    
|Gross investment          |                      |              | 1,312 |      |  |      | 2,859 |   |  |   | 5,616 |    
|                          | Allowance for losses |              |       |     |  |      |       |  |  |   |       | (29 | )
|                          |                      |              |       |      |  |      |       |   |  |   |       |    
|Real estate owned, net    |                      | $            | 1,312 |      |  | $    | 2,859 |   |  | $ | 5,587 |    
|                          |                      |              |       |      |  |      |       |   |  |   |       |    



---



|    |                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------
|(1) | In December 1999, the Bank acquired 18 lots of a
	tract development in La Quinta, California with a carrying value
	of $4.4 million.

The table below summarizes the changes in
valuation of the REO portfolio for the periods indicated.

|                                                  |                      |                         |   |      |  |      |    |      |   |      |    |     |   |   |       |        |   |   |        |         |  
|------------------------------------------------- | -------------------- | ----------------------- | - | ---- |  | ---- | -- | ---- | - | ---- | -- | --- | - | - | ----- | ------ | - | - | ------ | ------- | -
|                                                  |                      |                        
|                                                  |                      | Year Ended December 31,
|                                                  |                      |                        
|                                                  |                      | 2001                    |   | 2000 |  | 1999 |    | 1998 |   | 1997
|(Dollars in thousands)                            |                      |                         |   |      |  |      |    |      |   |     
|Total allowance for losses at beginning of period |                      | $                       |  |      |  | $    | 29 |      |   | $    | 45 |     |   | $ | 2,563 |        |   | $ | 11,871 |        
|                                                  | Provision for losses |                         |   |     |  |      |    |     |   |      |    | 80  |   |   |       | 60     |   |   |        | 913     |  
|                                                  | Charge-offs          |                         |   |     |  |      |    | (29  | ) |      |    | (96 | ) |   |       | (2,578 | ) |   |        | (10,221 | )
|                                                  |                      |                         |   |      |  |      |    |      |   |      |    |     |   |   |       |        |   |   |        |        
|Total allowance for losses at end of period       |                      | $                       |  |      |  | $    |   |      |   | $    | 29 |     |   | $ | 45    |        |   | $ | 2,563  |        
|                                                  |                      |                         |   |      |  |      |    |      |   |      |    |     |   |   |       |        |   |   |        |        

Investment Securities

The Company has authority to invest in a variety
of investment securities, including U.S. Government and agency
securities, mortgage-backed securities and corporate securities.
However, in recent years the Companys strategy has been to
deploy its assets through loan originations, rather than
purchases of investment securities. As a result, the investment
activity has been steadily decreasing over the last six years,
and during 2001, 2000 and 1999 there was no investment activity.
The Company classifies all securities acquired as
available-for-sale under GAAP, and thus the securities are
carried at fair value, with unrealized gains and losses excluded
from income and reported as a separate component of
stockholders equity, net of taxes.

Sources of Funds

The Companys principal sources of funds in
recent years have been deposits obtained on a retail basis
through its branch offices and, to a lesser extent, advances
from the FHLB. In addition, funds have been obtained from
maturities and repayments of loans and securities, and sales of
loans, securities and other assets, including real estate owned.

Deposits

At December 31, 2001, the Company operated
eight retail-banking locations with three primary product lines;
(1) checking and savings accounts, (2) money market
accounts, and (3) certificates of deposit. Six of these
branches are located in the South Bay area of Los Angeles
County, one is located in the San Fernando Valley area of Los
Angeles County and the other is located near the border of Los
Angeles and Ventura Counties. In March 2002, the Company opened
its ninth retail branch in Gardena, California. At
December 31, 2001, the Companys retail branches
carried average deposit balances of $240.3 million and

24



---



##### Table of Contents



$108.1 million in the Valley and South Bay
regions, respectively, which is substantially higher than most
local banking companies. The Company does not operate a money
desk or otherwise solicit Brokered Deposits.


The Company has several types of deposit accounts
principally designed to attract short term deposits. The table
below summarizes the twelve month average on deposits and the
weighted average interest costs incurred thereon during the
periods indicated. See Item 7 
Managements Discussion and Analysis of Financial Condition
and Results of Operations  Net Interest Income.

|                           |       |                         |         |           |  |          |      |        |   |          |       |          |   |        |         |           |  |          |      |      |   |  |       |        |   |   |         |           |  |  |      |      |   |  |       |        |  
|-------------------------- | ----- | ----------------------- | ------- | --------- |  | -------- | ---- | ------ | - | -------- | ----- | -------- | - | ------ | ------- | --------- |  | -------- | ---- | ---- | - |  | ----- | ------ | - | - | ------- | --------- |  |  | ---- | ---- | - |  | ----- | ------ | -
|                           |       |                        
|                           |       | Year Ended December 31,
|                           |       |                        
|                           |       |                         |         |           |  |         
|                           |       | 2001                    |         | 2000      |  | 1999    
|                           |       |                         |         |           |  |         
|                           |       |                         |         | Weighted  |  |          |      |        |   | Weighted |       |          |   |        |         | Weighted  |  |         
|                           |       |                         |         | Average   |  | Percent  |      |        |   | Average  |       | Percent  |   |        |         | Average   |  | Percent 
|                           |       | Amount                  |         | Cost      |  | of Total |      | Amount |   | Cost     |       | of Total |   | Amount |         | Cost      |  | of Total
|(Dollars in thousands)     |       |                         |         |           |  |          |      |        |   |          |       |          |   |        |         |           |  |         
|Noninterest checking       |       | $                       | 32,956  |           |  |          |     |        |   |          | 2.69  | %        |   | $      | 31,174  |           |  |          |     |      |   |  | 2.67  | %      |   | $ | 24,469  |           |  |  |     |      |   |  | 2.32  | %     
|Checking/ NOW              |       |                         | 49,014  |           |  |          | 2.48 | %      |   |          | 4.00  |          |   |        | 39,609  |           |  |          | 2.46 | %    |   |  | 3.39  |        |   |   | 35,105  |           |  |  | 2.16 | %    |   |  | 3.33  |       
|Passbook                   |       |                         | 35,345  |           |  |          | 2.52 | %      |   |          | 2.89  |          |   |        | 26,658  |           |  |          | 2.18 | %    |   |  | 2.28  |        |   |   | 27,666  |           |  |  | 3.31 | %    |   |  | 2.62  |       
|Money market               |       |                         | 215,243 |           |  |          | 3.94 | %      |   |          | 17.58 |          |   |        | 180,815 |           |  |          | 4.99 | %    |   |  | 15.46 |        |   |   | 156,538 |           |  |  | 4.37 | %    |   |  | 14.85 |       
|Certificates of deposit(1) |       |                         | 892,016 |           |  |          | 5.54 | %      |   |          | 72.84 |          |   |        | 891,037 |           |  |          | 5.94 | %    |   |  | 76.20 |        |   |   | 810,392 |           |  |  | 5.22 | %    |   |  | 76.88 |       
|                           |       |                         |         |           |  |          |      |        |   |          |       |          |   |        |         |           |  |          |      |      |   |  |       |        |   |   |         |           |  |  |      |      |   |  |       |       
|                           | Total |                         | $       | 1,224,574 |  |          |      | 5.04   | % |          |       | 100.00   | % |        | $       | 1,169,293 |  |          |      | 5.58 | % |  |       | 100.00 | % |   | $       | 1,054,170 |  |  |      | 4.94 | % |  |       | 100.00 | %
|                           |       |                         |         |           |  |          |      |        |   |          |       |          |   |        |         |           |  |          |      |      |   |  |       |        |   |   |         |           |  |  |      |      |   |  |       |       



---



| | 
| | 
| | 



|    |                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes $60.0 million of state deposits
	placed by the State of California with the Company. See
	Note 7  Deposits for certificates of
	deposit with balances > $100,000.

FHLB Advances

A primary alternate funding source for the
Company is a credit line with the FHLB with a maximum advance of
up 40% of the Companys total assets based on qualifying
collateral. The FHLB system functions as a source of credit to
savings institutions which are members of the FHLB. Advances are
secured by the Companys mortgage loans and the capital
stock of the FHLB owned by the Company. Subject to the
FHLBs advance policies and requirements, these advances
can be requested for any business purpose in which the Company
is authorized to engage. In granting advances, the FHLB
considers a members creditworthiness and other relevant
factors. At December 31, 2001, the Company had an approved
line of credit with the FHLB for a maximum advance of up to 40%
of total assets ($749.3 million as of December 31,
2001) based on qualifying collateral. At December 31, 2001,
the Company had fourteen FHLB advances outstanding totaling
$484.0 million which had a weighted averaged interest rate
of 4.27% and a weighted average remaining maturity of
3 years and 4 months.

Senior Notes

On December 31, 1997, the Company issued
$40.0 million of Senior Notes due 2004 (Senior
Notes) in a private placement, which included registration
rights. Interest on the Senior Notes is payable semi-annually at
the stated interest rate of 12.50%. On or after
December 31, 2002, the 1997 Senior Notes will be redeemable
at any time at the option of the Company, in whole or in part,
at the redemption price of 106.25% for the twelve month period
beginning December 31, 2002, and 103.125% beginning
December 31, 2003, and thereafter until maturity.

In September 2001, the Company authorized up to
$5.0 million for the repurchase of shares of its common
stock and to retire Senior Notes. This increased the amount
previously authorized. The Company announced two 5% repurchase
authorizations in March 2000 and July 2000, which authorized an
aggregate of approximately 541,000 shares, and an additional
77,000 shares in April 2001. As of December 31, 2001,
cumulative repurchases included 555,319 shares at an average
price of $11.74. The Company has also repurchased
$14.2 million in Senior Notes at an average price of 102.2%
of par value.

25



---



##### Table of Contents



Capital Securities

On March 28, 2001 and November 28,
2001, HFC Capital Trust I (Trust I) and
HFC Capital Trust II (Trust II),
respectively, statutory business trusts and wholly owned
subsidiaries of the Company, issued $9.0 million of 10.18%
fixed rate capital securities (the Capital
Securities I) and $5.0 million of floating rate
capital securities (the Capital Securities II),
respectively. The Capital Securities, which were issued in
separate private placement transactions, represent undivided
preferred beneficial interests in the assets of the respective
Trusts. The Company is the owner of all the beneficial interests
represented by the common securities of Trust I and
Trust II (the Common Securities I and
Common Securities II) (together with the
Capital Securities I and Capital
Securities II and, collectively the Trust
Securities). Trust I and Trust II exist for the
sole purpose of issuing the Trust Securities and investing the
proceeds thereof in 10.18% fixed rate and floating rate,
respectively, junior subordinated deferrable interest debentures
(the Junior Subordinated Debentures I and
Junior Subordinated Debentures II) issued by
the Company and engaging in certain other limited activities.
Interest on the Capital Securities is payable semi-annually.

The Junior Subordinated Debentures I held by
Trust I will mature on June 8, 2031, at which time the
Company is obligated to redeem the Capital Securities I.
The Capital Securities I are callable, in whole or in part,
at par value after ten years. The proceeds were used to
repurchase $7.2 million of its Senior Notes at an average
price of 101.4% of par value.

The floating rate on the Capital
Securities II, with an initial start rate of 5.97%,
reprices semi-annually based on the index of six month LIBOR
plus a spread of 3.75%, with a cap of 11.00% through
December 8, 2006. The Junior Subordinated
Debentures II held by Trust II will mature on
December 8, 2031, at which time the Company is obligated to
redeem the Capital Securities II. The Capital
Securities II are callable, in whole or in part, at par
value after five years. The proceeds were used to repurchase
$4.0 million of its Senior Notes at an average price of
105.0% of par value.

26



---



##### Table of Contents






Item 2.     Properties

As of December 31, 2001, the Company had
eight leased and two wholly owned properties. The leased
properties included its corporate headquarters, seven branch
offices (two of which were ground leases for sites on which the
Company has built branch offices), and one warehouse. All of the
properties owned or leased by the Company are in Southern
California.

The following table summarizes the Companys
owned and leased properties at December 31, 2001, and, with
respect to leased properties, highlights the principal terms and
net book values of the owned properties and leasehold
improvements. None of the leases contain any unusual terms and
are all net or triple net leases.

|        |                                           |            |  |          |  |         |  |             |  |            |   |         |         |  |  |        |         |  |   |         |         | 
|------- | ----------------------------------------- | ---------- |  | -------- |  | ------- |  | ----------- |  | ---------- | - | ------- | ------- |  |  | ------ | ------- |  | - | ------- | ------- | 
|        |                                           | Expiration |  | Renewal  |  | Monthly |  | Square      |  | Net       
|        |                                           | of term    |  | Options  |  | Rental  |  | Feet        |  | Book Value
|        |                                           |            |  |          |  |         |  |             |  |           
|Leased: |                                           |            |  |          |  |         |  |             |  |            |   |         |         |  |  |        |         |  |   |        
|        | El Segundo Corporate                      |            |  | 11/30/05 |  |         |  | One 5-year  |  |            | $ | 105,348 |         |  |  | 61,190 |         |  | $ | 472,274 |        
|        | Torrance Branch(1)                        |            |  | 12/31/01 |  |         |  | One 5-year  |  |            |   | 18,578  |         |  |  | 7,343  |         |  |   |        |        
|        | Torrance Branch(2)                        |            |  | 08/31/05 |  |         |  | N/A         |  |            |   | 8,600   |         |  |  | 4,300  |         |  |   | 159,859 |        
|        | Westlake Branch                           |            |  | 06/30/10 |  |         |  | Two 5-year  |  |            |   | 15,113  |         |  |  | 7,700  |         |  |   | 100,523 |        
|        | Manhattan Beach Branch                    |            |  | 10/30/10 |  |         |  | Four 5-year |  |            |   | 4,590   |         |  |  | 4,590  |         |  |   | 26,605  |        
|        | Warehouse                                 |            |  | 06/30/01 |  |         |  | Two 3-year  |  |            |   | 4,100   |         |  |  | 10,000 |         |  |   | 60,637  |        
|        | Tarzana Branch                            |            |  | 01/31/05 |  |         |  | Five 5-year |  |            |   | 3,589   |         |  |  | 3,352  |         |  |   | 2,050   |        
|        | Redondo Beach Branch                      |            |  | 04/30/04 |  |         |  | Two 5-year  |  |            |   | 4,128   |         |  |  | 1,403  |         |  |   | 62,562  |        
|        | Hermosa Beach Branch                      |            |  | 09/01/05 |  |         |  | Four 5-year |  |            |   | 2,413   |         |  |  | 588    |         |  |   | 59,736  |        
|        |                                           |            |  |          |  |         |  |             |  |            |   |         |         |  |  |        |         |  |   |        
|        |                                           | Total      |  |          |  |         |  |             |  |            |   | $       | 166,459 |  |  |        | 100,466 |  |   | $       | 944,246 | 
|        |                                           |            |  |          |  |         |  |             |  |            |   |         |         |  |  |        |         |  |   |        
|Owned:  |                                           |            |  |          |  |         |  |             |  |            |   |         |         |  |  |        |         |  |   |        
|        | Hawthorne Branch                          |            |  |          |  |         |  |             |  |            |   |         |         |  |  | 10,000 |         |  | $ | 141,594 |        
|        | Westchester Branch                        |            |  |          |  |         |  |             |  |            |   |         |         |  |  | 8,800  |         |  |   | 327,554 |        
|        | Manhattan Beach Branch (building only)(3) |            |  |          |  |         |  |             |  |            |   |         |         |  |  | 4,590  |         |  |   | 26,605  |        
|        | Tarzana Branch (building only)(3)         |            |  |          |  |         |  |             |  |            |   |         |         |  |  | 3,352  |         |  |   | 2,050   |        
|        |                                           |            |  |          |  |         |  |             |  |            |   |         |         |  |  |        |         |  |   |        
|        |                                           | Total      |  |          |  |         |  |             |  |            |   |         |         |  |  |        | 26,742  |  |   | $       | 497,803 | 
|        |                                           |            |  |          |  |         |  |             |  |            |   |         |         |  |  |        |         |  |   |        



---



| | 
| | 
| | 



|    |                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------
|(1) | The Torrance branch lease was terminated on
	December 31, 2001, due to the relocation of the branch.                             
|   
|(2) | The new Torrance branch lease began on
	November 1, 2001, for the new location.                                                  
|   
|(3) | Ground lease only; building and improvements are
	owned by the Company but revert to the landlord upon termination
	of the lease.

The Bank utilizes a client-server computer system
with use of various third-party vendors software for
retail deposit operations, loan servicing, accounting and loan
origination functions. The net book value of the Banks
electronic data processing equipment, including personal
computers and software, was $0.5 million at
December 31, 2001.

At December 31, 2001, the net book values of
the Companys office property, and furniture, fixtures and
equipment, excluding data processing equipment, were
$3.7 million. See Note 6  Office
Property and Equipment. The Company believes that all of
the above facilities are in good condition and are adequate for
the Companys present operations.

27



---



##### Table of Contents






Item 3.     Legal
Proceedings

Litigation

In January 2002, the Court confirmed the
settlement of the construction defect case entitled Marine
Village Townhomes Homeowners Association v. Hawthorne
Savings and Loan Associationin which the Bank was a
defendant. The terms of the settlement are confidential, but the
settlement did not have an adverse impact on the Companys
results of operations.

In April 2001, the Superior Court of the State of
California, County of Los Angeles granted Plaintiffs
motion to reinstate a construction defect case entitled Stone
Water Terrace HOA v. Hawthorne Savings and Loan Association,in which the Bank was named as a defendant. The case had
previously been dismissed because Plaintiff failed to take
certain actions to prosecute its case. In this action, Plaintiff
alleges, under several theories of recovery, that the Bank is
responsible for construction defects in a multi-unit condominium
complex. The Bank initially provided construction loans to the
developer, but took over the completion of a portion of the
project after the developer defaulted. Plaintiff seeks damages
in an unspecified amount, plus punitive damages. The Bank denies
the allegations in the complaint and has cross-complained
against all of the subcontractors for indemnity. Discovery has
not commenced, but Plaintiffs have indicated that damages may
exceed $800,000. Although the Bank intends to vigorously defend
its position in these actions and to seek indemnification from
the responsible parties, there can be no assurances that the
Company will prevail. In addition, the inherent uncertainty of
jury or judicial verdicts makes it impossible to determine with
certainty the Companys maximum exposure in this action,
although based upon the information developed to date, the
Company believes its exposure will not exceed the amounts
indicated by Plaintiffs. However, it is probable that the
Company will incur substantial legal fees defending this matter.

The Company is involved in a variety of other
litigation matters in the ordinary course of its business, and
anticipates that it will become involved in new litigation
matters from time to time in the future. Based on the current
assessment of these other matters, management does not presently
believe that any one of these existing other matters is likely
to have material adverse impact on the Companys financial
condition, result of operations or cash flows. However, the
Company will incur legal and related costs concerning the
litigation and may from time to time determine to settle some or
all of the cases, regardless of managements assessment of
the Companys legal position. The amount of legal defense
costs and settlements in any period will depend on many factors,
including the status of cases (and the number of cases that are
in trial or about to be brought to trial) and the opposing
parties aggressiveness in pursuing their cases and their
perception of their legal position. Further, the inherent
uncertainty of jury or judicial verdicts makes it impossible to
determine with certainty the Companys maximum cost in any
pending litigation. Accordingly, the Companys litigation
costs and expenses may vary materially from period to period,
and no assurance can be given that these costs will not be
material in any particular period.






|        |                                                     
|------- | ----------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
	Holders

No matters were submitted to a vote of
stockholders during the fourth quarter of 2001.

28



---



##### Table of Contents






Item 4A.     Executive
Officers

The following table sets forth, as of
February 28, 2002, the names and ages of all executive
officers of the Company, indicating their positions and
principal occupation.

|                     |  |     |    |                                                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-------------------- |  | --- | -- | ---------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name                 |  | Age |    | Position with the Company and Prior Experience
|                     |  |     |    |                                               
|Simone Lagomarsino   |  |     | 40 |                                                |  | President and Chief Executive Officer of
	Hawthorne Financial Corporation and Hawthorne Savings, F.S.B.,
	since December 1999. Executive Vice President and Chief
	Financial Officer of Hawthorne Financial and Hawthorne Savings,
	F.S.B., from February 1999 through December 1999. Executive Vice
	President and Chief Financial Officer of First Plus Bank from
	March 1998 to February 1999. Senior Vice President, Finance of
	Imperial Financial Group from March 1997 to March 1998. Senior
	Vice President and Chief Financial Officer of Ventura County
	National Bank from March 1995 to March 1997 (Ventura County
	National Bank was sold to City National Bank in January 1997).
	Financial advisor Prudential Securities September 1993 to March
	1995.
|Karen C. Abajian     |  |     | 39 |                                                |  | Executive Vice President and Chief Financial
	Officer of Hawthorne Financial Corporation and Hawthorne
	Savings, F.S.B., since April 2000. Senior Vice President and
	Controller of Imperial Bank from May 1993 to March 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|Jacqueline Calhoun   |  |     | 32 |                                                |  | Senior Vice President and Chief Credit Officer of
	Hawthorne Savings, F.S.B., since October 2001. Senior Consultant
	of Unicon Financial Services, Inc. from January 2000 to October
	2001. Senior Vice President of American International Bank from
	January 1998 to January 2000. Credit Administration consultant
	from January 1997 to January 1998.                                                                                                                                                                                                                                                                                                                                                                                                             
|Gerald Carruthers    |  |     | 59 |                                                |  | Executive Vice President and Chief Lending
	Officer of Hawthorne Savings, F.S.B., since December 2001.
	Senior Vice President of Washington Mutual from 1997 to 2000.
	Senior Vice President of First Interstate Bank from 1986 to 1996.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|David L. Hardin      |  |     | 48 |                                                |  | Executive Vice President of Hawthorne Savings,
	F.S.B., since September 1993. Executive Vice President and
	Director, Retail Banking of Downey Savings from February 1992 to
	September 1993. Executive Vice President and Chief Retail
	Officer of Valley Federal Savings from November 1990 to February
	1992.                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Eileen Lyon          |  |     | 44 |                                                |  | Senior Vice President, General Counsel, and
	Corporate Secretary of Hawthorne Financial Corporation and
	Hawthorne Savings, F.S.B., since February 2000. Partner with
	Manatt, Phelps & Phillips, LLP, from 1993 to February 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Marilyn J. Momeny    |  |     | 49 |                                                |  | Senior Vice President and Human Resources Manager
	of Hawthorne Savings, F.S.B., since February 2002. Human
	Resource consultant from 1999 through 2002. Vice President of
	Automatic Data Processing, Inc., from 1998 to 1999. Human
	Resources Director of Automatic Data Processing, Inc., from 1993
	through 1998.                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Charles B. Stoneburg |  |     | 59 |                                                |  | Executive Vice President and Chief Operating
	Officer of Hawthorne Savings, F.S.B., since August 1993.
	President of Semper Enterprises Inc., from August 1981 to July
	1993. Executive Vice President of FiServ Corporation from
	September 1972 to August 1981.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Carol Ward           |  |     | 47 |                                                |  | Senior Vice President of Hawthorne Savings,
	F.S.B., since November 2001. Independent consultant from March
	1999 to November 2001. Executive Vice President of Mercantile
	National Bank from June 1996 to March 1999.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

29



---



##### Table of Contents






PART II




Item 5.     Market
for Registrants Common Stock and Related Stockholder
Matters

Market Prices of Common Stock

The common stock of the Company (Common
Stock) is traded on the Nasdaq National Market under the
symbol HTHR. Mellon Investor Services LLC is the
Companys transfer agent and registrar, and is able to
respond to inquiries from shareholders on their website:
www.melloninvestor.com or through their mailing address:
P.O. Box 3315, South Hacksensack, New Jersey, 07606.
The following table sets forth the high and low sales prices of
the Common Stock as reported by Nasdaq for the periods indicated
below.

|                             |  |      |       |     |  |   |       | 
|---------------------------- |  | ---- | ----- | --- |  | - | ----- | 
|                             |  | High |       | Low
|                             |  |      |       |    
|Year ended December 31, 2001 |  |      |       |     |  |   |       | 
|First quarter                |  | $    | 17.00 |     |  | $ | 14.50 | 
|Second quarter               |  |      | 18.20 |     |  |   | 15.56 | 
|Third quarter                |  |      | 20.42 |     |  |   | 17.65 | 
|Fourth quarter               |  |      | 20.00 |     |  |   | 18.03 | 
|                            
|Year ended December 31, 2000 |  |      |       |     |  |   |       | 
|First quarter                |  | $    | 11.50 |     |  | $ | 7.64  | 
|Second quarter               |  |      | 8.75  |     |  |   | 7.38  | 
|Third quarter                |  |      | 12.00 |     |  |   | 7.75  | 
|Fourth quarter               |  |      | 15.00 |     |  |   | 11.00 | 

Stockholders

As of March 20, 2002, there were
approximately 400 holders of record.

Dividends

It is the present policy of the Company to retain
earnings to provide funds for use in its business. The Company
has not paid cash dividends on the Common Stock during the past
several years and does not anticipate doing so in the
foreseeable future.

As a holding company whose only significant asset
is the common stock of the Bank, the Companys ability to
pay dividends on its common stock and to conduct business
activities directly or in non-banking subsidiaries depends
significantly on the receipt of dividends or other distributions
from the Bank. Federal banking laws and regulations, including
the regulations of the OTS, limit the Banks ability to pay
dividends to the Company. The Bank generally may not declare
dividends or make any other capital distribution to the Company
if, after the payment of such dividends or other distribution,
the Bank would fall within any of the three undercapitalized
categories under the prompt corrective action standards
established by the OTS and the other federal banking agencies.
Another regulation of the OTS also limits the Companys
ability to pay dividends and make other capital distributions in
a manner that depends upon the extent to which it meets
regulatory capital requirements. In addition, HOLA generally
requires savings association subsidiary of a savings and loan
holding company to give the OTS at least 30 days advance
notice of any proposed dividends to be made on its guarantee,
permanent or other non-withdrawable stock or else the dividend
will be invalid. See Item 1. Business 
Regulation of the Bank  Capital Distribution
Limitations. Further, the OTS may prohibit any dividend or
other capital distribution that it determines would constitute
an unsafe or unsound practice. In addition to the regulation of
dividends and other capital distributions, there are various
statutory and regulatory limitations on the extent to which the
Bank can finance or otherwise transfer funds to the Company or
any of its non-banking subsidiaries, whether in the form of
loans, extensions of credit, investments or asset purchases. The
director of the OTS may further restrict these transactions in
the interest of safety and soundness.

30



---



##### Table of Contents






Item 6.     Selected
Financial Data

The selected financial data presented below is
derived from the audited consolidated financial statements of
the Company and should be read in conjunction with the
Consolidated Financial Statements presented elsewhere herein.

|                                      |                                                                       |                                       |   |           |         |      |   |           |         |      |   |           |         |   |   |           |         |   |   |         |         |  
|------------------------------------- | --------------------------------------------------------------------- | ------------------------------------- | - | --------- | ------- | ---- | - | --------- | ------- | ---- | - | --------- | ------- | - | - | --------- | ------- | - | - | ------- | ------- | -
|                                      |                                                                       |                                      
|                                      |                                                                       | At or for the Year Ended December 31,
|                                      |                                                                       |                                      
|                                      |                                                                       | 2001                                  |   | 2000      |         | 1999 |   | 1998      |         | 1997
|(In thousands, except per share data) |                                                                       |                                       |   |           |         |      |   |           |         |     
|Consolidated statements of income:    |                                                                       |                                       |   |           |         |      |   |           |         |      |   |           |         |   |   |           |         |   |   |        
|                                      | Interest revenues                                                     |                                       | $ | 147,686   |         |      | $ | 148,988   |         |      | $ | 132,747   |         |   | $ | 106,992   |         |   | $ | 75,616  |        
|                                      | Interest costs                                                        |                                       |   | (85,670   | )       |      |   | (88,682   | )       |      |   | (73,626   | )       |   |   | (61,874   | )       |   |   | (43,825 | )      
|                                      |                                                                       |                                       |   |           |         |      |   |           |         |      |   |           |         |   |   |           |         |   |   |        
|                                      | Net interest income                                                   |                                       |   | 62,016    |         |      |   | 60,306    |         |      |   | 59,121    |         |   |   | 45,118    |         |   |   | 31,791  |        
|                                      | Provision for credit losses                                           |                                       |   | (3,400    | )       |      |   | (6,000    | )       |      |   | (12,000   | )       |   |   | (7,135    | )       |   |   | (5,137  | )      
|                                      |                                                                       |                                       |   |           |         |      |   |           |         |      |   |           |         |   |   |           |         |   |   |        
|                                      | Net interest income after provision for credit
	losses                |                                       |   | 58,616    |         |      |   | 54,306    |         |      |   | 47,121    |         |   |   | 37,983    |         |   |   | 26,654  |        
|                                      | Noninterest revenues                                                  |                                       |   | 5,630     |         |      |   | 8,094     |         |      |   | 7,820     |         |   |   | 4,653     |         |   |   | 3,588   |        
|                                      | Income/(loss) from real estate operations, net                        |                                       |   | 205       |         |      |   | (924      | )       |      |   | 324       |         |   |   | 1,909     |         |   |   | 229     |        
|                                      | General and administrative expenses                                   |                                       |   | (34,427   | )       |      |   | (34,328   | )       |      |   | (32,363   | )       |   |   | (28,802   | )       |   |   | (22,009 | )      
|                                      | Other non-operating (expense)/income                                  |                                       |   | (110      | )       |      |   | (2,196    | )       |      |   | (4,672    | )       |   |   | (31       | )       |   |   | 112     |        
|                                      |                                                                       |                                       |   |           |         |      |   |           |         |      |   |           |         |   |   |           |         |   |   |        
|                                      |                                                                       | Total noninterest expenses            |   |           | (34,537 | )    |   |           | (36,524 | )    |   |           | (37,035 | ) |   |           | (28,833 | ) |   |         | (21,897 | )
|                                      | Income before income tax (provision)/ benefit and
	extraordinary item |                                       |   | 29,914    |         |      |   | 24,952    |         |      |   | 18,230    |         |   |   | 15,712    |         |   |   | 8,574   |        
|                                      | Income tax (provision)/benefit                                        |                                       |   | (12,612   | )       |      |   | (10,668   | )       |      |   | (8,030    | )       |   |   | (4,674    | )       |   |   | 2,577   |        
|                                      |                                                                       |                                       |   |           |         |      |   |           |         |      |   |           |         |   |   |           |         |   |   |        
|                                      | Income before extraordinary item                                      |                                       |   | 17,302    |         |      |   | 14,284    |         |      |   | 10,200    |         |   |   | 11,038    |         |   |   | 11,151  |        
|                                      | Extraordinary item (net of taxes)                                     |                                       |   | (469      | )(1)    |      |   |          |         |      |   |          |         |   |   |          |         |   |   | (1,534  | )(2)   
|                                      |                                                                       |                                       |   |           |         |      |   |           |         |      |   |           |         |   |   |           |         |   |   |        
|                                      | Net income                                                            |                                       | $ | 16,833    |         |      | $ | 14,284    |         |      | $ | 10,200    |         |   | $ | 11,038    |         |   | $ | 9,617   |        
|                                      |                                                                       |                                       |   |           |         |      |   |           |         |      |   |           |         |   |   |           |         |   |   |        
|                                      | Net income available for common stock                                 |                                       | $ | 16,833    |         |      | $ | 14,284    |         |      | $ | 10,200    |         |   | $ | 11,038    |         |   | $ | 5,254   |        
|                                      |                                                                       |                                       |   |           |         |      |   |           |         |      |   |           |         |   |   |           |         |   |   |        
|Per share amounts:                    |                                                                       |                                       |   |           |         |      |   |           |         |      |   |           |         |   |   |           |         |   |   |        
|                                      | Basic earnings per share before extraordinary item                    |                                       | $ | 3.27      |         |      | $ | 2.69      |         |      | $ | 1.93      |         |   | $ | 2.64      |         |   | $ | 2.35    |        
|                                      | Extraordinary item (net of taxes)                                     |                                       |   | (0.09     | )       |      |   |          |         |      |   |          |         |   |   |          |         |   |   | (0.53   | )      
|                                      |                                                                       |                                       |   |           |         |      |   |           |         |      |   |           |         |   |   |           |         |   |   |        
|                                      | Basic earnings per share after extraordinary item                     |                                       | $ | 3.18      |         |      | $ | 2.69      |         |      | $ | 1.93      |         |   | $ | 2.64      |         |   | $ | 1.82    |        
|                                      |                                                                       |                                       |   |           |         |      |   |           |         |      |   |           |         |   |   |           |         |   |   |        
|                                      | Diluted earnings per share before extraordinary
	item                 |                                       | $ | 2.29      |         |      | $ | 1.94      |         |      | $ | 1.33      |         |   | $ | 1.65      |         |   | $ | 1.30    |        
|                                      | Extraordinary item (net of taxes)                                     |                                       |   | (0.06     | )       |      |   |          |         |      |   |          |         |   |   |          |         |   |   | (0.30   | )      
|                                      |                                                                       |                                       |   |           |         |      |   |           |         |      |   |           |         |   |   |           |         |   |   |        
|                                      | Diluted earnings per share after extraordinary
	item                  |                                       | $ | 2.23      |         |      | $ | 1.94      |         |      | $ | 1.33      |         |   | $ | 1.65      |         |   | $ | 1.00    |        
|                                      |                                                                       |                                       |   |           |         |      |   |           |         |      |   |           |         |   |   |           |         |   |   |        
|                                      | Diluted book value per share                                          |                                       |   | 16.00     |         |      |   | 13.91     |         |      |   | 12.10     |         |   |   | 10.43     |         |   |   | 7.67    |        
|Balance sheet data at period end:     |                                                                       |                                       |   |           |         |      |   |           |         |      |   |           |         |   |   |           |         |   |   |        
|                                      | Total assets                                                          |                                       | $ | 1,856,197 |         |      | $ | 1,753,395 |         |      | $ | 1,581,153 |         |   | $ | 1,412,434 |         |   | $ | 928,197 |        
|                                      | Cash and cash equivalents                                             |                                       |   | 98,583    |         |      |   | 99,919    |         |      |   | 86,722    |         |   |   | 45,449    |         |   |   | 51,620  |        
|                                      | Investment securities                                                 |                                       |   |          |         |      |   |          |         |      |   |          |         |   |   |          |         |   |   | 578     |        
|                                      | Loans receivable, net                                                 |                                       |   | 1,709,283 |         |      |   | 1,608,067 |         |      |   | 1,444,968 |         |   |   | 1,326,791 |         |   |   | 838,251 |        
|                                      | Real estate owned, net                                                |                                       |   | 1,312     |         |      |   | 2,859     |         |      |   | 5,587     |         |   |   | 4,070     |         |   |   | 9,859   |        
|                                      | Deposits                                                              |                                       |   | 1,199,645 |         |      |   | 1,214,856 |         |      |   | 1,086,635 |         |   |   | 1,019,450 |         |   |   | 799,501 |        
|                                      | Senior notes due 2004                                                 |                                       |   | 25,778    |         |      |   | 39,358    |         |      |   | 40,000    |         |   |   | 40,000    |         |   |   | 40,000  |        
|                                      | Capital securities                                                    |                                       |   | 14,000    |         |      |   |          |         |      |   |          |         |   |   |          |         |   |   |        |        
|                                      | FHLB advances                                                         |                                       |   | 484,000   |         |      |   | 384,000   |         |      |   | 349,000   |         |   |   | 264,000   |         |   |   | 40,000  |        
|                                      | Stockholders equity                                                  |                                       |   | 120,449   |         |      |   | 104,161   |         |      |   | 92,304    |         |   |   | 81,424    |         |   |   | 42,319  |        
|                                      | Allowance for credit losses                                           |                                       |   | 30,602    |         |      |   | 29,450    |         |      |   | 24,285    |         |   |   | 17,111    |         |   |   | 13,274  |        

31



---



##### Table of Contents



|                                              |                                                 |                                       |        |        |   |      |        |        |   |      |        |        |   |   |        |        |   |   |        |        |  
|--------------------------------------------- | ----------------------------------------------- | ------------------------------------- | ------ | ------ | - | ---- | ------ | ------ | - | ---- | ------ | ------ | - | - | ------ | ------ | - | - | ------ | ------ | -
|                                              |                                                 |                                      
|                                              |                                                 | At or for the Year Ended December 31,
|                                              |                                                 |                                      
|                                              |                                                 | 2001                                  |        | 2000   |   | 1999 |        | 1998   |   | 1997
|(Dollars in thousands, except per share data) |                                                 |                                       |        |        |   |      |        |        |   |     
|Asset quality at period end:                  |                                                 |                                       |        |        |   |      |        |        |   |      |        |        |   |   |        |        |   |   |        |       
|                                              | Nonaccrual loans                                |                                       | $      | 20,666 |   |      | $      | 31,601 |   |      | $      | 44,031 |   |   | $      | 47,688 |   |   | $      | 15,396 |  
|                                              | Real estate owned, net                          |                                       |        | 1,312  |   |      |        | 2,859  |   |      |        | 5,587  |   |   |        | 4,070  |   |   |        | 9,859  |  
|                                              |                                                 |                                       |        |        |   |      |        |        |   |      |        |        |   |   |        |        |   |   |        |       
|                                              |                                                 | $                                     | 21,978 |        |   | $    | 34,460 |        |   | $    | 49,618 |        |   | $ | 51,758 |        |   | $ | 25,255 |       
|                                              |                                                 |                                       |        |        |   |      |        |        |   |      |        |        |   |   |        |        |   |   |        |       
|Net charge-offs                               |                                                 | $                                     | 2,248  |        |   | $    | 835    |        |   | $    | 4,826  |        |   | $ | 3,298  |        |   | $ | 5,378  |       
|Yields and costs (for the period):            |                                                 |                                       |        |        |   |      |        |        |   |      |        |        |   |   |        |        |   |   |        |       
|                                              | Interest-earnings assets                        |                                       |        | 8.20   | % |      |        | 8.94   | % |      |        | 8.68   | % |   |        | 9.06   | % |   |        | 9.00   | %
|                                              | Interest-bearing liabilities                    |                                       |        | 5.21   | % |      |        | 5.81   | % |      |        | 5.21   | % |   |        | 5.60   | % |   |        | 5.44   | %
|                                              | Interest rate spread(3)                         |                                       |        | 2.99   | % |      |        | 3.13   | % |      |        | 3.47   | % |   |        | 3.46   | % |   |        | 3.56   | %
|                                              | Net interest margin(4)                          |                                       |        | 3.45   | % |      |        | 3.62   | % |      |        | 3.87   | % |   |        | 3.82   | % |   |        | 3.78   | %
|Performance ratios(5):                        |                                                 |                                       |        |        |   |      |        |        |   |      |        |        |   |   |        |        |   |   |        |       
|                                              | Return on average assets                        |                                       |        | 0.93   | % |      |        | 0.85   | % |      |        | 0.66   | % |   |        | 0.93   | % |   |        | 1.11   | %
|                                              | Return on average common stockholders equity   |                                       |        | 15.13  | % |      |        | 14.58  | % |      |        | 11.66  | % |   |        | 18.22  | % |   |        | 19.83  | %
|                                              | Average stockholders equity to average
	assets |                                       |        | 6.17   | % |      |        | 5.85   | % |      |        | 5.68   | % |   |        | 5.09   | % |   |        | 5.60   | %
|                                              | Efficiency ratio(6)                             |                                       |        | 50.89  | % |      |        | 50.19  | % |      |        | 48.35  | % |   |        | 57.88  | % |   |        | 62.19  | %
|Bank capital ratios at period end:            |                                                 |                                       |        |        |   |      |        |        |   |      |        |        |   |   |        |        |   |   |        |       
|                                              | Tangible                                        |                                       |        | 8.36   | % |      |        | 8.01   | % |      |        | 8.05   | % |   |        | 7.65   | % |   |        | 7.55   | %
|                                              | Core                                            |                                       |        | 8.36   | % |      |        | 8.01   | % |      |        | 8.05   | % |   |        | 7.65   | % |   |        | 7.55   | %
|                                              | Tier 1                                          |                                       |        | 11.63  | % |      |        | 11.30  | % |      |        | 11.37  | % |   |        | 10.10  | % |   |        | 10.23  | %
|                                              | Risk-based                                      |                                       |        | 12.70  | % |      |        | 12.23  | % |      |        | 12.50  | % |   |        | 11.10  | % |   |        | 11.48  | %
|Asset quality data at period end:             |                                                 |                                       |        |        |   |      |        |        |   |      |        |        |   |   |        |        |   |   |        |       
|                                              | Total nonaccrual loans to total assets          |                                       |        | 1.11   | % |      |        | 1.80   | % |      |        | 2.78   | % |   |        | 3.38   | % |   |        | 1.66   | %
|                                              | Nonaccrual loans to total gross loans           |                                       |        | 1.19   | % |      |        | 1.93   | % |      |        | 3.00   | % |   |        | 3.55   | % |   |        | 1.81   | %
|                                              | Allowance for credit losses to gross loans      |                                       |        | 1.76   | % |      |        | 1.80   | % |      |        | 1.65   | % |   |        | 1.27   | % |   |        | 1.56   | %
|                                              | Allowance for credit losses to nonaccrual loans |                                       |        | 148.08 | % |      |        | 93.19  | % |      |        | 55.15  | % |   |        | 35.88  | % |   |        | 86.22  | %
|                                              | Net charge-offs to average loans                |                                       |        | 0.13   | % |      |        | 0.05   | % |      |        | 0.34   | % |   |        | 0.30   | % |   |        | 0.72   | %



---



|    |                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Related to the accelerated write-off of prepaid
	issuance costs and premium due to the repurchase of Senior Notes.                                                                                                                                                                                          
|   
|(2) | Related to the accelerated write off of
	unamortized issuance costs and original issue discount
	associated with Senior Notes due 2000, which were issued by the
	Company in December 1995 and repaid in full in December 1997,
	with a portion of the proceeds from the offering of Senior Notes
	due 2004.
|   
|(3) | Interest rate spread represents the difference
	between the weighted average yield on interest-earning assets
	and the weighted average cost of interest-bearing liabilities.                                                                                                                               
|   
|(4) | Net interest income divided by average
	interest-earning assets.                                                                                                                                                                                                                                            
|   
|(5) | With the exception of period end ratios, all
	ratios are based on average balances for the period.                                                                                                                                                                                                          
|   
|(6) | Represents general and administrative expenses
	divided by net interest income before provision for credit
	losses and noninterest revenues.                                                                                                                                                                

32



---



##### Table of Contents






Item 7.     Managements
Discussion and Analysis of Financial Condition and Results of
Operations

OVERVIEW

The following discussion provides information
about the results of operations, financial condition, liquidity
and asset quality of the Company. This information is intended
to facilitate the understanding and assessment of significant
changes and trends related to the financial condition of the
Company and the results of its operations. This discussion and
analysis should be read in conjunction with the Companys
Consolidated Financial Statements and the accompanying notes
presented herein. See Cautionary Statement Regarding
Forward Looking Statements.

CRITICAL ACCOUNTING POLICIES



| |                            
| | ---------------------------
| | Allowance for Credit losses

In accordance with the SEC Staff Accounting
Bulletin No. 102, Selected Loan Loss Allowance
Methodology and Documentation Issues, and the newly
released FFIEC guidelines, management establishes specific
allowances for credit losses on individual loans when it has
determined that recovery of the Companys gross investment
is not probable and when the amount of loss can be reasonably
determined. On a quarterly basis, management completes a loan
loss allowance analysis that provides for an adequate balance in
the allowance for credit losses. Management evaluates the
allowance for credit losses in accordance with GAAP, within the
guidance established by SFAS No. 5, Accounting for
Contingencies, and SFAS No. 114, as amended by SFAS
No. 118, Accounting by Creditors for Impairment of a
Loan, as well as standards established by regulatory
Interagency Policy Statements on the Allowance for Loan and
Lease Losses (ALLL).

During the fourth quarter of 2001, management
enhanced the methodology in determining the allowance for credit
losses. The most significant change to the ALLL methodology was
related to the qualitative adjustments to the individual loan
types, based on the current local and national economic
conditions, which was previously included in the unallocated
allowance. In addition, adjustments were also made to changes in
internal policies and industry conditions. These changes
included: development of a risk based pricing matrix, driven by
risk factors such as collateral quality, debt coverage ratio
(DCR), recourse, etc.; implementation of more
conservative advance rates for land draws, requiring higher
minimum equity contributions, enhanced underwriting of borrower
cash flow on SFR construction loans, reduced LTV maximum for
land loans; and, with respect to consumer related loans, a small
upward adjustment was made due to the relative newness of the
overdraft protection product and the lack of seasoning to
validate the existing underwriting model.

In accordance with accounting and regulatory
issuance, the Companys methodology is summarized as
follows:

The Management separates loans into pools
by loan type and risk factor (i.e. loan
grade). The grading system is
designed to evaluate risk. Loan grading provides management with
information regarding actual or potential loan problems and
provides a basis for establishing action plans to strengthen
credits.

Management segments its portfolio into pools with
similar characteristics, based on loan type (collateral driven)
and risk factor (loan grade). Currently, the portfolio is
segmented into nine categories by collateral type, further
stratified by loan grade (Pass grades, Special Mention and
Substandard). The general pool categories are: SFR greater than
$1.0 million; SFR less than $1.0 million;
Multi-family; Commercial Real Estate (permanent); Commercial
Other; Commercial Construction; SFR Construction; Land; and,
Consumer.

The originating unit is responsible for
classifying each new and renewed loan in accordance with the
Banks Asset Classification System policy. The Banks
portfolio managers and asset managers, under the direction of
their supervisors, are responsible for ensuring that all loans
under their responsibility are appropriately graded. The
respective managers analyze any and all new information on
borrowers, including updated financial statements, payment
performance, random inspection of collateral, updated credit
reports, and determine if such information affects the loan
grade. In addition, the Banks internal credit review staff
is

33



---



##### Table of Contents



responsible for monitoring existing loan grades
and continually assessing the accuracy of assigned grades.
Periodically, the loan classifications are evaluated for
appropriateness by an independent third party loan review firm.


The primary factors used in assigning loan grades
include: capacity and willingness of borrower/ guarantor to
service debt considering current financial data; cash flow of
collateral property and ability to service existing debts;
alternate source of repayment; trade and bank payment history;
effects of current and anticipated market and economic
conditions; impact of interest rate fluctuations; collateral
value and the borrowers ability to refinance collateral
based on current value; property tax status; payment status;
status of insurance and taxes; and, existence of other liens.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In general, Pass graded assets are well protected
	by the current net worth and paying capacity of the borrower, or
	by the value of the asset or underlying collateral. Pass 1
	graded assets are of the highest quality and reflect risk
	similar to that of cash secured assets, with very strong cash
	flow, underlying credit of A or superior quality,
	LTV ratios of approximately 60% or less. Pass 2 graded
	assets have minimum risk, exhibit a satisfactory repayment
	program, are secured by excellent collateral and have LTV ratios
	of 65% or less; income property loans require A or
	superior quality collateral, must be above minimum debt service
	coverage requirements or reflect strong cash flow positions.
	Pass 3 graded assets include average risk with nominal loss
	potential (satisfactory for their size), are supported by
	repayment history and/or net worth (reflected by satisfactory
	financial statements).                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | Special Mention, grade 4, assets have potential
	weaknesses that require close monitoring by management. Assets
	included in this category include loans that have developed
	credit weaknesses since origination. This loan grade includes
	loans that the Bank is unable to properly supervise because of
	an inadequate control over collateral, an adverse trend in the
	borrowers operations, or a highly leveraged position
	reflected in the borrowers balance sheet. If either
	condition has deteriorated to the point that timely repayment is
	jeopardized, an adverse classification may be required. If the
	only weakness is credit data or collateral documentation
	exceptions that are not material to the timely repayment of the
	asset, it may not necessarily be graded as Special Mention.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | Substandard, grade 5, assets have a well defined
	weakness, which are characterized by the potential loss to the
	Bank if the deficiencies are not corrected. Such assets are
	inadequately protected by the current net worth and paying
	capacity of the borrower or by the collateral pledged, if any.
	These assets may be characterized by one, or a combination of
	the following weaknesses: primary source of repayment is gone or
	severely impaired and the Bank may have to rely upon the
	secondary source; but sufficient problems have arisen to cause
	the Bank to go to abnormal lengths to protect its position in
	order to maintain a high probability of repayment; the borrower
	is unable to generate enough cash flow to reduce their debts;
	deterioration in collateral value or inadequate inspection or
	verification of value (if collateral is expected to be the
	source of repayment); and, flaws in documentation leaving the
	Bank in a subordinated or unsecured position when the collateral
	is needed for repayment of the loan. The presence of one or more
	of these factors does not mandate that the asset be adversely
	classified if, based on the judgment of management, the presence
	of such factors does not indicate a weakness that jeopardizes
	the timely liquidation of the asset, or disposition of the
	collateral at book value.
|
| | Substandard, grade 6, assets display weaknesses
	described above under grade 5, with the added characteristic
	that the weaknesses make collection, or liquidation of the asset
	in full, questionable. These loans are typically on nonaccrual
	status and may have identifiable loss exposure, such as a high
	LTV ratio, and collateral that does not appear to be sufficient
	to provide full collection of principal upon liquidation of the
	asset. These assets are generally considered impaired under SFAS
	No. 114 and a specific valuation allowance
	(SVA) may be established.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

Management applies adjusted loss rates to
pools of loans (pool
rates).Pool rates are
established by examining historical charge-off data for groups
of loans and adjusting them for a variety of qualitative factors
that could affect future loss rates. Where the Bank has no or
nominal actual charge-off data for certain loan types, industry
data and managements judgment is utilized as
representative starting loss rates. The following qualitative
factors are considered: trends in past due and impaired loans;
trends in charge-offs and recoveries;

34



---



##### Table of Contents



trends in loan volume and loan terms; changes in
credit policies and underwriting; experience and the ability of
lending management and staff; external factors including
national and local economic trends and conditions, duration of
the current business cycle, competition, legal and regulatory
requirements, as well as potential events that may affect
collectibility of loans; industry conditions; and, concentration
of credit risk. Adjustments to loss rates are considered for any
qualitative factor deemed appropriate by management and may be
upward or downward. Managements analysis of historical
loss data in determining the initial loss rates for various loan
pools is summarized as follows:




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | For Pass graded pools, management calculated a
	loss rate based on actual aggregate losses by loan. Management
	utilized loss rates experienced by peers or industry average
	data for loan types for which the Bank had no actual losses over
	the period analyzed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | Since Special Mention assets reflect greater risk
	of loss than Pass graded assets, management used 30% of the
	Substandard loss rate, derived for each loan type, as the
	Special Mention loss rate. This estimate is representative of
	loss rates utilized by other institutions, both in terms of
	their loss experiences and as a reasonable industry standard
	rate, when loss data is not available.                                                                                                                                                                                                                                                                                                                                                                       
|
| | For Substandard graded pools, management
	evaluated loss data over the last three years, calculating the
	percentage of the aggregate balance of Substandard loans in each
	pool migrated to loss over this period. For loan types for which
	the Bank did not experience losses in Substandard pools,
	management utilized the highest annual loss rate experienced in
	the last three years for the overall Substandard portfolio. In
	some cases, where this average did not appear reflective of the
	level of risk associated with the loan type, management used an
	industry standard loss rate. In 2002, management may opt to
	utilize quarterly average outstanding balances in determining
	loss rates, which may result in slightly different loss rate
	calculations.

Management analyzes significant problem
assets for specific loss exposure and establishes SVAs as
needed.SFAS No. 114 defines
loan impairment as the existence of uncertainty concerning
collection of all principal and interest per the contractual
terms of a loan. Nonaccrual loans and loans which are considered
troubled debt restructures are typically impaired and analyzed
individually for SVAs. For collateral dependent loans,
impairment is typically considered measured by comparing the
loan amount to the fair value of collateral (determined via
appraisals and/or internal valuations), less costs to sell, with
a SVA established for the shortfall amount. Other methods can be
used to estimate impairment (market price or present value of
expected future cash flows discounted at the loans
original interest rate). Currently, $3.6 million in SVAs
have been established for two loans.

Management performs additional analyses to
validate the reasonableness of the estimate of credit losses.The estimated General Valuation
Allowance (GVA) level, based on the OTS Examiner
Benchmark and review of peer information, was used to establish
a range between $25.9 million and $27.9 million. The
Banks GVA balance of $27.0 million falls within this
range, which further supports the reasonableness of the
Banks GVA balance at December 31, 2001.

The GVA includes an unallocated amount. The
unallocated allowance is based upon managements evaluation
of various conditions, the effects of which are not directly
measured in the determination of the formula and specific
allowances. The evaluation of the inherent loss with respect to
these conditions is subject to a higher degree of uncertainty
because they are not identified with specific problem credits or
portfolio segments. The conditions evaluated in connection with
the unallocated allowance include other general economic and
business conditions affecting our key lending areas.

Management believes that the provision for credit
losses was at an adequate level during 2001 and that the
allowance for credit losses of $30.6 million at
December 31, 2001, is adequate to absorb the losses that,
in the opinion and judgment of management, are known and
inherent in the Banks loan portfolio.



| |                 
| | ----------------
| | Nonaccrual Loans

The Company generally ceases to accrue interest
on any loan with respect to which the loans contractual
payments are more than 90 days delinquent, as well as loans
classified substandard for which interest payment

35



---



##### Table of Contents



reserves were established from loan funds rather
than borrower funds. In addition, interest is not recognized on
any loan for which management has determined that collection of
the Companys investment in the loan is not reasonably
assured. A nonaccrual loan may be restored to accrual status
when delinquent principal and interest payments are brought
current, the loan is paying in accordance with its payment terms
for a period, typically between three to six months, and future
monthly principal and interest payments are expected to be
collected.




| |                  
| | -----------------
| | Real Estate Owned

Properties acquired through foreclosure, or deed
in lieu of foreclosure (real estate owned), are
transferred to REO and carried at the lower of cost or estimated
fair value less the estimated costs to sell the property. The
fair value of the property is based upon a current appraisal.
The difference between the fair value of the real estate
collateral and the loan balance at the time of transfer is
recorded as a loan charge off if fair value is lower. Subsequent
to foreclosure, management periodically performs valuations and
the REO property is carried at the lower of carrying value or
fair value, less costs to sell. The determination of a
propertys estimated fair value incorporates
(1) revenues projected to be realized from disposal of the
property, (2) construction and renovation costs,
(3) marketing and transaction costs and (4) holding
costs (e.g., property taxes, insurance and homeowners
association dues). Any subsequent declines in the fair value of
the REO property after the date of transfer are recorded through
a write-down of the asset. Revenue recognition upon disposition
of the property is dependent upon the sale having met certain
criteria relating to the buyers initial investment in the
property sold. Gains and losses from sales of real estate owned
properties are reflected in Income/(loss) from real estate
operations, net in the consolidated statements of income.

RESULTS OF OPERATIONS



| |                        
| | -----------------------
| | 2001 Compared with 2000

General

Net income for the year ended December 31,
2001, was $17.3 million, or $2.29 per diluted share before
extraordinary item and $16.8 million, or $2.23 per diluted
share after extraordinary item, an increase of 17.85% over net
earnings of $14.3 million, or $1.94 per diluted share, for
the same period in 2000. Net income for the year ended
December 31, 2001, resulted in a return on average assets
(ROA) of 0.93% and a return on average equity
(ROE) of 15.13%, compared with a ROA of 0.85% and a
ROE 14.58% for the year ended December 31, 2000. Income
before income taxes and extraordinary item increased 19.89%, for
the year ended December 31, 2001, to $29.9 million
from $25.0 million in 2000.

The extraordinary item, net of tax, of
$0.5 million for the year ended December 31, 2001, was
due to the acceleration of the amortization of $0.5 million in
prepaid offering costs and $0.3 million in premium paid in
conjunction with the repurchase of $13.6 million of 1997
12.50% Senior Notes during the year.

The Companys net interest income before
provision for credit losses increased 2.84% to
$62.0 million during the year ended December 31, 2001,
compared with $60.3 million for the year ended
December 31, 2000. The Companys net interest income
was impacted by a 475 basis point drop in interest rates during
2001. The resulting historically low interest rate environment
produced compression in the net interest margin during the first
half of the year due to the immediate repricing of adjustable
rate assets and the lag in liability repricing resulting from
the six month weighted average maturity of certificates of
deposits. The Companys yield on average earning assets was
8.20% for the year ended December 31, 2001, compared with
8.94% during the same period in 2000. Contributing to the
increase in year over year interest revenues on loans was a
$10.9 million, or 34.60%, decrease in nonaccrual loans. The
average cost of funds for the Company decreased to 5.21% during
the year ended December 31, 2001, compared with 5.81% for
the year ended December 31, 2000. The Companys
resulting net interest margin for the year ended
December 31, 2001, was 3.45%, compared with 3.62% during
the same period in 2000. Although the year over year net
interest margin declined, the Company has shown continuous
improvement in this area, with the net interest margin
increasing to 3.66% during the fourth quarter of 2001, from
3.30% during the first and second quarters of 2001, and 3.49%
during the third quarter of 2001. As of December 31, 2001,
90.62% of the Companys loan portfolio

36



---



##### Table of Contents



was tied to adjustable rate indices, such as
COFI, Prime, CMT, MTA and LIBOR. Out of these adjustable rate
loans, approximately 61.73%, or $1.0 billion, have reached their
internal interest rate floors. Therefore, these loans have taken
on fixed rate characteristics, while the majority of the
Companys deposits have a six month average life.


Provision for credit losses totaled
$3.4 million for the year ended December 31, 2001,
compared with $6.0 million for the year ended
December 31, 2000. The decrease in the provision for credit
losses was due to improvement in asset quality. At
December 31, 2001, the ratio of total allowance for credit
losses to gross loans was 1.76%, compared with 1.80% at
December 31, 2000.

Nonaccrual loans totaled $20.7 million at
December 31, 2001 (or 1.11% of total assets), compared with
nonaccrual loans of $31.6 million (or 1.80% of total
assets) at December 31, 2000. Total classified loans were
$58.0 million at December 31, 2001, compared with
$72.2 million at December 31, 2000. Delinquent loans
totaled $7.7 million at December 31, 2001, compared with
$26.9 million at December 31, 2000. The Company had
$1.3 million in other real estate owned properties at
December 31, 2001, compared with $2.9 million at
December 31, 2000.

Noninterest revenues were $5.6 million for
the year ended December 31, 2001, compared with noninterest
revenues of $8.1 million earned during the same period in
2000. Noninterest revenues for the year ended December 31,
2000, included a $1.2 million award from the United States
Treasury Departments Bank Enterprise Award program for the
Banks lending and financial services activities in
distressed communities.

Total general and administrative expenses
(G&A) were $34.4 million for the year ended
December 31, 2001, compared with $34.3 million of
G&A incurred during the same period in 2000. Overall G&A
for the year ended December 31, 2001, was consistent with
2000.

37



---



##### Table of Contents





| |                    
| | -------------------
| | Net Interest Income

The following table shows average balance sheet
data, related revenues and costs, and effective weighted average
yields and costs for each of the three years ended
December 31.

|                                      |                                 |                                                        |                                            |           |           |           |        |         |         |           |      |        |       |         |  |           |           |           |        |   |         |         |      |   |       |      |  |        |           |           |        |   |         |         |      |   |       |      | 
|------------------------------------- | ------------------------------- | ------------------------------------------------------ | ------------------------------------------ | --------- | --------- | --------- | ------ | ------- | ------- | --------- | ---- | ------ | ----- | ------- |  | --------- | --------- | --------- | ------ | - | ------- | ------- | ---- | - | ----- | ---- |  | ------ | --------- | --------- | ------ | - | ------- | ------- | ---- | - | ----- | ---- | 
|                                      |                                 |                                                       
|                                      |                                 | Year Ended December 31,                               
|                                      |                                 |                                                       
|                                      |                                 |                                                        |                                            |           |           |          
|                                      |                                 | 2001                                                   |                                            | 2000      |           | 1999     
|                                      |                                 |                                                        |                                            |           |           |          
|                                      |                                 | Average                                                |                                            | Revenues/ |           | Yield/    |        | Average |         | Revenues/ |      | Yield/ |       | Average |  | Revenues/ |           | Yield/   
|                                      |                                 | Balance                                                |                                            | Cost      |           | Cost      |        | Balance |         | Cost      |      | Cost   |       | Balance |  | Cost      |           | Cost     
|(Dollars in thousands)                |                                 |                                                        |                                            |           |           |           |        |         |         |           |      |        |       |         |  |           |           |          
|Assets:                               |                                 |                                                        |                                            |           |           |           |        |         |         |           |      |        |       |         |  |           |           |           |        |   |         |         |      |   |       |      |  |        |           |           |        |   |         |         |      |  
|                                      | Interest-earning assets:        |                                                        |                                            |           |           |           |        |         |         |           |      |        |       |         |  |           |           |           |        |   |         |         |      |   |       |      |  |        |           |           |        |   |         |         |      |   |      
|                                      |                                 | Loans receivable(1)(2)                                 |                                            | $         | 1,696,785 |           |        | $       | 143,249 |           |      |        | 8.44  | %       |  | $         | 1,547,206 |           |        | $ | 141,279 |         |      |   | 9.13  | %    |  | $      | 1,411,697 |           |        | $ | 126,854 |         |      |   | 8.99  | %   
|                                      |                                 | Cash and cash equivalents                              |                                            |           | 81,446    |           |        |         | 3,231   |           |      |        | 3.97  |         |  |           | 98,071    |           |        |   | 6,233   |         |      |   | 6.36  |      |  |        | 99,179    |           |        |   | 4,911   |         |      |   | 4.95  |     
|                                      |                                 | Investment in capital stock of Federal Home Loan
	Bank |                                            |           | 21,754    |           |        |         | 1,206   |           |      |        | 5.54  |         |  |           | 20,566    |           |        |   | 1,476   |         |      |   | 7.18  |      |  |        | 18,344    |           |        |   | 982     |         |      |   | 5.35  |     
|                                      |                                 |                                                        |                                            |           |           |           |        |         |         |           |      |        |       |         |  |           |           |           |        |   |         |         |      |   |       |      |  |        |           |           |        |   |         |         |      |  
|                                      |                                 |                                                        | Total interest-earning assets              |           |           | 1,799,985 |        |         |         | 147,686   |      |        |       | 8.20    |  |           |           | 1,665,843 |        |   |         | 148,988 |      |   |       | 8.94 |  |        |           | 1,529,220 |        |   |         | 132,747 |      |   |       | 8.68 | 
|                                      |                                 |                                                        |                                            |           |           |           |        |         |         |           |      |        |       |         |  |           |           |           |        |   |         |         |      |   |       |      |  |        |           |           |        |   |         |         |      |  
|                                      | Noninterest-earning assets      |                                                        |                                            | 2,845     |           |           |        |         |         |           |      |        |       |         |  | 9,410     |           |           |        |   |         |         |      |   |       |      |  | 11,005 |           |           |        |   |         |         |      |   |      
|                                      |                                 |                                                        |                                            |           |           |           |        |         |         |           |      |        |       |         |  |           |           |           |        |   |         |         |      |   |       |      |  |        |           |           |        |   |         |         |      |  
|                                      |                                 |                                                        | Total assets                               |           | $         | 1,802,830 |        |         |         |           |      |        |       |         |  |           | $         | 1,675,253 |        |   |         |         |      |   |       |      |  |        | $         | 1,540,225 |        |   |         |         |      |   |       |      | 
|                                      |                                 |                                                        |                                            |           |           |           |        |         |         |           |      |        |       |         |  |           |           |           |        |   |         |         |      |   |       |      |  |        |           |           |        |   |         |         |      |  
|Liabilities and Stockholders Equity: |                                 |                                                        |                                            |           |           |           |        |         |         |           |      |        |       |         |  |           |           |           |        |   |         |         |      |   |       |      |  |        |           |           |        |   |         |         |      |  
|                                      | Interest-bearing liabilities:   |                                                        |                                            |           |           |           |        |         |         |           |      |        |       |         |  |           |           |           |        |   |         |         |      |   |       |      |  |        |           |           |        |   |         |         |      |   |      
|                                      |                                 | Deposits                                               |                                            | $         | 1,191,618 |           |        | $       | 60,022  |           |      |        | 5.04  |         |  | $         | 1,138,119 |           |        | $ | 63,513  |         |      |   | 5.58  |      |  | $      | 1,029,701 |           |        | $ | 50,831  |         |      |   | 4.94  |     
|                                      |                                 | FHLB advances                                          |                                            |           | 407,836   |           |        |         | 20,956  |           |      |        | 5.07  |         |  |           | 346,983   |           |        |   | 20,180  |         |      |   | 5.82  |      |  |        | 343,205   |           |        |   | 17,795  |         |      |   | 5.18  |     
|                                      |                                 | Senior notes                                           |                                            |           | 31,714    |           |        |         | 3,970   |           |      |        | 12.52 |         |  |           | 39,912    |           |        |   | 4,989   |         |      |   | 12.50 |      |  |        | 40,000    |           |        |   | 5,000   |         |      |   | 12.50 |     
|                                      |                                 | Capital securities                                     |                                            |           | 7,345     |           |        |         | 722     |           |      |        | 9.83  |         |  |           |          |           |        |   |        |         |      |   |      |      |  |        |          |           |        |   |        |         |      |   |      |     
|                                      |                                 |                                                        |                                            |           |           |           |        |         |         |           |      |        |       |         |  |           |           |           |        |   |         |         |      |   |       |      |  |        |           |           |        |   |         |         |      |  
|                                      |                                 |                                                        | Total interest-bearing liabilities         |           |           | 1,638,513 |        |         |         | 85,670    |      |        |       | 5.21    |  |           |           | 1,525,014 |        |   |         | 88,682  |      |   |       | 5.81 |  |        |           | 1,412,906 |        |   |         | 73,626  |      |   |       | 5.21 | 
|                                      |                                 |                                                        |                                            |           |           |           |        |         |         |           |      |        |       |         |  |           |           |           |        |   |         |         |      |   |       |      |  |        |           |           |        |   |         |         |      |  
|                                      | Noninterest-bearing checking    |                                                        |                                            | 32,956    |           |           |        |         |         |           |      |        |       |         |  | 31,174    |           |           |        |   |         |         |      |   |       |      |  | 24,469 |           |           |        |   |         |         |      |   |      
|                                      | Noninterest-bearing liabilities |                                                        |                                            | 20,098    |           |           |        |         |         |           |      |        |       |         |  | 21,124    |           |           |        |   |         |         |      |   |       |      |  | 15,337 |           |           |        |   |         |         |      |   |      
|                                      | Stockholders equity            |                                                        |                                            | 111,263   |           |           |        |         |         |           |      |        |       |         |  | 97,941    |           |           |        |   |         |         |      |   |       |      |  | 87,513 |           |           |        |   |         |         |      |   |      
|                                      |                                 |                                                        |                                            |           |           |           |        |         |         |           |      |        |       |         |  |           |           |           |        |   |         |         |      |   |       |      |  |        |           |           |        |   |         |         |      |  
|                                      |                                 |                                                        | Total liabilities and stockholders equity |           | $         | 1,802,830 |        |         |         |           |      |        |       |         |  |           | $         | 1,675,253 |        |   |         |         |      |   |       |      |  |        | $         | 1,540,225 |        |   |         |         |      |   |       |      | 
|                                      |                                 |                                                        |                                            |           |           |           |        |         |         |           |      |        |       |         |  |           |           |           |        |   |         |         |      |   |       |      |  |        |           |           |        |   |         |         |      |  
|Net interest income                   |                                 |                                                        |                                            |           |           | $         | 62,016 |         |         |           |      |        |       |         |  |           |           | $         | 60,306 |   |         |         |      |   |       |      |  |        |           | $         | 59,121 |   |         |         |      |  
|                                      |                                 |                                                        |                                            |           |           |           |        |         |         |           |      |        |       |         |  |           |           |           |        |   |         |         |      |   |       |      |  |        |           |           |        |   |         |         |      |  
|Interest rate spread                  |                                 |                                                        |                                            |           |           |           |        |         |         |           | 2.99 | %      |       |         |  |           |           |           |        |   |         |         | 3.13 | % |       |      |  |        |           |           |        |   |         |         | 3.47 | %
|                                      |                                 |                                                        |                                            |           |           |           |        |         |         |           |      |        |       |         |  |           |           |           |        |   |         |         |      |   |       |      |  |        |           |           |        |   |         |         |      |  
|Net interest margin                   |                                 |                                                        |                                            |           |           |           |        |         |         |           | 3.45 | %      |       |         |  |           |           |           |        |   |         |         | 3.62 | % |       |      |  |        |           |           |        |   |         |         | 3.87 | %
|                                      |                                 |                                                        |                                            |           |           |           |        |         |         |           |      |        |       |         |  |           |           |           |        |   |         |         |      |   |       |      |  |        |           |           |        |   |         |         |      |  



---



| | 
| | 
| | 



|    |                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes the interest on nonaccrual loans only to
	the extent that it was paid and recognized as interest income.                                                    
|   
|(2) | Includes income earned on net deferred loan fees
	of $2.4 million, $2.6 million and $4.7 million for the
	years ended December 31, 2001, 2000 and 1999, respectively.

The operations of the Company are substantially
dependent on its net interest income, which is the difference
between the interest income earned from its interest-earning
assets and the interest expense incurred on its interest-bearing
liabilities. The Companys net interest margin is its net
interest income divided by its average interest-earning assets.
Net interest income and net interest margin are affected by
several factors, including (1) the level of, and the
relationship between, the dollar amount of interest-earning
assets and interest-bearing liabilities, (2) the
relationship between the repricing or maturity of the
Companys adjustable rate and fixed rate loans and short
term investment securities and its deposits and borrowings, and
(3) the magnitude of the Companys noninterest-earning
assets, including nonaccrual loans and REO.

The Companys net interest income increased
2.84% to $62.0 million during the year ended
December 31, 2001, compared with $60.3 million during
the year ended December 31, 2000. Average earning assets
increased to $1.8 billion for the year ended
December 31, 2001, compared with $1.7 billion for the
year ended December 31, 2000. Due to the historically low
interest rate environment in 2001, which has continued into
2002, prepayment speeds continue to increase. If this trend
continues, it could negatively impact growth in

38



---



##### Table of Contents



interest earning assets, which in turn could
negatively impact net income and operational efficiency. The
yield on interest-earning assets was 8.20% for the year ended
December 31, 2001, compared with 8.94% during the same
period in 2000. Contributing to the increase in year over year
interest revenues on loans was a $10.9 million, or 34.60%,
decrease in nonaccrual loans. The steady growth in loans was
funded through borrowings from the FHLB. The average cost of
interest-bearing liabilities for the Company decreased to 5.21%
for the year ended December 31, 2001, compared with 5.81%
during the same period in 2000. Expressed as a percentage of
interest-earning assets, the Companys resulting net
interest margin was 3.45% for the year ended December 31,
2001, compared with 3.62% during the same period in 2000.
Current year earnings were impacted by the 475 basis point drop
in interest rates during 2001. The resulting interest rate
environment caused compression in the net interest margin during
the first half of the year due to the immediate repricing of
adjustable rate assets and the lag in liability repricing
resulting from the six month weighted average maturity of
certificates of deposits.


The substantial majority of the Companys
earning assets (principally loans) are adjustable rate. The
Companys deposits are primarily comprised of term
certificate accounts, which carry fixed interest rates and
predominantly possess original terms ranging from six to twelve
months. The Companys borrowings, which are principally
derived from the FHLB, are for terms ranging from one to ten
years (though such terms are subject to certain early call
provisions) and carry both variable and fixed interest rates.

As of December 31, 2001, 90.62% of the
Companys net loan portfolio was adjustable rate, with
84.91% of such loans subject to repricing no less frequently
than annually. The substantial majority of such loans are priced
at a margin over various market sensitive indices, including the
MTA, the Prime Rate, LIBOR, COFI, one year CMT and the one month
CMT. As of December 31, 2001, $1.0 billion, or 61.73%,
of the Companys adjustable rate net loan portfolio had
reached internal interest rate floors. These loans will take on
fixed rate repricing characteristics until sufficient upward
interest rate movements will bring the fully indexed rate above
their internal interest rate floors.

At December 31, 2001, 68.79% of the
Companys interest-bearing deposits were comprised of
certificate accounts, the majority of which have original terms
averaging twelve months. The remaining, weighted average term to
maturity for the Companys certificate accounts
approximated ten months at December 31, 2001. Generally,
the Companys offering rates for certificate accounts move
directionally with the general level of short term interest
rates, though the margin may vary due to competitive pressures.
The compression in the net interest margin during 2001 was due
to the rapid decline in interest rates. Since the majority of
the certificate of deposit accounts have repriced at least once
to current lower rates, the Company expects that the cost of
these accounts will stabilize in 2002. However, small upward
interest rate adjustments over an extended period of time could
have an adverse impact on the net interest margin due to the
fixed rate repricing characteristics of the loan portfolio
previously discussed.

As of December 31, 2001, 74.17% of the
Companys borrowings from the FHLB are fixed rate, with
remaining terms ranging from one to ten years (though such
remaining terms are subject to early call provisions). The
remaining 25.83% of the borrowings carry an adjustable interest
rate, with 80% of the adjustable borrowings tied to the Prime
Rate, maturing in February 2003. The remaining 20% is tied to
one month LIBOR, and matures in May 2002. Accordingly, the
continued decrease in market interest rates has resulted in a
gradual decrease in the cost of the Companys FHLB
borrowings, and the cost of any newly acquired borrowings will
reflect current market pricing.

39



---



##### Table of Contents



The following table sets forth the dollar amount
of changes in interest revenues and interest costs attributable
to changes in the balances of interest-earning assets and
interest-bearing liabilities, and changes in interest rates. For
each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to
(1) changes in volume (i.e., changes in volume multiplied
by old rate), (2) changes in rate (i.e., changes in rate
multiplied by old volume) and (3) changes attributable to
both rate and volume.

|                              |                                                        |                                        |        |                                        |   |         |         |         |   |            |      |        |   |         |        |        |   |   |        |        |   |   |        |       |  |   |      |     |   |   |        |        |  
|----------------------------- | ------------------------------------------------------ | -------------------------------------- | ------ | -------------------------------------- | - | ------- | ------- | ------- | - | ---------- | ---- | ------ | - | ------- | ------ | ------ | - | - | ------ | ------ | - | - | ------ | ----- |  | - | ---- | --- | - | - | ------ | ------ | -
|                              |                                                        |                                        |        |                                       
|                              |                                                        | Years Ended December 31, 2001 and 2000 |        | Years Ended December 31, 2000 and 1999
|                              |                                                        | Increase (Decrease) Due to Change In   |        | Increase (Decrease) Due to Change In  
|                              |                                                        |                                        |        |                                       
|                              |                                                        |                                        |        | Volume and                             |   | Net     |         |         |   | Volume and |      | Net   
|                              |                                                        | Volume                                 |        | Rate                                   |   | Rate(1) |         | Change  |   | Volume     |      | Rate   |   | Rate(1) |        | Change
|(Dollars in thousands)        |                                                        |                                        |        |                                        |   |         |         |         |   |            |      |        |   |         |        |       
|Interest-earning assets:      |                                                        |                                        |        |                                        |   |         |         |         |   |            |      |        |   |         |        |        |   |   |        |        |   |   |        |       |  |   |      |     |   |   |        |       
|                              | Loans receivable(2)                                    |                                        | $      | 13,658                                 |   |         | $       | (10,658 | ) |            | $    | (1,030 | ) |         | $      | 1,970  |   |   | $      | 12,177 |   |   | $      | 2,051 |  |   | $    | 197 |   |   | $      | 14,425 |  
|                              | Cash and cash equivalents                              |                                        |        | (1,057                                 | ) |         |         | (2,342  | ) |            |      | 397    |   |         |        | (3,002 | ) |   |        | (55    | ) |   |        | 1,392 |  |   |      | (15 | ) |   |        | 1,322  |  
|                              | Investment in capital stock of Federal Home Loan
	Bank |                                        |        | 85                                     |   |         |         | (336    | ) |            |      | (19    | ) |         |        | (270   | ) |   |        | 119    |   |   |        | 335   |  |   |      | 40  |   |   |        | 494    |  
|                              |                                                        |                                        |        |                                        |   |         |         |         |   |            |      |        |   |         |        |        |   |   |        |        |   |   |        |       |  |   |      |     |   |   |        |       
|                              |                                                        |                                        | 12,686 |                                        |   |         | (13,336 | )       |   |            | (652 | )      |   |         | (1,302 | )      |   |   | 12,241 |        |   |   | 3,778  |       |  |   | 222  |     |   |   | 16,241 |       
|                              |                                                        |                                        |        |                                        |   |         |         |         |   |            |      |        |   |         |        |        |   |   |        |        |   |   |        |       |  |   |      |     |   |   |        |       
|Interest-bearing liabilities: |                                                        |                                        |        |                                        |   |         |         |         |   |            |      |        |   |         |        |        |   |   |        |        |   |   |        |       |  |   |      |     |   |   |        |       
|                              | Deposits                                               |                                        |        | 2,986                                  |   |         |         | (6,186  | ) |            |      | (291   | ) |         |        | (3,491 | ) |   |        | 5,352  |   |   |        | 6,632 |  |   |      | 698 |   |   |        | 12,682 |  
|                              | FHLB advances                                          |                                        |        | 3,539                                  |   |         |         | (2,351  | ) |            |      | (412   | ) |         |        | 776    |   |   |        | 196    |   |   |        | 2,165 |  |   |      | 24  |   |   |        | 2,385  |  
|                              | Senior notes                                           |                                        |        | (1,025                                 | ) |         |         | 7       |   |            |      | (1     | ) |         |        | (1,019 | ) |   |        | (11    | ) |   |        |      |  |   |      |    |   |   |        | (11    | )
|                              | Capital securities                                     |                                        |        |                                       |   |         |         |        |   |            |      | 722    |   |         |        | 722    |   |   |        |       |   |   |        |      |  |   |      |    |   |   |        |       |  
|                              |                                                        |                                        |        |                                        |   |         |         |         |   |            |      |        |   |         |        |        |   |   |        |        |   |   |        |       |  |   |      |     |   |   |        |       
|                              |                                                        |                                        | 5,500  |                                        |   |         | (8,530  | )       |   |            | 18   |        |   |         | (3,012 | )      |   |   | 5,537  |        |   |   | 8,797  |       |  |   | 722  |     |   |   | 15,056 |       
|                              |                                                        |                                        |        |                                        |   |         |         |         |   |            |      |        |   |         |        |        |   |   |        |        |   |   |        |       |  |   |      |     |   |   |        |       
|Change in net interest income |                                                        | $                                      | 7,186  |                                        |   | $       | (4,806  | )       |   | $          | (670 | )      |   | $       | 1,710  |        |   | $ | 6,704  |        |   | $ | (5,019 | )     |  | $ | (500 | )   |   | $ | 1,185  |       
|                              |                                                        |                                        |        |                                        |   |         |         |         |   |            |      |        |   |         |        |        |   |   |        |        |   |   |        |       |  |   |      |     |   |   |        |       



---



|    |                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------
|(1) | Calculated by multiplying change in rate by
	change in volume.                                                   
|   
|(2) | Includes the interest on nonaccrual loans only to
	the extent that it was paid and recognized as interest income.

The Companys interest revenues decreased by
$1.3 million, or 0.87%, during the year ended
December 31, 2001, compared with the same period in 2000.
This decrease was primarily attributable to the 239 basis point
decrease in the yield on cash and cash equivalents, which
averaged 3.97% during 2001, compared with 6.36% in 2000. Average
cash and cash equivalents decreased to $81.4 million in
2001, compared with $98.1 million in 2000. Also
contributing to the decrease was a 69 basis point decline
in the yield on average loans receivable, which averaged 8.44%
during 2001, compared with 9.13% in 2000, partially offset by an
increase of 9.67% in the average balance of loans outstanding.
Average total loans, net of deferred fees, grew to
$1.7 billion in 2001, compared with $1.5 billion in
2000.

Interest costs decreased by $3.0 million, or
3.40%, during the year ended December 31, 2001, compared
with the same period in 2000. The decrease was primarily
attributable to a 60 basis point decrease in the average cost of
funds, to 5.21% for the year ended December 31, 2001, from
5.81% for the same period of 2000. The Companys average
interest-bearing liabilities increased to $1.64 billion for
the year ended December 31, 2001, compared with
$1.53 billion during the same period in 2000, primarily due
to increases of $60.9 million and $53.5 million, in the
average balance of FHLB advances and average interest-bearing
deposits, respectively. Average interest-bearing deposits were
$1.19 billion with an average cost of funds of 5.04% during
the year ended December 31, 2001, compared with
$1.14 billion and a 5.58% average cost of funds during the
same period in 2000. The average balance of certificates of
deposit (CDs) was $892.0 million with an
average cost of funds of 5.54%, compared with
$891.0 million and a 5.94% average cost of funds during the
years ended December 31, 2001 and 2000, respectively. The
average balance of money market accounts was $215.2 million
with an average cost of funds of 3.94% during the year ended
December 31, 2001, compared with $180.8 million and a
4.99% average cost of funds during the same period in 2000. As a
percentage of total average deposits, transaction accounts have
increased to 27.16% for the year ended December 31, 2001,
compared with 23.80% of total average deposits during the same
period in 2000. The change in the deposit mix and the decrease
in the average cost of funds had a positive impact on the
Companys total interest costs during 2001.

40



---



##### Table of Contents



These changes in interest revenues and interest
costs produced an increase of $1.7 million, or 2.84%, in
the Companys net interest income for the year ended
December 31, 2001, compared with the same period in 2000.
Expressed as a percentage of interest-earning assets, the
Companys net interest margin decreased to 3.45% during the
year ended December 31, 2001, compared with the net
interest margin of 3.62% produced during the same period in
2000. The 475 basis point drop in interest rates during 2001
produced compression in the net interest margin during the first
half of the year due to the immediate repricing of adjustable
rate assets and the lag in liability repricing resulting from
the six month weighted average maturity of certificates of
deposits.

Although the year over year net interest margin
declined, the Company has shown continuous improvement in this
area, with the net interest margin increasing to 3.66% during
the fourth quarter of 2001, from 3.30% during the first and
second quarters of 2001, and 3.49% during the third quarter of
2001. This quarter over quarter increase is primarily due to
experiencing the benefit of the repricing of the certificates of
deposits, which have a six month average life. As of
December 31, 2001, $1.0 billion, or 61.73%, of the
Companys adjustable rate net loan portfolio had reached
contractual floors. These loans will take on fixed rate
repricing characteristics until sufficient upward interest rate
movements will bring the fully indexed rate above their floors.

Provision for Credit Losses

Provision for credit losses were
$3.4 million and $6.0 million for 2001 and 2000,
respectively. The decrease in the provision for credit losses in
2001, was due to improvement in asset quality through the
elimination of collateral dependent lending, tightening of other
loan attributes (LTV, DSCR, etc.), revision of approval
authorities and internal limitations on loan size beginning in
January 2001. Nonaccrual loans totaled $20.7 million at
December 31, 2001 (or 1.11% of total assets), compared with
nonaccrual loans of $31.6 million (or 1.80% of total
assets) at December 31, 2000. Other classified loans were
$37.3 million at December 31, 2001, compared with
$40.6 million at December 31, 2000. Additionally,
total classified assets to Bank core capital and general
allowance for credit losses was 32.59% in 2001, compared with
45.78% in 2000. Delinquent loans totaled $7.7 million at
December 31, 2001, the lowest level of delinquencies in the
last twelve years, compared with $26.9 million at
December 31, 2000. As a result of the improved asset
quality, management reduced the level of provision for credit
losses in 2001. At December 31, 2001, the ratio of
allowance for credit losses to loans receivable, net of specific
allowance, was 1.76%, compared with 1.80% at December 31,
2000.

Although the Company maintains its allowance for
credit losses at a level which it considers to be adequate to
absorb the losses that, in the opinion and judgment of
management, are known and inherent in the Banks loan
portfolio, there can be no assurance that such losses will not
exceed the amounts, thereby adversely affecting future results
of operations. The calculation of the adequacy of the allowance
for credit losses, and therefore the requisite amount of
provision for credit losses, is based on several factors,
including underlying loan collateral values, delinquency trends
and historical loan loss experience, as discussed herein, all of
which can change without notice based on market and economic
conditions and other factors. See Item 1 
Business, Allowance for Credit losses for a more complete
discussion of the Companys allowance for credit losses.

Noninterest Revenues

Noninterest revenues were $5.6 million for
the year ended December 31, 2001, a decrease of
$2.5 million, or 30.44%, from $8.1 million earned in
2000.

Loan related fees primarily consist of fees
collected from borrowers (1) for the early repayment of
their loans, (2) for the extension of the maturity of loans
(predominantly short term construction loans, with respect to
which extension options are often included in the original term
of the Companys loan) and (3) in connection with
certain loans which contain exit or release fees payable to the
Company upon the maturity or repayment of the Companys
loan. The Company anticipates that these loan related fees will
decrease, as the nature of loans currently being underwritten
will not allow the Company to charge the same level of fees that

41



---



##### Table of Contents



were charged in prior years. Noninterest revenues
also include deposit fee income for service fees, nonsufficient
fund fees and other miscellaneous check and service charges,
which increased to $1.4 million for the year ended
December 31, 2001, an increase of 33.27% from
$1.0 million earned in 2000. This increase in deposit fees
was generated from new product offerings and a new fee schedule
rolled out in July of 2000.


Noninterest revenues for the year ended
December 31, 2000, included a $1.2 million award from
the United States Treasury Departments Bank Enterprise
Award Program for its lending and financial services activities
in distressed communities.

Real Estate Operations

The table below sets forth the costs and revenues
attributable to the Companys REO properties for the
periods indicated. The compensatory and legal costs directly
associated with the Companys property management and
disposal operations are included in general and administrative
expenses.

|                                                 |                                     |                          |     |      |   |      |      |      |   |   |      |      |  
|------------------------------------------------ | ----------------------------------- | ------------------------ | --- | ---- | - | ---- | ---- | ---- | - | - | ---- | ---- | -
|                                                 |                                     |                         
|                                                 |                                     | Years Ended December 31,
|                                                 |                                     |                         
|                                                 |                                     | 2001                     |     | 2000 |   | 1999
|(Dollars in thousands)                           |                                     |                          |     |      |   |     
|Expenses associated with real estate operations: |                                     |                          |     |      |   |      |      |      |   |   |      |     
|                                                 | Repairs, maintenance and renovation |                          | $   | (22  | ) |      | $    | (294 | ) |   | $    | (219 | )
|                                                 | Insurance and property taxes        |                          |     | (10  | ) |      |      | (18  | ) |   |      | (132 | )
|                                                 |                                     |                          |     |      |   |      |      |      |   |   |      |     
|                                                 |                                     |                          | (32 | )    |   |      | (312 | )    |   |   | (351 | )   
|Net income/(loss) from sales of REO              |                                     |                          | 106 |      |   |      | (166 | )    |   |   | 754  |     
|Property operations, net                         |                                     |                          | 131 |      |   |      | 30   |      |   |   | 1    |     
|Charge-off/provision for losses on REO           |                                     |                          |    |      |   |      | (476 | )    |   |   | (80  | )   
|                                                 |                                     |                          |     |      |   |      |      |      |   |   |      |     
|Income/(loss) from real estate operations, net   |                                     | $                        | 205 |      |   | $    | (924 | )    |   | $ | 324  |     
|                                                 |                                     |                          |     |      |   |      |      |      |   |   |      |     

Net income/(loss) from sales of REO properties
represent the difference between the proceeds received from
property disposal and the carrying value of such properties upon
disposal. Property operations principally include the net
operating income (collected rental revenues less operating
expenses and certain renovation costs) from foreclosed income
producing properties or receipt, following foreclosure, of
similar funds held by receivers during the period the original
loan was in default.

During the year ended December 31, 2001, the
Company sold 5 properties generating net cash proceeds of
$3.0 million and net income of $0.1 million, compared
with sales of 14 properties generating net cash proceeds of
$5.1 million and a net loss of $0.2 million during the
year ended December 31, 2000.

Noninterest Expenses



| |                                    
| | -----------------------------------
| | General and Administrative Expenses

The table below details the Companys
general and administrative expenses for the periods indicated.

|                       |                 |                          |        |               |        |        |        |      |        |      |        |        |    |   |        |     |        |   |        |       |        |   |       |      |       | 
|---------------------- | --------------- | ------------------------ | ------ | ------------- | ------ | ------ | ------ | ---- | ------ | ---- | ------ | ------ | -- | - | ------ | --- | ------ | - | ------ | ----- | ------ | - | ----- | ---- | ----- | 
|                       |                 |                         
|                       |                 | Years Ended December 31,
|                       |                 |                         
|                       |                 |                          |        |              
|                       |                 | 2001 and 2000            |        | 2000 and 1999
|                       |                 |                          |        |              
|                       |                 | 2001                     |        | 2000          |        | Change |        | 2000 |        | 1999 |        | Change
|(Dollars in thousands) |                 |                          |        |               |        |        |        |      |        |      |        |       
|Employee               |                 | $                        | 18,320 |               |        | $      | 17,391 |      |        | $    | 929    |        |    | $ | 17,391 |     |        | $ | 14,822 |       |        | $ | 2,569 |     
|Operating              |                 |                          | 6,409  |               |        |        | 6,092  |      |        |      | 317    |        |    |   | 6,092  |     |        |   | 6,393  |       |        |   | (301  | )   
|Occupancy              |                 |                          | 4,015  |               |        |        | 3,758  |      |        |      | 257    |        |    |   | 3,758  |     |        |   | 3,889  |       |        |   | (131  | )   
|Professional           |                 |                          | 2,857  |               |        |        | 4,255  |      |        |      | (1,398 | )      |    |   | 4,255  |     |        |   | 4,035  |       |        |   | 220   |     
|Technology             |                 |                          | 1,897  |               |        |        | 1,939  |      |        |      | (42    | )      |    |   | 1,939  |     |        |   | 1,988  |       |        |   | (49   | )   
|SAIF premiums and      |                 |                          |        |               |        |        |        |      |        |      |        |        |    |   |        |     |        |   |        |       |        |   |       |     
|                       | OTS assessments |                          |        | 929           |        |        |        | 893  |        |      |        | 36     |    |   |        | 893 |        |   |        | 1,236 |        |   |       | (343 | )    
|                       |                 |                          |        |               |        |        |        |      |        |      |        |        |    |   |        |     |        |   |        |       |        |   |       |     
|                       |                 | Total                    |        | $             | 34,427 |        |        | $    | 34,328 |      |        | $      | 99 |   |        | $   | 34,328 |   |        | $     | 32,363 |   |       | $    | 1,965 | 
|                       |                 |                          |        |               |        |        |        |      |        |      |        |        |    |   |        |     |        |   |        |       |        |   |       |     

42



---



##### Table of Contents



Total general and administrative expenses were
$34.4 million for the year ended December 31, 2001,
compared with $34.3 million of G&A incurred during the
same period in 2000. G&A for the year ended
December 31, 2001, was consistent with 2000. The increase
in employee costs was primarily due to an increase of
$0.7 million in compensation related expenses as a result
of a new formalized employee merit program implemented in 2001.
The decrease in professional fees was primarily due to lower
legal expenses related to litigation as a result of fewer
outstanding legal issues and insurance company reimbursements
for legal fees. The Companys efficiency ratio (defined as
total general and administrative expenses divided by net
interest income before provision and noninterest revenues,
excluding REO, net) improved to 44.80% during the fourth quarter
from 55.37%, 54.36% and 50.01% during the first, second and
third quarters of 2001, respectively, as a result of the
combined quarter over quarter improvement in the net interest
margin in 2001 and lower G&A costs during the fourth
quarter, compared with the earlier quarters of 2001. The
resulting efficiency ratio for the year ended December 31,
2001, was 50.89% compared with 50.19% for the year ended
December 31, 2000.

The Company pays premiums to the SAIF based upon
the dollar amount of deposits it holds and the assessment rate
charged by the FDIC, which is based upon the Companys
financial condition, its capital ratios and the rating it
receives in connection with annual regulatory examinations by
the OTS.



| |                            
| | ---------------------------
| | Other Non-Operating Expense

During 2001, other non-operating expenses totaled
$0.1 million associated with ongoing litigation and/or
satisfaction of judgments against the Company, compared with
$2.2 million during the same period in 2000. This decrease
is primarily attributable to the $2.0 million expense
during 2000 associated with ongoing litigation and/or
satisfaction of judgments against the Company, including the
satisfaction of the judgment in the Takaki vs. Hawthorne
Savings and Loan Associationmatter, and $0.1 million
in connection with the early termination of the Irvine office
lease.

Income Taxes

The Company recorded an income tax provision of
$12.6 million, excluding a $0.3 million income tax
benefit on the extraordinary item related to the early
extinguishment of debt, for the year ended December 31,
2001, compared with $10.7 million during 2000. The
Companys effective tax rate was 42.16% for the year ended
December 31, 2001, compared with 42.75% during the same
period in 2000. The decrease in the effective tax rate was
primarily due to the ability of the Company to utilize tax
credits related to lending activity in the Los Angeles
Revitalization Zones.

Extraordinary Item

During the year ended December 31, 2001, the
Company repurchased $13.6 million of its Senior Notes at an
average price of 102.5% of par value. Payment of the premium and
recognition of the prepaid offering costs associated with the
Senior Notes, resulted in an extraordinary loss of
$0.5 million, net of related income taxes of
$0.3 million, or approximately $0.06 per diluted share.

2000 Compared with 1999

General

Net income for the year ended December 31,
2000, was $14.3 million, or $1.94 per diluted share,
compared with $10.2 million, or $1.33 per diluted share,
for the same period in 1999. This net income resulted in a ROA
of 0.85%, and a ROE of 14.58% for the year ended
December 31, 2000, compared with a ROA of 0.66% and a ROE
of 11.66%, during the same period in 1999. Pre-tax income
increased 36.87% for the year ended December 31, 2000, to
$25.0 million in 2000 from $18.2 million generated
during the same period in 1999.

The Companys net interest income before
provision for credit losses increased 2.00% to
$60.3 million for the year ended December 31, 2000,
compared with $59.1 million in 1999. The Companys
yield on average earning assets was 8.94% for the year ended
December 31, 2000, compared with 8.68% during the same
period

43



---



##### Table of Contents



in 1999. The average cost of interest-bearing
liabilities for the Company increased to 5.81% during the year
ended December 31, 2000, compared with 5.21% during the
same period in 1999. The Companys resulting net interest
margin for the year ended December 31, 2000, was 3.62%,
compared with 3.87% during the same period in 1999. The
compression in the net interest margin is the result of the
inverted yield curve environment in which short term rates were
higher than long term rates. In turn, adjustable rate assets
repriced off of the lower, long term rates while
interest-bearing liabilities priced off of the higher short term
rates.


Provision for credit losses totaled
$6.0 million in 2000, compared with $12.0 million in
1999. At December 31, 2000, the ratio of total allowance
for credit losses to gross loans reached 1.80%, compared with
1.65% at December 31, 1999.

Nonaccrual loans totaled $31.6 million at
December 31, 2000 (or 1.80% of total assets), compared with
nonaccrual loans of $44.0 million (or 2.78% of total
assets) at December 31, 1999. Other classified loans were
$40.6 million at December 31, 2000, compared with
$25.6 million at December 31, 1999. Delinquent loans
totaled $26.9 million at December 31, 2000, compared
with $24.0 million at December 31, 1999.

Total general and administrative expenses
(G&A) were $34.3 million for the year ended
December 31, 2000, a 6.07% increase over the
$32.4 million of G&A incurred during the same period in
1999. The increase in G&A was primarily due to increases in
employee costs and, to a much lesser extent, professional fees.
The increase in employee costs was primarily due to
$1.2 million in higher incentive costs and a decrease of
$1.5 million in deferred costs related to more standardized
loan structures and underwriting procedures. The increase in
professional fees was primarily comprised of outside consultants
working on operational projects, partially offset by decreases
in legal fees attributable to ongoing litigation matters
previously disclosed as well as loan documentation and
restructurings. The $2.5 million decrease in other
non-operating expenses was primarily due to fewer legal
settlements in 2000 compared with 1999.

Net Interest Income

The Company recorded net interest income before
provision for credit losses of $60.3 million and
$59.1 million for the years ended December 31, 2000
and 1999, respectively, reflecting an increase of 2.00%. Average
earning assets were $1.7 billion for the year ended
December 31, 2000, compared with $1.5 billion during
1999, reflecting an increase of 8.93%. The yield on
interest-earning assets was 8.94% in 2000, compared with 8.68%
in 1999.

The Companys interest revenues increased by
$16.2 million, or 12.23%, during the year ended
December 31, 2000, compared with the same period in 1999.
This increase was primarily attributable to a 9.60% increase in
the average balance of loans outstanding and a 14 basis point
increase in the yield on average loans outstanding, which
averaged 9.13% during 2000, compared with 8.99% in 1999. Average
total loans, net of deferred fees, grew to $1.5 billion in
2000, over $1.4 billion in 1999.

The steady growth in loans was funded through
deposit growth and borrowings from the FHLB. Interest costs
increased by $15.1 million, or 20.45%, during the year
ended December 31, 2000, compared with the same period in
1999. The average cost of interest-bearing liabilities for the
Company increased to 5.81% during the year ended
December 31, 2000, compared with 5.21% during the same
period in 1999. The average balance of certificates of deposits
increased $80.6 million, to $891.0 million and 5.94%
in average cost of funds during the year ended December 31,
2000, compared with $810.4 million and 5.22% in average
cost of funds during the same period in 1999. In addition, the
average balance of money market accounts reflected an increase
of $24.3 million, to $180.8 million and 4.99% in
average cost of funds in 2000, compared with $156.5 million
and 4.37% in average cost of funds in 1999. The increase in
volume and rates on deposits had a negative impact on the
Companys interest costs.

Expressed as a percentage of interest-earning
assets, the Companys resulting net interest margin was
3.62% and 3.87% in 2000 and 1999, respectively. The compression
in the net interest margin was the result of the inverted yield
curve environment in which short term rates were higher than
long term rates. In turn, adjustable rate assets were repriced
off of the lower, long term rates while interest-bearing
liabilities were priced off of the higher short term rates.

44



---



##### Table of Contents



Provision for Credit Losses

Provision for credit losses were
$6.0 million and $12.0 million for 2000 and 1999,
respectively. The decrease in the provision for credit losses
was due to improvement in asset quality. The Companys
ratio of net charge-offs was 0.05% in 2000, an improvement over
0.34% in 1999. Additionally, total classified assets to Bank
core capital and general allowance for credit losses decreased
to 45.78% in 2000, compared with 49.96% in 1999.

Average loans outstanding during 2000 increased
by $135.5 million, or 9.60% over 1999, while the provision
for credit losses decreased by $6.0 million in 2000, or
50.0%, compared to 1999 provisions. At December 31, 2000,
the ratio of allowance for credit losses to loans receivable,
net of specific allowance, was 1.80%, compared with 1.65% as of
December 31, 1999.

Noninterest Revenues

Noninterest revenues were $8.1 million for
the year ended December 31, 2000, an increase of
$0.3 million, or 3.50%, from $7.8 million earned in
1999.

Noninterest revenues for the year ended
December 31, 2000, included a $1.2 million award from
the United States Treasury Departments Bank Enterprise
Award Program for its lending and financial services activities
in distressed communities. The Bank was one of 158 depository
institutions that received awards in 2000. In addition, the
Banks service fees on deposits of $1.0 million in
2000 increased 106.05% from 1999, primarily due to a new fee
schedule rolled out in July 2000.

Real Estate Operations

During the year ended December 31, 2000, the
Company sold 14 properties generating net cash proceeds of
$5.1 million and a net loss of $0.2 million, compared
with sales of 22 properties generating net cash proceeds of
$10.4 million and net income of $0.8 million during
the year ended December 31, 1999.

Noninterest Expenses



| |                                    
| | -----------------------------------
| | General and Administrative Expenses

Total general and administrative expenses were
$34.3 million in 2000, a 6.07% increase over the
$32.4 million of G&A incurred during the same period in
1999. The increase in G&A expenses was primarily due to
increases in employee costs and professional fees. The increase
in employee costs was primarily due to $1.2 million in
higher incentive costs and a decrease of $1.5 million in
deferred costs related to more standardized loan structures and
underwriting procedures. The increase in professional fees was
primarily comprised of outside consultants working on
operational projects, partially offset by decreases in legal
fees attributable to ongoing litigation matters previously
disclosed as well as loan documentation and restructurings.

The increase in G&A expenses had a negative
impact on the Companys efficiency ratio. The efficiency
ratio for the year ended December 31, 2000, increased to
50.19% compared with 48.35% during the same period in 1999.



| |                            
| | ---------------------------
| | Other Non-Operating Expense

Other non-operating expense totaled
$2.2 million for the year ended December 31, 2000,
primarily during the first quarter, of which $2.0 million
related to amounts paid, or reserved for payment, in connection
with ongoing litigation and/or satisfaction of judgments against
the Company. The remaining expense was primarily in connection
with the early termination of the Irvine office lease. During
1999, the Company incurred $4.7 million in other
non-operating expenses, of which $4.3 million related to
amounts paid, or reserved for payment, in connection with
ongoing litigation and/or satisfaction of judgments against the
Company, and severance for the former CEO.

45



---



##### Table of Contents



Income Taxes

The Company recorded an income tax provision of
$10.7 million for the year ended December 31, 2000,
compared with $8.0 million during 1999. The Companys
effective tax rate was 42.75% for the year ended
December 31, 2000, compared with 44.05% during the same
period in 1999.

BALANCE SHEET ANALYSIS

The Companys total assets at
December 31, 2001, were $1.86 billion, an increase of
$102.8 million, or 5.86%, over December 31, 2000. As
of December 31, 2001, asset growth was reflected in all
categories of interest-earning assets, with the exception of
cash and cash equivalents. Loan receivables, net, reflected the
largest growth, increasing by $101.2 million, or 6.29%,
over 2000. Due to the historically low interest rate environment
in 2001, which has continued into 2002, prepayment speeds
continue to increase. If this trend continues, it could
negatively impact growth in interest earning assets, which in
turn could negatively impact net income and operational
efficiency. The growth in loans during 2001 was funded through
FHLB advances. FHLB advances increased to $484.0 million at
December 31, 2001, from $384.0 million at
December 31, 2000, reflecting an increase of 26.04%. Total
deposits decreased to $1.20 billion at December 31,
2001, from $1.21 billion at December 31, 2000,
reflecting a decrease of 1.25%, which was due to a decrease of
$74.3 million in certificates of deposits while transaction
accounts increased $59.1 million, or 18.73%, to
$374.5 million at December 31, 2001, from
$315.4 million at December 31, 2000. As a percentage
of total deposits, transaction accounts have increased to 31.21%
at December 31, 2001, compared with 25.96% of total
deposits at December 31, 2000. Certificates of deposit
totaled $825.2 million, or 68.79% of total deposits at
December 31, 2001, compared with 74.04% of total deposits,
or $899.5 million, at December 31, 2000. The change in
the deposit mix had a positive impact on the Companys
total interest costs during 2001. The cross-sell ratio, defined
as the number of different types of loan and/or deposit products
and services per customer household, increased to 2.37 per
household at December 31, 2001, from 1.78 at
December 31, 2000.

Stockholders Equity and Regulatory
Capital

The Companys capital consists of common
stockholders equity, which amounted to
$120.4 million, or 6.49%, of the Companys total
assets at December 31, 2001.

Management is committed to maintaining capital at
a level sufficient to assure shareholders, customers, and
regulators that the Company and its subsidiaries are financially
sound. The Company and the Bank are subject to risk-based
capital regulations adopted by the federal banking regulators in
January 1990. These guidelines are used to evaluate capital
adequacy and are based on an institutions asset risk
profile and off-balance sheet exposures. According to the
regulations, institutions whose Tier 1 and total capital
ratios meet or exceed 6% and 10%, respectively, are deemed
well capitalized.

46



---



##### Table of Contents



As of December 31, 2001, the Bank is
categorized as well capitalized under the regulatory
framework for PCA Rules. There are no conditions or events
subsequent to December 31, 2001, that management believes
have changed the Banks category. The following table
compares the Banks actual capital ratios to those required
by regulatory agencies to meet the minimum capital requirements
required by the OTS and to be categorized as well
capitalized under the PCA Rules for the periods indicated.

|                         |                                              |        |   |                   |  |                   |  |        |   |                   |   |         |  |  |  |      |   |  |   |         |  |  |  |       |  
|------------------------ | -------------------------------------------- | ------ | - | ----------------- |  | ----------------- |  | ------ | - | ----------------- | - | ------- |  |  |  | ---- | - |  | - | ------- |  |  |  | ----- | -
|                         |                                              |        |   |                   |  |                   |  |        |   |                  
|                         |                                              |        |   |                   |  |                   |  |        |   | To Be Well       
|                         |                                              |        |   |                   |  |                   |  |        |   | Capitalized Under
|                         |                                              |        |   |                   |  |                   |  | Prompt
|                         |                                              |        |   | For Capital       |  | Corrective Action
|                         |                                              | Actual |   | Adequacy Purposes |  | Provisions       
|                         |                                              |        |   |                   |  |                  
|                         |                                              | Amount |   | Ratios            |  | Amount            |  | Ratios |   | Amount            |   | Ratios 
|(Dollars in thousands)   |                                              |        |   |                   |  |                   |  |        |   |                   |   |        
|As of December 31, 2001: |                                              |        |   |                   |  |                   |  |        |   |                   |   |         |  |  |  |      |   |  |   |         |  |  |  |      
|                         | Total capital to risk weighted assets        |        | $ | 169,278           |  |                   |  | 12.70  | % |                   | $ | 106,619 |  |  |  | 8.00 | % |  | $ | 133,274 |  |  |  | 10.00 | %
|                         | Core capital to adjusted tangible assets     |        |   | 154,981           |  |                   |  | 8.36   | % |                   |   | 74,153  |  |  |  | 4.00 | % |  |   | 92,692  |  |  |  | 5.00  | %
|                         | Tangible capital to adjusted tangible assets |        |   | 154,981           |  |                   |  | 8.36   | % |                   |   | 27,807  |  |  |  | 1.50 | % |  |   | n/a     |  |  |  | n/a   |  
|                         | Tier 1 capital to risk weighted assets       |        |   | 154,981           |  |                   |  | 11.63  | % |                   |   | n/a     |  |  |  | n/a  |   |  |   | 79,965  |  |  |  | 6.00  | %
|                        
|As of December 31, 2000: |                                              |        |   |                   |  |                   |  |        |   |                   |   |         |  |  |  |      |   |  |   |         |  |  |  |      
|                         | Total capital to risk weighted assets        |        | $ | 151,914           |  |                   |  | 12.23  | % |                   | $ | 99,407  |  |  |  | 8.00 | % |  | $ | 124,259 |  |  |  | 10.00 | %
|                         | Core capital to adjusted tangible assets     |        |   | 140,387           |  |                   |  | 8.01   | % |                   |   | 70,078  |  |  |  | 4.00 | % |  |   | 87,598  |  |  |  | 5.00  | %
|                         | Tangible capital to adjusted tangible assets |        |   | 140,387           |  |                   |  | 8.01   | % |                   |   | 26,279  |  |  |  | 1.50 | % |  |   | n/a     |  |  |  | n/a   |  
|                         | Tier 1 capital to risk weighted assets       |        |   | 140,387           |  |                   |  | 11.30  | % |                   |   | n/a     |  |  |  | n/a  |   |  |   | 74,555  |  |  |  | 6.00  | %

The following table summarizes the regulatory
capital requirements under HOLA for the Bank as of
December 31, 2001. As indicated in the table below, the
Banks capital levels exceed all three of the currently
applicable minimum HOLA capital requirements.

|                               |                  |                  |           |              |  |                    |      |   |  |         |           |   |  |  |      |   |  |   |           |        |   |  |       |   | 
|------------------------------ | ---------------- | ---------------- | --------- | ------------ |  | ------------------ | ---- | - |  | ------- | --------- | - |  |  | ---- | - |  | - | --------- | ------ | - |  | ----- | - | 
|                               |                  |                  |           |              |  |                   
|                               |                  | Tangible Capital |           | Core Capital |  | Risk-based Capital
|                               |                  |                  |           |              |  |                   
|                               |                  | Balance          |           | %            |  | Balance            |      | % |  | Balance |           | %
|(Dollars in thousands)         |                  |                  |           |              |  |                    |      |   |  |         |           |  
|Stockholders equity           |                  | $                | 154,981   |              |  |                    |     |   |  | $       | 154,981   |   |  |  |     |   |  | $ | 154,981   |        |   |  |      |  
|Adjustments:                   |                  |                  |           |              |  |                    |      |   |  |         |           |   |  |  |      |   |  |   |           |        |   |  |       |  
|                               | General reserves |                  |           |             |  |                    |      |  |  |         |           |  |  |  |      |  |  |   |           | 16,787 |   |  |       |  | 
|                               | Other(1)         |                  |           |             |  |                    |      |  |  |         |           |  |  |  |      |  |  |   |           | (2,490 | ) |  |       |  | 
|                               |                  |                  |           |              |  |                    |      |   |  |         |           |   |  |  |      |   |  |   |           |        |   |  |       |  
|Regulatory capital             |                  |                  | 154,981   |              |  |                    | 8.36 | % |  |         | 154,981   |   |  |  | 8.36 | % |  |   | 169,278   |        |   |  | 12.70 | %
|Regulatory capital requirement |                  |                  | 27,807    |              |  |                    | 1.50 |   |  |         | 74,153    |   |  |  | 4.00 |   |  |   | 106,619   |        |   |  | 8.00  |  
|                               |                  |                  |           |              |  |                    |      |   |  |         |           |   |  |  |      |   |  |   |           |        |   |  |       |  
|Excess capital                 |                  | $                | 127,174   |              |  |                    | 6.86 | % |  | $       | 80,828    |   |  |  | 4.36 | % |  | $ | 62,659    |        |   |  | 4.70  | %
|                               |                  |                  |           |              |  |                    |      |   |  |         |           |   |  |  |      |   |  |   |           |        |   |  |       |  
|Adjusted assets(2)             |                  | $                | 1,853,831 |              |  |                    |      |   |  | $       | 1,853,831 |   |  |  |      |   |  | $ | 1,332,742 |        |   |  |       |  
|                               |                  |                  |           |              |  |                    |      |   |  |         |           |   |  |  |      |   |  |   |           |        |   |  |       |  



---



|    |                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes the portion of non-residential
	construction and land development loans that exceed a
	loan-to-value of 80%.                                                                                                                                                                                                  
|   
|(2) | The term adjusted assets refers to
	(i) the term adjusted total assets as defined
	in 12 C.F.R. Section 567.1(a) for purposes of tangible
	and core capital requirements, and (ii) the term risk
	weighted assets as defined in 12 C.F.R.
	Section 567.5(d) for purposes of the risk-based capital
	requirements.

CAPITAL RESOURCES AND LIQUIDITY

Hawthorne Financial Corporation maintained cash
and cash equivalents of $2.8 million at December 31,
2001. Hawthorne Financial Corporation is a holding company with
no significant business operations outside of the Bank. From
time to time, the Company is dependent upon the Bank for
dividends in order to make future semi-annual interest payments.
The ability of the Bank to provide dividends to Hawthorne
Financial Corporation is governed by applicable regulations of
the OTS. The Bank received OTS approval to declare a

47



---



##### Table of Contents



dividend to the Holding Company in an amount
needed to pay the 2001 interest payments on the Senior Notes and
the Capital Securities. Based upon these applicable regulations,
the Banks supervisory rating, and the Banks current
and projected earnings rate, management fully expects the Bank
to maintain the ability to provide dividends to Hawthorne
Financial Corporation for the payment of interest on the
Companys long-term debt for the foreseeable future.


In September 2001, the Company authorized up to
$5.0 million for the repurchase of shares of its common
stock and to retire Senior Notes. This increased the amount
previously authorized. The Company announced two 5% repurchase
authorizations in March 2000 and July 2000, which authorized an
aggregate of approximately 541,000 shares, and an additional
77,000 shares in April 2001. As of March 21, 2002,
cumulative repurchases included 555,402 shares at an average
price of $11.74. The Company has also repurchase
$14.2 million in Senior Notes at an average price of 102.2%
of par value.

On March 28, 2001 and November 28,
2001, HFC Capital Trust I (Trust I) and HFC
Capital Trust II (Trust II), respectively,
statutory business trusts and wholly owned subsidiaries of the
Company, issued $9.0 million of 10.18% fixed rate capital
securities (the Capital Securities I) and
$5.0 million of floating rate capital securities (the
Capital Securities II), respectively. The
Capital Securities, which were issued in separate private
placement transactions, represent undivided preferred beneficial
interests in the assets of the respective Trusts. The Company is
the owner of all the beneficial interests represented by the
common securities of Trust I and Trust II (the
Common Securities I and Common
Securities II) (together with the Capital
Securities I and Capital
Securities II and, collectively the Trust
Securities). Trust I and Trust II exist for the
sole purpose of issuing the Trust Securities and investing the
proceeds thereof in 10.18% fixed rate and floating rate,
respectively, junior subordinated deferrable interest debentures
(the Junior Subordinated Debentures I and
Junior Subordinated Debentures II) issued by
the Company and engaging in certain other limited activities.
Interest on the Capital Securities is payable semi-annually.

The Junior Subordinated Debentures I held by
Trust I will mature on June 8, 2031, at which time the
Company is obligated to redeem the Capital Securities I.
The Capital Securities I are callable, in whole or in part, at
par value after ten years. The proceeds were used to repurchase
$7.2 million of its Senior Notes at an average price of
101.4% of par value. See Note 17 
Extraordinary Item.

The floating rate on the Capital Securities II,
with an initial start rate of 5.97%, reprices semi-annually
based on the index of six month LIBOR plus a spread of 3.75%,
with a cap of 11.00% through December 8, 2006. The Junior
Subordinated Debentures II held by Trust II will
mature on December 8, 2031, at which time the Company is
obligated to redeem the Capital Securities II. The Capital
Securities II are callable, in whole or in part, at par
value after five years. The proceeds were used to repurchase
$4.0 million of its Senior Notes at an average price of
105.0% of par value. See Note 17  Extraordinary
Item.

OTS regulations no longer require a savings
association to maintain an average daily balance of liquid
assets. In July 2001, the OTS issued a final rule that
eliminated the 4% liquidity requirement and replaced it with a
general requirement that thrifts maintain sufficient liquidity
to ensure safety and soundness. Therefore, OTS regulations no
longer require a savings association to maintain a specified
average daily balance of liquid assets (including cash, certain
time deposits and savings accounts, bankers acceptances,
certain government obligations, and certain other investments).
The Bank maintains an adequate level of liquid assets to ensure
safe and sound daily operations.

The Companys primary funding resources are
deposits, principal payments on loans, FHLB advances and cash
flows from operations. Other possible sources of liquidity
available to the Company include whole loan sales, commercial
bank lines of credit, and direct access, under certain
conditions, to borrowings from the Federal Reserve System. The
cash needs of the Company are principally for the payment of
interest on, and withdrawals of, deposit accounts, the funding
of loans and operating costs and expenses.

On March 20, 2002, Hawthorne Financial
Corporation (Hawthorne) and its subsidiary,
Hawthorne Savings, F.S.B. (the Bank), entered into
an Agreement and Plan of Reorganization (Agreement)
with First Fidelity Bancorp, Inc., (First Fidelity)
and its subsidiary, First Fidelity Investment and Loan
Association (Thrift), pursuant to which First
Fidelity will be merged with the Company (or a newly

48



---



##### Table of Contents



organized subsidiary of the Company) and the
Thrift will be merged into the Bank (Merger). First
Fidelity stockholders will receive $36.60 per share for
their stock, in cash, Hawthorne stock, or a combination of the
two, at the election of the stockholders, subject to a maximum
of approximately 1,266,555 shares of Hawthorne stock in the
aggregate to be issued in the transaction. The transaction,
which is subject to regulatory approval and approval by the
stockholders of Hawthorne and First Fidelity, is anticipated to
close during the third quarter of 2002. The Thrift is a
California state chartered industrial loan company with assets
of $616.8 million as of December 31, 2001, and four
branches located in Orange County and San Diego County,
California, that specializes in loans secured by income
producing real estate. In connection with the Agreement,
Hawthorne and certain officers and directors of First Fidelity,
in their capacities as shareholders of First Fidelity, entered
into Shareholder Agreements pursuant to which such officers and
directors agreed to vote the shares of First Fidelity common
stock held by them in favor of the Merger.


On January 22, 2002, the Securities and
Exchange Commission issued an interpretive release on
disclosures related to liquidity and capital resources,
including off-balance sheet arrangements. The Company does not
have material off-balance sheet arrangements or related party
transactions that are not disclosed herein. The Company is not
aware of factors that are reasonably likely to adversely affect
liquidity trends, other than the risk factors presented herein
and in other Company filings. However, the following additional
information is provided to assist financial statement users.

Lending Commitments  At
December 31, 2001, the Company had commitments to fund the
undisbursed portion of existing construction and land loans of
$113.5 million and income property and estate loans of
$5.3 million. The commitments to fund the undisbursed
portion of existing lines of credit, excluding construction and
land lines of credit, totaled $18.7 million.

Operating Leases  These leases
generally are entered into only for non-strategic investments
(e.g., office buildings, warehouses) where the economic profile
is favorable. The liquidity impact of outstanding leases is not
material to the Company as disclosed herein.

Participation Loans  The Bank enters
into agreements with other financial institutions to participate
a percentage of ownership interest in selected loan originations
of the Bank, in the ordinary course of business. The
participation agreements reflect an absolute and outright sale
from the Bank to the participant for a percentage ownership
interest in the loan originated by the Bank. These agreements
are made by the Bank to the participant without recourse,
representation, or warranty of any kind, either expressed or
implied.

Other Contractual Obligations  The
Company does not have material financial guarantees or other
contractual commitments that are reasonably likely to adversely
affect liquidity. The Federal Home Loan Bank issued a
$66.0 million Letter of Credit on June 25, 2001, which
matured on January 10, 2002, which is disclosed herein. See
Note 14  Off-Balance Sheet Activity.

Related Party Transactions  The
Company has related party transactions in the ordinary course of
business. The Company also paid a director-related company for
recruitment services, which were made under terms that were
consistent with the Companys policies regarding
recruitment firms. The Company also granted loans to certain
executives, and extended credit in the form of overdraft
protection lines, as disclosed herein. The Company does not have
any other related party transactions that materially affect the
results of operations, cash flow or financial condition. See
Note 16  Related Parties.

INTEREST RATE RISK MANAGEMENT

Interest rate risk (IRR) and credit
risk constitute the two greatest sources of financial exposure
for insured financial institutions. Please refer to
Item 1  Business, Loan Portfolio,
for a thorough discussion of the Companys lending
activities. IRR represents the impact that changes in absolute
and relative levels of market interest rates may have upon the
Companys net interest income (NII) and
theoretical liquidation value, also referred to as net portfolio
value (NPV). NPV is defined as the present value of
expected net cash flows from existing assets minus the present
value of expected net cash flows from existing liabilities.
Changes in the NII (the net interest spread between
interest-earning assets and interest-bearing liabilities)

49



---



##### Table of Contents



are influenced to a significant degree by the
repricing characteristics of assets and liabilities (timing
risk), the relationship between various rates (basis risk), and
changes in the shape of the yield curve.


The Company realizes income principally from the
differential or spread between the interest earned on loans,
investments, other interest-earning assets and the interest
incurred on deposits and borrowings. The volumes and yields on
loans, deposits and borrowings are affected by market interest
rates. As of December 31, 2001, 90.62% of the
Companys loan portfolio was tied to adjustable rate
indices, such as COFI, Prime, CMT, MTA and LIBOR. As of
December 31, 2001, $1.0 billion, or 61.73%, of the
Companys adjustable rate net loan portfolio had reached
their internal interest rate floors. These loans will take on
fixed rate repricing characteristics until sufficient upward
interest rate movements will bring the fully indexed rate above
their internal interest rate floors.

The majority of the Companys deposits are
time deposits with a stated maturity (generally one year or
less) and a fixed rate of interest. As of December 31,
2001, 74.17% of the Companys borrowings from the FHLB are
fixed rate, with remaining terms ranging from one to ten years
(though such remaining terms are subject to early call
provisions). The remaining 25.83% of the borrowings carry an
adjustable interest rate, with 80% of the adjustable borrowings
tied to the Prime Rate, maturing in February 2003.

Changes in the market level of interest rates
directly and immediately affect the Companys interest
spread, and therefore profitability. Sharp and significant
changes to market rates can cause the interest spread to shrink
or expand significantly in the near term, principally because of
the timing differences between the adjustable rate loans and the
maturities (and therefore repricing) of the deposits and
borrowings.

The Companys Asset/ Liability Committee
(ALCO) is responsible for managing the
Companys assets and liabilities in a manner that balances
profitability, IRR and various other risks including liquidity.
ALCO operates under policies and within risk limits prescribed
by, reviewed and approved by the Board of Directors.

ALCO seeks to stabilize the Companys NII
and NPV by matching its rate-sensitive assets and liabilities
through maintaining the maturity and repricing of these assets
and liabilities at appropriate levels given the interest rate
environment. When the amount of rate-sensitive liabilities
exceeds rate-sensitive assets within specified time periods, the
NII generally will be negatively impacted by increasing rates
and positively impacted by decreasing rates. Conversely, when
the amount of rate-sensitive assets exceeds the amount of
rate-sensitive liabilities within specified time periods, net
interest income will generally be positively impacted by
increasing rates and negatively impacted by decreasing rates.
The speed and velocity of the repricing of assets and
liabilities will also contribute to the effects on the
Companys NII and NPV, as will the presence or absence of
periodic and lifetime internal interest rate caps and floors.
The benefit of the Banks asset sensitive balance sheet
will be partially negated by the $1.0 billion in loans that
have reached contractual floors that will not immediately
reprice upwards. These adjustable loans have taken on fixed rate
loan characteristics and will not reprice until rates have
increased enough to bring the fully indexed rate above the
internal floor rate.

The Company utilizes two methods for measuring
interest rate risk, gap analysis and interest rate simulations.
Gap analysis focuses on measuring absolute dollar amounts
subject to repricing within certain periods of time,
particularly the one year maturity horizon. Interest rate
simulations are produced using a software model that is based on
actual cash flows and repricing characteristics for all of the
Companys financial instruments and incorporates
market-based assumptions regarding the impact of changing
interest rates on current volumes of applicable financial
instruments. These assumptions are inherently uncertain, and,
consequently, the model cannot precisely measure net interest
income or precisely predict the impact of changes in interest
rates on net interest income. Actual results will differ from
simulated results due to timing, magnitude and frequency of
interest rate changes, as well as changes in market conditions
and management strategies. See Item 7A, Quantitative
and Qualitative Disclosure about Market Risks.

Interest rate simulations provide the Company
with an estimate of both the dollar amount and percentage change
in NII under various rate scenarios. Normally, all assets and
liabilities are subjected to tests of up to 300 basis points in
increases and decreases in interest rates in 100 basis point
increments. Under each interest

50



---



##### Table of Contents



rate scenario, the Company projects its net
interest income and the NPV of its current balance sheet. From
these results, the Company can then develop alternatives in
dealing with the tolerance thresholds.


With the sharp decline in interest rates during
2001, the rate shock scenarios for a decrease in rates became
unpredictable. Many of the current deposit rates and market
indices such as LIBOR were below 3%. As a result, a rate shock
down of 300 or even 200 basis points was not possible. With
concurrence from the OTS, for December 31, 2001, rate
shocks were performed for 100, 200 and 300 basis points up, and
100 basis points down.

Since 1995, the Company has been utilizing
internal interest rate floors on individual loans held for
investment, to mitigate the risk of interest margin compression
in a decreasing rate environment. Additionally, on most new
income property loans, the Company utilizes internal interest
rate caps on individual loans held for investment. These are
life caps and are usually three points above the rate at
underwriting or at an amount that would still allow for
one-to-one debt service coverage at the maximum rate, thereby
reducing the likelihood of borrower default in a rising rate
environment. The risk to the Company associated with the
internal interest rate floors is that interest rates may
decline, and the borrower may choose to refinance the loan,
either with the Company or with another financial institution,
resulting in the Company having to replace the higher-yielding
asset at a lower rate. Due to the 2001 interest rate
environment, which has continued into 2002, prepayment speeds
continue to increase. If this trend continues, it could
negatively impact growth in interest earning assets, which in
turn could negatively impact net income and operational
efficiency. The Company is also exposed to risks associated with
interest rate caps in that interest rates could exceed the
maximum rates on such loans, and while the Companys cost
of funds would continue to rise, the interest income derived
from these loans would be fixed, resulting in an overall
compression on net interest income.

A traditional, although analytically limited
measure, of a financial institutions IRR is the
static gap. Static gap is the difference between the
amount of assets and liabilities (adjusted for any off-balance
positions) which are expected to mature or reprice within a
specific period. Generally, a positive gap benefits an
institution during periods of rising interest rates, and a
negative gap benefits an institution during periods of declining
interest rates. However, because a portion of the indices that
the Companys loan products are priced to may lag changes
in market interest rates by three months or more, the
Companys net interest income may not reflect changes in
interest rates immediately.

At December 31, 2001, 68.79% of the
Companys interest-bearing deposits were comprised of
certificate accounts, the majority of which have original terms
averaging twelve months. The remaining, weighted average term to
maturity for the Companys certificate accounts
approximated five months at December 31, 2001. Generally,
the Companys offering rates for certificate accounts move
directionally with the general level of short term interest
rates, though the margin may vary due to competitive pressures.
The Company saw compression in the net interest margin during
2001 due to the rapid decline in interest rates. Now that the
majority of the certificate accounts have repriced at least once
to current, lower rates, the Company expects that the cost of
its certificate accounts will stabilize in the coming months.

51



---



##### Table of Contents



The following table sets forth information
concerning repricing opportunities for the Companys
interest-earning assets and interest-bearing liabilities as of
December 31, 2001. The amount of assets and liabilities
shown within a particular period were determined in accordance
with their contractual maturities, except that adjustable rate
products are included in the period in which they are first
scheduled to adjust and not in the period in which they mature.
Such assets and liabilities are classified by the earlier of
their maturity or repricing date.

|                                               |                              |                             |           |            |         |          |         |            |         |       |          |        |         |   |          |        |        |   |         |         |   |   |           |           |         | 
|---------------------------------------------- | ---------------------------- | --------------------------- | --------- | ---------- | ------- | -------- | ------- | ---------- | ------- | ----- | -------- | ------ | ------- | - | -------- | ------ | ------ | - | ------- | ------- | - | - | --------- | --------- | ------- | 
|                                               |                              |                            
|                                               |                              | December 31, 2001          
|                                               |                              |                            
|                                               |                              |                             |           | Over Three |         | Over Six |         | Over One   |         |      
|                                               |                              | Three                       |           | through    |         | through  |         | Year       |         | Over  |          |       
|                                               |                              | Months                      |           | Six        |         | Twelve   |         | through    |         | Five  |          |       
|                                               |                              | Or Less                     |           | Months     |         | Months   |         | Five years |         | Years |          | Total 
|(Dollars in thousands)                         |                              |                             |           |            |         |          |         |            |         |       |          |       
|Interest-earning assets:                       |                              |                             |           |            |         |          |         |            |         |       |          |        |         |   |          |        |        |   |         |         |   |   |           |          
|                                               | Cash and cash equivalents(1) |                             | $         | 82,613     |         |          | $       |           |         |       | $        |       |         |   | $        |       |        |   | $       |        |   |   | $         | 82,613    |        
|                                               | Investments and FHLB Stock   |                             |           | 24,464     |         |          |         |           |         |       |          |       |         |   |          |       |        |   |         |        |   |   |           | 24,464    |        
|                                               | Loans(2)                     |                             |           | 1,218,298  |         |          |         | 358,284    |         |       |          | 27,011 |         |   |          | 10,430 |        |   |         | 119,525 |   |   |           | 1,733,548 |        
|                                               |                              |                             |           |            |         |          |         |            |         |       |          |        |         |   |          |        |        |   |         |         |   |   |           |          
|Total interest-earning assets                  |                              | $                           | 1,325,375 |            |         | $        | 358,284 |            |         | $     | 27,011   |        |         | $ | 10,430   |        |        | $ | 119,525 |         |   | $ | 1,840,625 |          
|                                               |                              |                             |           |            |         |          |         |            |         |       |          |        |         |   |          |        |        |   |         |         |   |   |           |          
|Interest-bearing liabilities:                  |                              |                             |           |            |         |          |         |            |         |       |          |        |         |   |          |        |        |   |         |         |   |   |           |          
|                                               | Deposits:                    |                             |           |            |         |          |         |            |         |       |          |        |         |   |          |        |        |   |         |         |   |   |           |           |        
|                                               |                              | Non-certificates of deposit |           | $          | 338,829 |          |         | $          |        |       |          | $      |        |   |          | $      |       |   |         | $       |  |   |           | $         | 338,829 | 
|                                               |                              | Certificates of deposit     |           |            | 452,964 |          |         |            | 120,572 |       |          |        | 180,104 |   |          |        | 71,542 |   |         |         |  |   |           |           | 825,182 | 
|                                               | FHLB advances                |                             |           | 329,000    |         |          |         | 30,000     |         |       |          | 50,000 |         |   |          | 75,000 |        |   |         |        |   |   |           | 484,000   |        
|                                               | Senior notes                 |                             |           |           |         |          |         |           |         |       |          |       |         |   |          | 25,778 |        |   |         |        |   |   |           | 25,778    |        
|                                               | Capital securities           |                             |           |           |         |          |         | 5,000      |         |       |          |       |         |   |          |       |        |   |         | 9,000   |   |   |           | 14,000    |        
|                                               |                              |                             |           |            |         |          |         |            |         |       |          |        |         |   |          |        |        |   |         |         |   |   |           |          
|Total interest-bearing liabilities             |                              | $                           | 1,120,793 |            |         | $        | 155,572 |            |         | $     | 230,104  |        |         | $ | 172,320  |        |        | $ | 9,000   |         |   | $ | 1,687,789 |          
|                                               |                              |                             |           |            |         |          |         |            |         |       |          |        |         |   |          |        |        |   |         |         |   |   |           |          
|Interest rate sensitivity gap                  |                              | $                           | 204,582   |            |         | $        | 202,712 |            |         | $     | (203,093 | )      |         | $ | (161,890 | )      |        | $ | 110,525 |         |   | $ | 152,836   |          
|Cumulative interest rate sensitivity gap       |                              |                             | 204,582   |            |         |          | 407,294 |            |         |       | 204,201  |        |         |   | 42,311   |        |        |   | 152,836 |         |   |   | 152,836   |          
|As percentage of total interest-earning assets |                              |                             | 11.11     | %          |         |          | 22.13   | %          |         |       | 11.09    | %      |         |   | 2.30     | %      |        |   | 8.30    | %       |   |   | 8.30      | %        



---



|    |                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------
|(1) | Excludes noninterest-earning cash balances.                                                                                    
|   
|(2) | Balances include $20.7 million of nonaccrual
	loans, and are gross of deferred fees and costs and allowance
	for credit losses.






|         |                                                            
|-------- | -----------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosure
	about Market Risks

The Company realizes income principally from the
differential or spread between the interest earned on loans,
investments, and other interest-earning assets and the interest
paid on deposits and borrowings. The Company, like other
financial institutions, is subject to interest rate risk to the
degree that its interest-earning assets reprice differently than
its interest-bearing liabilities. The Companys primary
objective in managing interest rate risk is to minimize the
adverse impact of changes in interest rates on the
Companys net interest income and capital, while
structuring the Companys asset-liability mix to obtain the
maximum yield-cost spread on that structure.

A sudden and substantial increase or decrease in
interest rates may adversely impact the Companys income to
the extent that the interest rates borne by the assets and
liabilities do not change at the same speed, to the same extent,
or on the same basis. The Company has adopted formal policies
and practices to monitor its interest rate risk exposure. As a
part of this effort, the Company uses the NPV methodology to
gauge IRR exposure.

Using an internally generated model, the Company
monitors interest rate sensitivity by estimating the change in
NPV over a range of interest rate scenarios. NPV is the
discounted present value of the difference

52



---



##### Table of Contents



between incoming cashflows on interest-earning
assets and other assets, and the outgoing cashflows on
interest-bearing liabilities and other liabilities. The NPV
ratio is defined as the NPV for a given rate scenario divided by
the market value of the assets in the same scenario. The
Sensitivity Measure is the decline in the NPV ratio, in basis
points, caused by a 200 basis point increase or decrease in
interest rates, whichever produces the largest decline. By
agreement with the OTS, the downward rate shock was performed
for 100 basis points down only, due to the overall compression
of rates. The higher an institutions Sensitivity Measure,
the greater is considered its exposure to IRR. The OTS also
produces a similar analysis using its own model, based upon data
submitted on the Banks quarterly Thrift Financial Report
(TFR).


At December 31, 2001, based on the
Companys internally generated model, it was estimated that
the Companys NPV ratio was 9.77% in the event of a 200
basis point increase in rates, a decrease of 1.31% from basecase
of 9.90%. If rates were to decrease by 100 basis points, the
Companys NPV ratio was estimated at 9.92%, an increase of
0.20% from basecase.

Presented below, as of December 31, 2001, is
an analysis of the Companys IRR as measured in the NPV for
instantaneous and sustained parallel shifts of 100, 200, and 300
basis point increments in market interest rates.

|                       |  |          |         |                     |  |               |         |       |  |             |        |   |  |  |      |   |  |  |        | 
|---------------------- |  | -------- | ------- | ------------------- |  | ------------- | ------- | ----- |  | ----------- | ------ | - |  |  | ---- | - |  |  | ------ | 
|                       |  |          |         |                     |  |               |         |      
|                       |  |          |         | Net Portfolio Value |  |               |         |      
|                       |  |          |         |                     |  |               |         |      
|                       |  | Change   |         |                     |  | $ Change from |         |       |  | Change from
|                       |  | in Rates |         | $ Amount            |  | Basecase      |         | Ratio |  | Basecase   
|(Dollars in thousands) |  |          |         |                     |  |               |         |       |  |            
|                       |  |          | +300 bp |                     |  | $             | 184,058 |       |  | $           | (4,511 | ) |  |  | 9.89 | % |  |  | -01 bp | 
|                       |  |          | +200 bp |                     |  |               | 182,932 |       |  |             | (5,637 | ) |  |  | 9.77 | % |  |  | -13 bp | 
|                       |  |          | +100 bp |                     |  |               | 182,142 |       |  |             | (6,427 | ) |  |  | 9.66 | % |  |  | -24 bp | 
|                       |  |          | 0 bp    |                     |  |               | 188,569 |       |  |             |        |   |  |  | 9.90 | % |  |  |        | 
|                       |  |          | -100 bp |                     |  |               | 190,522 |       |  |             | 1,953  |   |  |  | 9.92 | % |  |  | +02 bp | 
|                       |  |          | -200 bp |                     |  |               | n/a     |       |  |             | n/a    |   |  |  | n/a  |   |  |  | n/a    | 
|                       |  |          | -300 bp |                     |  |               | n/a     |       |  |             | n/a    |   |  |  | n/a  |   |  |  | n/a    | 

Management believes that the NPV methodology
overcomes three shortcomings of the typical maturity gap
methodology. First, it does not use arbitrary repricing
intervals and accounts for all expected cash flows, weighing
each by its appropriate discount factor. Second, because the NPV
method projects cash flows of each financial instrument under
different rate environments, it can incorporate the effect of
embedded options on an associations IRR exposure. Third,
it allows interest rates on different instruments to change by
varying amounts in response to a change in market interest
rates, resulting in more accurate estimates of cash flows.

On a quarterly basis, the results of the
internally generated model are reconciled to the results of the
OTS model. Historically the OTS has valued the NPV higher, but
the changes in NPV as a result of the rate increases and
decreases are normally directionally consistent between the two
models. The difference between the two models resides in the
prepayment assumptions, the ability of the Company to analyze
each individual rate index in a changing environment, and the
ability of the Companys model to include internal caps and
floors on loans in the rate shock analyses. Through the
inclusion of more specific information regarding the
Companys unique loan portfolio, the internal model
reflects greater sensitivity in both a rising and a declining
rate environment. Based on both the Companys model and the
regulatory model, in accordance with the OTS Guidelines
Interest Rate Sensitivity Measure, the Company falls within the
OTS minimal risk category.






Item 8.     Financial
Statements and Supplementary Data


Information regarding Financial Statements and
Supplementary Data appears on pages A-1 through A-34 under
the captions Consolidated Statements of Financial
Condition, Consolidated Statements of Income,
Consolidated Statements of Stockholders
Equity, Consolidated Statements of Cash Flows
and Notes to Consolidated Financial Statements and
is incorporated herein by reference.






|        |                                                                                      
|------- | -------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
	Accountants on Accounting and Financial Disclosure

None.

53



---



##### Table of Contents






PART III






|         |                                                    
|-------- | ---------------------------------------------------
|Item 10. | Directors and Executive Officers of the
	Registrant

Except as hereinafter noted, the information
concerning directors and executive officers of the Company is
incorporated by reference from the section entitled
Election of Directors of the Companys Proxy
Statement, which is filed as Exhibit No. 99 to this
Annual Report on Form 10-K. For information concerning
executive officers of the Company, see Item 4(A).
Executive Officers Of The Registrant.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

Information concerning executive compensation is
incorporated by reference from the section entitled
Compensation of Directors and Executive Officers in
the Companys Proxy Statement, which is filed as
Exhibit No. 99 to this Annual Report on Form 10-K.






|         |                                                                
|-------- | ---------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
	Owners and Management

Information concerning security ownership of
certain beneficial owners and management is incorporated by
reference from the sections entitled Principal
Shareholders and Election of Directors of the
Companys Proxy Statement, which is filed as
Exhibit No. 99 to this Annual Report on Form 10-K.






|         |                                                
|-------- | -----------------------------------------------
|Item 13. | Certain Relationships and Related
	Transactions

Information concerning certain relationships and
related transactions is incorporated by reference from the
section entitled Certain Transactions of the
Companys Proxy Statement, which is filed as
Exhibit No. 99 to this Annual Report on Form 10-K.




PART IV






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

(A) The following documents are filed as
part of this report:



| |                         
| | ------------------------
| | (1) Financial Statements



| |                                  
| | ---------------------------------
| | Independent Auditors Report     
| | Consolidated Financial Statements

| |                                                                                                       
| | ------------------------------------------------------------------------------------------------------
| | Consolidated Statements of Financial Condition as
	of December 31, 2001 and 2000.                     
| | Consolidated Statements of Income for the years
	ended December 31, 2001, 2000 and 1999.              
| | Consolidated Statements of Stockholders
	Equity for the years ended December 31, 2001, 2000 and 1999.
| | Consolidated Statements of Cash Flows for the
	years ended December 31, 2001, 2000 and 1999.          
| | Notes to Consolidated Financial Statements for
	the years ended December 31, 2001, 2000 and 1999.     



| |                                   
| | ----------------------------------
| | (2) Financial Statement
	Schedules



| |                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Schedules are omitted because they are not
	applicable or because the required information is provided in
	the Consolidated Financial Statements, including the Notes
	thereto.



| |     |                    
| | --- | -------------------
| | (B) | Reports on Form 8-K

Not applicable.

54



---



##### Table of Contents





| |     |         
| | --- | --------
| | (C) | Exhibits

Exhibits are listed by number corresponding to
the Exhibit Table of Item 601 of Regulation S-K.

|        |      |                         |  |                                                                                                                                                                                                             
|------- | ---- | ----------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |                        
|Number  |      | Description of Document
|        |      |                        
|        | 3.1  |                         |  | Certificate of Incorporation of the Company and
	Amendment of Certificate of Incorporation of the Company(1)                                                                                                
|        | 3.2  |                         |  | Bylaws of the Company(1)                                                                                                                                                                                    
|        | 4.1  |                         |  | Specimen certificate of the Companys Common
	Stock(2)                                                                                                                                                      
|        | 4.2  |                         |  | Indenture, dated as of December 31, 1997,
	between the Company and United States Trust Company of New York,
	as Trustee, relating to the Companys 12 1/2% Notes
	due 2004(3)                               
|        | 4.3  |                         |  | Form of the Companys 12 1/2% Notes due
	2004 (included in Section 2.02 of the Indenture included as
	Exhibit 4.2)(3)                                                                                       
|        | 4.4  |                         |  | Form of Warrants to purchase an aggregate of
	2,512,188 shares of Common Stock(2)                                                                                                                           
|        | 4.5  |                         |  | Registration Rights Agreement among the Company
	and certain investors(2)                                                                                                                                   
|        | 4.6  |                         |  | Unit Purchase Agreement among the Company and the
	investors named therein(2)                                                                                                                               
|        | 4.7  |                         |  | Indenture dated as of March 28, 2001 between
	Hawthorne Financial Corporation and Wilmington Trust Company, as
	Trustee(2)                                                                                  
|        | 4.8  |                         |  | Certificate of Trust of HFC Capital Trust I(2)                                                                                                                                                              
|        | 4.9  |                         |  | Amended and Restated Trust Agreement of HFC
	Capital Trust I, among Hawthorne Financial Corporation,
	Wilmington Trust Company and the Administrative Trustees named
	therein dated as of March 28, 2001(2) 
|        | 4.10 |                         |  | Capital Securities Certificate of HFC Capital
	Trust I(2)                                                                                                                                                   
|        | 4.11 |                         |  | Common Securities Certificate of HFC Capital
	Trust I(2)                                                                                                                                                    
|        | 4.12 |                         |  | Capital Securities Guarantee Agreement between
	Hawthorne Financial Corporation and Wilmington Trust Company,
	dated as of March 28, 2001(2)                                                                
|        | 4.13 |                         |  | Common Securities Guarantee Agreement between
	Hawthorne Financial Corporation and Wilmington Trust Company,
	dated as of March 28, 2001(2)                                                                 
|        | 4.14 |                         |  | 10.18% Junior Subordinated Deferrable Interest
	Debentures due June 8, 2031(2)                                                                                                                              
|        | 4.15 |                         |  | Indenture dated as of November 28, 2001
	between Hawthorne Financial Corporation and Wilmington Trust
	Company, as Trustee                                                                                  
|        | 4.16 |                         |  | Certificate of Trust of HFC Capital Trust II                                                                                                                                                                
|        | 4.17 |                         |  | Amended and Restated Trust Agreement of HFC
	Capital Trust II, among Hawthorne Financial Corporation,
	Wilmington Trust Company and the Administrative Trustees named
	therein dated as of November 28, 2001
|        | 4.18 |                         |  | Capital Securities Certificate of HFC Capital
	Trust II                                                                                                                                                     
|        | 4.19 |                         |  | Common Securities Certificate of HFC Capital
	Trust II                                                                                                                                                      
|        | 4.20 |                         |  | Capital Securities Guarantee Agreement between
	Hawthorne Financial Corporation and Wilmington Trust Company,
	dated as of November 28, 2001                                                                
|        | 4.21 |                         |  | Floating Rate Junior Subordinated Debt Securities
	due December 8, 2031                                                                                                                                     
|        | 4.22 |                         |  | HFC Capital Trust II Placement Agent
	Agreement                                                                                                                                                             
|        | 10.1 |                         |  | Hawthorne Financial Corporation 2001 Stock
	Incentive Plan*                                                                                                                                                 
|        | 10.2 |                         |  | Lease of corporate headquarters(4)                                                                                                                                                                          
|        | 10.3 |                         |  | Change in Control Agreements between Company and
	Simone Lagomarsino(5)*                                                                                                                                    
|        | 10.4 |                         |  | Change in Control Employment Agreement(5)*                                                                                                                                                                  
|        | 10.5 |                         |  | Deferred Compensation Plan(2)*                                                                                                                                                                              
|        | 10.6 |                         |  | Deferred Compensation Loan Agreement between
	Hawthorne and Karen Abajian(2)*                                                                                                                               

55



---



##### Table of Contents



|        |      |                         |  |                                                                                                                                                                                                                                            
|------- | ---- | ----------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |                        
|Number  |      | Description of Document
|        |      |                        
|        | 10.7 |                         |  | Agreement and Plan of Reorganization dated as of
	March 20, 2002 by and among Hawthorne Financial
	Corporation, First Fidelity Bancorp, Inc., Hawthorne Savings,
	F.S.B., First Fidelity Investment & Loan Association and HF
	Merger Corp.
|        | 11.1 |                         |  | Statement on computation of per share earnings(6)                                                                                                                                                                                          
|        | 21.1 |                         |  | Subsidiaries of the Registrant, Hawthorne
	Savings, F.S.B.                                                                                                                                                                                 
|        | 23.1 |                         |  | Consent of Deloitte & Touche LLP                                                                                                                                                                                                           
|        | 99   |                         |  | Proxy Statement for Annual Meeting of
	Shareholders(7)                                                                                                                                                                                     



---



|    |                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   | Designates management contract, compensatory plan
	or arrangement.                                                                                               
|   
|(1) | Incorporated by reference from the Companys
	Registration Statement on Form S-8 (No. 33-74800)
	filed on February 3, 1994.                                      
|   
|(2) | Incorporated by reference from the Companys
	Annual Report on Form 10-K for the year ended
	December 31, 2000.                                                  
|   
|(3) | Incorporated by reference from the Companys
	Annual Report on Form 10-K for the year ended
	December 31, 1997, as amended on May 11, 1998 and
	November 3, 1998.
|   
|(4) | Incorporated by reference from the Companys
	Annual Report on Form 10-K for the year ended
	December 31, 1996.                                                  
|   
|(5) | Incorporated by reference from the Companys
	Quarterly Report on Form 10-Q for the quarter ended
	June 30, 2000.                                                
|   
|(6) | See Note 1 to the Notes to Consolidated Financial
	Statements included in Item 8 and listed in Item 14
	(a) of this Annual Report on Form 10-K.                  
|   
|(7) | To be filed within 120 days after the end of
	the fiscal year ended December 31, 2001.                                                                           

56



---



##### Table of Contents



SIGNATURES

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



| |                                       
| | --------------------------------------
| | HAWTHORNE FINANCIAL CORPORATION       
|
| | By: /s/ SIMONE LAGOMARSINO            
| |                                       
| | Simone Lagomarsino                    
| | President and Chief Executive
	Officer

Dated: March 25, 2002

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 in the capacities
and on the dates indicated.

|                                                                                                                                         |  |               
|---------------------------------------------------------------------------------------------------------------------------------------- |  | --------------
|Signature                                                                                                                                |  | Date          
|                                                                                                                                         |  |               
|/s/ SIMONE LAGOMARSINOSimone Lagomarsino
	Director, President, and Chief Executive Officer
	(Principal Executive Officer)                |  | March 25, 2002
|/s/ KAREN C. ABAJIANKaren C. Abajian
	Executive Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer) |  | March 25, 2002
|/s/ TIMOTHY R. CHRISMANTimothy R. Chrisman
	Chairman of the Board                                                                        |  | March 25, 2002
|/s/ MARILYN G. AMATOMarilyn G. Amato
	Director                                                                                           |  | March 25, 2002
|/s/ GARY W. BRUMMETTGary W. Brummett
	Director                                                                                           |  | March 25, 2002
|/s/ ANTHONY W. LIBERATIAnthony W. Liberati
	Director                                                                                     |  | March 25, 2002
|/s/ HARRY F. RADCLIFFEHarry F. Radcliffe
	Director                                                                                       |  | March 25, 2002
|/s/ HOWARD E. RITTHoward E. Ritt
	Director                                                                                               |  | March 25, 2002

57



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS, INDEPENDENT
AUDITORS REPORT

CONTENTS

|                                  |                                                  |      |     |     | 
|--------------------------------- | ------------------------------------------------ | ---- | --- | --- | 
|                                  |                                                  | Page
|                                  |                                                  |     
|Independent Auditors Report      |                                                  |      | A-2 |    
|Consolidated Financial Statements |                                                  |      |     |    
|                                  | Consolidated Statements of Financial Condition   |      |     | A-3 | 
|                                  | Consolidated Statements of Income                |      |     | A-4 | 
|                                  | Consolidated Statements of Stockholders
	Equity |      |     | A-5 | 
|                                  | Consolidated Statements of Cash Flows            |      |     | A-6 | 
|                                  | Notes to Consolidated Financial Statements       |      |     | A-7 | 

A-1



---



##### Table of Contents






INDEPENDENT AUDITORS REPORT

To the Board of Directors and Stockholders

Hawthorne Financial Corporation


El Segundo, California:


We have audited the accompanying consolidated
statements of financial condition of Hawthorne Financial
Corporation and Subsidiaries (the Company) as of
December 31, 2001 and 2000, and the related consolidated
statements of income, stockholders equity, and cash flows
for each of the three years in the period ended
December 31, 2001. These consolidated financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the
consolidated 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, such consolidated financial
statements present fairly, in all material respects, the
financial position of Hawthorne Financial Corporation and
Subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the
United States of America.

/s/ DELOITTE & TOUCHE LLP

Los Angeles, California

January 29, 2002


(March 20, 2002 as to Note 20)


A-2



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES






CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION


|                                      |                                                                                                                                             |                                        |                     |                                            |         |           |           |           |         |           |           | 
|------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------- | ------------------- | ------------------------------------------ | ------- | --------- | --------- | --------- | ------- | --------- | --------- | 
|                                      |                                                                                                                                             | December 31,                           |                     | December 31,                              
|                                      |                                                                                                                                             | 2001                                   |                     | 2000                                      
|(Dollars in thousands)                |                                                                                                                                             |                                        |                     |                                           
|Assets:                              
|                                      | Cash and cash equivalents                                                                                                                   |                                        | $                   | 98,583                                     |         |           | $         | 99,919    |        
|                                      | Loans receivable (net of allowance for credit
	losses of $30,602 in 2001 and $29,450 in 2000)                                               |                                        |                     | 1,709,283                                  |         |           |           | 1,608,067 |        
|                                      | Real estate owned, net                                                                                                                      |                                        |                     | 1,312                                      |         |           |           | 2,859     |        
|                                      | Accrued interest receivable                                                                                                                 |                                        |                     | 9,677                                      |         |           |           | 11,040    |        
|                                      | Investment in capital stock of Federal Home Loan
	Bank, at cost                                                                             |                                        |                     | 24,464                                     |         |           |           | 20,730    |        
|                                      | Office property and equipment at cost, net                                                                                                  |                                        |                     | 4,237                                      |         |           |           | 4,808     |        
|                                      | Deferred tax asset                                                                                                                          |                                        |                     | 4,363                                      |         |           |           | 2,867     |        
|                                      | Other assets                                                                                                                                |                                        |                     | 4,278                                      |         |           |           | 3,105     |        
|                                      |                                                                                                                                             |                                        |                     |                                            |         |           |           |          
|                                      |                                                                                                                                             |                                        |                     | Total assets                               |         | $         | 1,856,197 |           |         | $         | 1,753,395 | 
|                                      |                                                                                                                                             |                                        |                     |                                            |         |           |           |          
|Liabilities and Stockholders Equity:
|                                      | Liabilities:                                                                                                                                |                                        |                     |                                            |         |           |           |           |        
|                                      |                                                                                                                                             | Deposits:                              |                     |                                            |         |           |           |           |         |          
|                                      |                                                                                                                                             |                                        | Noninterest-bearing |                                            | $       | 35,634    |           |           | $       | 32,994    |          
|                                      |                                                                                                                                             |                                        | Interest-bearing    |                                            |         | 1,164,011 |           |           |         | 1,181,862 |          
|                                      |                                                                                                                                             |                                        |                     |                                            |         |           |           |          
|                                      |                                                                                                                                             |                                        |                     | Total deposits                             |         |           | 1,199,645 |           |         |           | 1,214,856 | 
|                                      |                                                                                                                                             | FHLB advances                          |                     |                                            | 484,000 |           |           |           | 384,000 |          
|                                      |                                                                                                                                             | Senior notes                           |                     |                                            | 25,778  |           |           |           | 39,358  |          
|                                      |                                                                                                                                             | Capital securities                     |                     |                                            | 14,000  |           |           |           |        |          
|                                      |                                                                                                                                             | Accounts payable and other liabilities |                     |                                            | 12,325  |           |           |           | 11,020  |          
|                                      |                                                                                                                                             |                                        |                     |                                            |         |           |           |          
|                                      |                                                                                                                                             |                                        |                     | Total liabilities                          |         |           | 1,735,748 |           |         |           | 1,649,234 | 
|                                      |                                                                                                                                             |                                        |                     |                                            |         |           |           |          
|Stockholders Equity:                 |                                                                                                                                             |                                        |                     |                                            |         |           |           |          
|                                      | Common stock  $0.01 par value;
	authorized 20,000,000 shares; issued and outstanding, 5,920,226
	shares (2001) and 5,566,801 shares (2000) |                                        |                     | 59                                         |         |           |           | 56        |        
|                                      | Capital in excess of par value  common
	stock                                                                                              |                                        |                     | 44,524                                     |         |           |           | 42,095    |        
|                                      | Retained earnings                                                                                                                           |                                        |                     | 82,435                                     |         |           |           | 65,602    |        
|                                      |                                                                                                                                             |                                        |                     |                                            |         |           |           |          
|                                      |                                                                                                                                             |                                        | 127,018             |                                            |         |           | 107,753   |          
|Less:                                 |                                                                                                                                             |                                        |                     |                                            |         |           |           |          
|                                      | Treasury stock, at cost  560,719
	shares (2001) and 391,406 shares (2000)                                                                  |                                        |                     | (6,569                                     | )       |           |           | (3,592    | )      
|                                      |                                                                                                                                             |                                        |                     |                                            |         |           |           |          
|                                      |                                                                                                                                             |                                        |                     | Total stockholders equity                 |         |           | 120,449   |           |         |           | 104,161   | 
|                                      |                                                                                                                                             |                                        |                     |                                            |         |           |           |          
|                                      |                                                                                                                                             |                                        |                     | Total liabilities and stockholders equity |         | $         | 1,856,197 |           |         | $         | 1,753,395 | 
|                                      |                                                                                                                                             |                                        |                     |                                            |         |           |           |          

See Accompanying Notes to Consolidated Financial
Statements

A-3



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES






CONSOLIDATED STATEMENTS OF INCOME


|                                                                                    |                                      |                                   |                                                        |         |        |         |        |         |        |         |        |         |        |         | 
|----------------------------------------------------------------------------------- | ------------------------------------ | --------------------------------- | ------------------------------------------------------ | ------- | ------ | ------- | ------ | ------- | ------ | ------- | ------ | ------- | ------ | ------- | 
|                                                                                    |                                      |                                  
|                                                                                    |                                      | Years Ended December 31,         
|                                                                                    |                                      |                                  
|                                                                                    |                                      | 2001                              |                                                        | 2000    |        | 1999   
|(In thousands, except per share data)                                               |                                      |                                   |                                                        |         |        |        
|Interest revenues:                                                                  |                                      |                                   |                                                        |         |        |         |        |         |        |         |        |        
|                                                                                    | Loans                                |                                   | $                                                      | 143,249 |        |         | $      | 141,279 |        |         | $      | 126,854 |       
|                                                                                    | Fed funds and other                  |                                   |                                                        | 4,437   |        |         |        | 7,709   |        |         |        | 5,893   |       
|                                                                                    |                                      |                                   |                                                        |         |        |         |        |         |        |         |        |        
|                                                                                    |                                      |                                   | Total interest revenues                                |         |        | 147,686 |        |         |        | 148,988 |        |         |        | 132,747 | 
|                                                                                    |                                      |                                   |                                                        |         |        |         |        |         |        |         |        |        
|Interest costs:                                                                     |                                      |                                   |                                                        |         |        |         |        |         |        |         |        |        
|                                                                                    | Deposits                             |                                   |                                                        | 60,022  |        |         |        | 63,513  |        |         |        | 50,831  |       
|                                                                                    | FHLB advances                        |                                   |                                                        | 20,956  |        |         |        | 20,180  |        |         |        | 17,795  |       
|                                                                                    | Senior notes                         |                                   |                                                        | 3,970   |        |         |        | 4,989   |        |         |        | 5,000   |       
|                                                                                    | Capital securities                   |                                   |                                                        | 722     |        |         |        |        |        |         |        |        |       
|                                                                                    |                                      |                                   |                                                        |         |        |         |        |         |        |         |        |        
|                                                                                    |                                      |                                   | Total interest costs                                   |         |        | 85,670  |        |         |        | 88,682  |        |         |        | 73,626  | 
|                                                                                    |                                      |                                   |                                                        |         |        |         |        |         |        |         |        |        
|Net interest income                                                                 |                                      |                                   | 62,016                                                 |         |        |         | 60,306 |         |        |         | 59,121 |        
|Provision for credit losses                                                         |                                      |                                   | 3,400                                                  |         |        |         | 6,000  |         |        |         | 12,000 |        
|                                                                                    |                                      |                                   |                                                        |         |        |         |        |         |        |         |        |        
|                                                                                    |                                      |                                   | Net interest income after provision for credit
	losses |         |        | 58,616  |        |         |        | 54,306  |        |         |        | 47,121  | 
|Noninterest revenues:                                                               |                                      |                                   |                                                        |         |        |         |        |         |        |         |        |        
|                                                                                    | Loan related and other fees          |                                   |                                                        | 4,268   |        |         |        | 7,072   |        |         |        | 7,324   |       
|                                                                                    | Deposit fees                         |                                   |                                                        | 1,362   |        |         |        | 1,022   |        |         |        | 496     |       
|                                                                                    |                                      |                                   |                                                        |         |        |         |        |         |        |         |        |        
|                                                                                    |                                      |                                   | Total noninterest revenues                             |         |        | 5,630   |        |         |        | 8,094   |        |         |        | 7,820   | 
|Income/(loss) from real estate operations, net                                      |                                      |                                   | 205                                                    |         |        |         | (924   | )       |        |         | 324    |        
|Noninterest expenses:                                                               |                                      |                                   |                                                        |         |        |         |        |         |        |         |        |        
|                                                                                    | General and administrative expenses: |                                   |                                                        |         |        |         |        |         |        |         |        |         |       
|                                                                                    |                                      | Employee                          |                                                        |         | 18,320 |         |        |         | 17,391 |         |        |         | 14,822 |        
|                                                                                    |                                      | Operating                         |                                                        |         | 6,409  |         |        |         | 6,092  |         |        |         | 6,393  |        
|                                                                                    |                                      | Occupancy                         |                                                        |         | 4,015  |         |        |         | 3,758  |         |        |         | 3,889  |        
|                                                                                    |                                      | Professional                      |                                                        |         | 2,857  |         |        |         | 4,255  |         |        |         | 4,035  |        
|                                                                                    |                                      | Technology                        |                                                        |         | 1,897  |         |        |         | 1,939  |         |        |         | 1,988  |        
|                                                                                    |                                      | SAIF premiums and OTS assessments |                                                        |         | 929    |         |        |         | 893    |         |        |         | 1,236  |        
|                                                                                    |                                      |                                   |                                                        |         |        |         |        |         |        |         |        |        
|                                                                                    |                                      |                                   | Total general and administrative expenses              |         |        | 34,427  |        |         |        | 34,328  |        |         |        | 32,363  | 
|                                                                                    | Other non-operating expenses         |                                   |                                                        | 110     |        |         |        | 2,196   |        |         |        | 4,672   |       
|                                                                                    |                                      |                                   |                                                        |         |        |         |        |         |        |         |        |        
|                                                                                    |                                      |                                   | Total noninterest expenses                             |         |        | 34,537  |        |         |        | 36,524  |        |         |        | 37,035  | 
|                                                                                    |                                      |                                   |                                                        |         |        |         |        |         |        |         |        |        
|Income before income taxes and extraordinary item                                   |                                      |                                   | 29,914                                                 |         |        |         | 24,952 |         |        |         | 18,230 |        
|Income tax provision                                                                |                                      |                                   | 12,612                                                 |         |        |         | 10,668 |         |        |         | 8,030  |        
|                                                                                    |                                      |                                   |                                                        |         |        |         |        |         |        |         |        |        
|Income before extraordinary item                                                    |                                      |                                   | 17,302                                                 |         |        |         | 14,284 |         |        |         | 10,200 |        
|Extraordinary item, related to early
	extinguishment of debt (net of taxes of $342) |                                      |                                   | (469                                                   | )       |        |         |       |         |        |         |       |        
|                                                                                    |                                      |                                   |                                                        |         |        |         |        |         |        |         |        |        
|Net income                                                                          |                                      | $                                 | 16,833                                                 |         |        | $       | 14,284 |         |        | $       | 10,200 |        
|                                                                                    |                                      |                                   |                                                        |         |        |         |        |         |        |         |        |        
|Basic earnings per share before extraordinary item                                  |                                      | $                                 | 3.27                                                   |         |        | $       | 2.69   |         |        | $       | 1.93   |        
|                                                                                    |                                      |                                   |                                                        |         |        |         |        |         |        |         |        |        
|Basic earnings per share after extraordinary item                                   |                                      | $                                 | 3.18                                                   |         |        | $       | 2.69   |         |        | $       | 1.93   |        
|                                                                                    |                                      |                                   |                                                        |         |        |         |        |         |        |         |        |        
|Diluted earnings per share before extraordinary
	item                               |                                      | $                                 | 2.29                                                   |         |        | $       | 1.94   |         |        | $       | 1.33   |        
|                                                                                    |                                      |                                   |                                                        |         |        |         |        |         |        |         |        |        
|Diluted earnings per share after extraordinary
	item                                |                                      | $                                 | 2.23                                                   |         |        | $       | 1.94   |         |        | $       | 1.33   |        
|                                                                                    |                                      |                                   |                                                        |         |        |         |        |         |        |         |        |        
|Weighted average basic shares outstanding                                           |                                      |                                   | 5,291                                                  |         |        |         | 5,300  |         |        |         | 5,288  |        
|                                                                                    |                                      |                                   |                                                        |         |        |         |        |         |        |         |        |        
|Weighted average diluted shares outstanding                                         |                                      |                                   | 7,565                                                  |         |        |         | 7,371  |         |        |         | 7,697  |        
|                                                                                    |                                      |                                   |                                                        |         |        |         |        |         |        |         |        |        

See Accompanying Notes to Consolidated Financial
Statements

A-4



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                                        |  |           |       |        |  |            |    |          |  |          |        |           |  |               |        |               |  |   |        |   |  |   |     |   |  |   |         |   |  |   |        | 
|--------------------------------------- |  | --------- | ----- | ------ |  | ---------- | -- | -------- |  | -------- | ------ | --------- |  | ------------- | ------ | ------------- |  | - | ------ | - |  | - | --- | - |  | - | ------- | - |  | - | ------ | 
|                                        |  |           |       |        |  | Capital in |    |          |  |          |        | Loan to   |  |               |        |              
|                                        |  |           |       |        |  | Excess of  |    |          |  |          |        | Employee  |  |               |        |              
|                                        |  | Number of |       |        |  | Par Value- |    |          |  |          |        | Stock     |  | Total         |        |              
|                                        |  | Common    |       | Common |  | Common     |    | Retained |  | Treasury |        | Ownership |  | Stockholders |        | Comprehensive
|                                        |  | Shares    |       | Stock  |  | Stock      |    | Earnings |  | Stock    |        | Plan      |  | Equity        |        | income       
|(In thousands)                          |  |           |       |        |  |            |    |          |  |          |        |           |  |               |        |              
|Balance at January 1, 1999              |  |           | 5,190 |        |  | $          | 52 |          |  | $        | 40,349 |           |  | $             | 41,150 |               |  | $ | (48    | ) |  | $ | (79 | ) |  | $ | 81,424  |   |  |   |        | 
|Exercised stock options                 |  |           | 110   |        |  |            | 1  |          |  |          | 576    |           |  |               |       |               |  |   |       |   |  |   |    |   |  |   | 577     |   |  |   |        | 
|Exercised warrants                      |  |           | 26    |        |  |            |   |          |  |          | 56     |           |  |               |       |               |  |   |       |   |  |   |    |   |  |   | 56      |   |  |   |        | 
|Net income                              |  |           |       |        |  |            |   |          |  |          |       |           |  |               | 10,200 |               |  |   |       |   |  |   |    |   |  |   | 10,200  |   |  | $ | 10,200 | 
|Other                                   |  |           |       |        |  |            |   |          |  |          |       |           |  |               | (32    | )             |  |   |       |   |  |   |    |   |  |   | (32     | ) |  |   |        | 
|Repayments                              |  |           |       |        |  |            |   |          |  |          |       |           |  |               |       |               |  |   |       |   |  |   | 79  |   |  |   | 79      |   |  |   |        | 
|                                        |  |           |       |        |  |            |    |          |  |          |        |           |  |               |        |               |  |   |        |   |  |   |     |   |  |   |         |   |  |   |        | 
|Comprehensive Income                    |  |           |       |        |  |            |   |          |  |          |       |           |  |               |       |               |  |   |       |   |  |   |    |   |  |   |        |   |  | $ | 10,200 | 
|                                        |  |           |       |        |  |            |    |          |  |          |        |           |  |               |        |               |  |   |        |   |  |   |     |   |  |   |         |   |  |   |        | 
|Balance at December 31, 1999            |  |           | 5,326 |        |  |            | 53 |          |  |          | 40,981 |           |  |               | 51,318 |               |  |   | (48    | ) |  |   |    |   |  |   | 92,304  |   |  |   |        | 
|Exercised stock options                 |  |           | 236   |        |  |            | 3  |          |  |          | 1,114  |           |  |               |       |               |  |   |       |   |  |   |    |   |  |   | 1,117   |   |  |   |        | 
|Treasury stock                          |  |           | (387  | )      |  |            |   |          |  |          |       |           |  |               |       |               |  |   | (3,544 | ) |  |   |    |   |  |   | (3,544  | ) |  |   |        | 
|Net income                              |  |           |       |        |  |            |   |          |  |          |       |           |  |               | 14,284 |               |  |   |       |   |  |   |    |   |  |   | 14,284  |   |  | $ | 14,284 | 
|                                        |  |           |       |        |  |            |    |          |  |          |        |           |  |               |        |               |  |   |        |   |  |   |     |   |  |   |         |   |  |   |        | 
|Comprehensive Income                    |  |           |       |        |  |            |   |          |  |          |       |           |  |               |       |               |  |   |       |   |  |   |    |   |  |   |        |   |  | $ | 14,284 | 
|                                        |  |           |       |        |  |            |    |          |  |          |        |           |  |               |        |               |  |   |        |   |  |   |     |   |  |   |         |   |  |   |        | 
|Balance at December 31, 2000            |  |           | 5,175 |        |  |            | 56 |          |  |          | 42,095 |           |  |               | 65,602 |               |  |   | (3,592 | ) |  |   |    |   |  |   | 104,161 |   |  |   |        | 
|Exercised stock options                 |  |           | 84    |        |  |            |   |          |  |          | 443    |           |  |               |       |               |  |   |       |   |  |   |    |   |  |   | 443     |   |  |   |        | 
|Exercised warrants                      |  |           | 269   |        |  |            | 3  |          |  |          | 15     |           |  |               |       |               |  |   |       |   |  |   |    |   |  |   | 18      |   |  |   |        | 
|Tax benefit for stock options exercised |  |           |       |        |  |            |   |          |  |          | 1,971  |           |  |               |       |               |  |   |       |   |  |   |    |   |  |   | 1,971   |   |  |   |        | 
|Treasury stock                          |  |           | (168  | )      |  |            |   |          |  |          |       |           |  |               |       |               |  |   | (2,977 | ) |  |   |    |   |  |   | (2,977  | ) |  |   |        | 
|Net income                              |  |           |       |        |  |            |   |          |  |          |       |           |  |               | 16,833 |               |  |   |       |   |  |   |    |   |  |   | 16,833  |   |  | $ | 16,833 | 
|                                        |  |           |       |        |  |            |    |          |  |          |        |           |  |               |        |               |  |   |        |   |  |   |     |   |  |   |         |   |  |   |        | 
|Comprehensive Income                    |  |           |       |        |  |            |   |          |  |          |       |           |  |               |       |               |  |   |       |   |  |   |    |   |  |   |        |   |  | $ | 16,833 | 
|                                        |  |           |       |        |  |            |    |          |  |          |        |           |  |               |        |               |  |   |        |   |  |   |     |   |  |   |         |   |  |   |        | 
|Balance at December 31, 2001            |  |           | 5,360 |        |  | $          | 59 |          |  | $        | 44,524 |           |  | $             | 82,435 |               |  | $ | (6,569 | ) |  | $ |    |   |  | $ | 120,449 |   |  |   |        | 
|                                        |  |           |       |        |  |            |    |          |  |          |        |           |  |               |        |               |  |   |        |   |  |   |     |   |  |   |         |   |  |   |        | 

See Accompanying Notes to Consolidated Financial
Statements

A-5



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                 |                                                                                |                                                                |                                           |         |          |          |        |         |          |          |        |        |          |          |  
|------------------------------------------------ | ------------------------------------------------------------------------------ | -------------------------------------------------------------- | ----------------------------------------- | ------- | -------- | -------- | ------ | ------- | -------- | -------- | ------ | ------ | -------- | -------- | -
|                                                 |                                                                                |                                                               
|                                                 |                                                                                | Years Ended December 31,                                      
|                                                 |                                                                                |                                                               
|                                                 |                                                                                | 2001                                                           |                                           | 2000    |          | 1999    
|(Dollars in thousands)                           |                                                                                |                                                                |                                           |         |          |         
|Cash Flows from Operating Activities:            |                                                                                |                                                                |                                           |         |          |          |        |         |          |          |        |       
|                                                 | Net Income                                                                     |                                                                | $                                         | 16,833  |          |          | $      | 14,284  |          |          | $      | 10,200 |         
|                                                 | Adjustments to reconcile net income to cash
	provided by operating activities: |                                                                |                                           |         |          |          |        |         |          |          |        |        |         
|                                                 |                                                                                | Deferred income tax (benefit)/provision                        |                                           |         | (1,496   | )        |        |         | (664     | )        |        |        | 619      |         
|                                                 |                                                                                | Provision for credit losses on loans                           |                                           |         | 3,400    |          |        |         | 6,000    |          |        |        | 12,000   |         
|                                                 |                                                                                | Chargeoff/provision for losses on real estate
	owned           |                                           |         |         |          |        |         | 476      |          |        |        | 80       |         
|                                                 |                                                                                | Net loss from sale of loans                                    |                                           |         | 110      |          |        |         |         |          |        |        |         |         
|                                                 |                                                                                | Net(gain)/loss from sale of real estate owned                  |                                           |         | (106     | )        |        |         | 166      |          |        |        | (754     | )       
|                                                 |                                                                                | Net loss from disposal of other assets                         |                                           |         |         |          |        |         |         |          |        |        | 7        |         
|                                                 |                                                                                | Loan fee and discount accretion                                |                                           |         | (2,341   | )        |        |         | (2,822   | )        |        |        | (5,108   | )       
|                                                 |                                                                                | Depreciation and amortization                                  |                                           |         | 2,750    |          |        |         | 2,778    |          |        |        | 2,389    |         
|                                                 |                                                                                | FHLB dividends                                                 |                                           |         | (1,206   | )        |        |         | (1,476   | )        |        |        | (961     | )       
|                                                 |                                                                                | Decrease/(increase) in accrued interest receivable             |                                           |         | 1,363    |          |        |         | (1,790   | )        |        |        | (826     | )       
|                                                 |                                                                                | Decrease in other assets                                       |                                           |         | 798      |          |        |         | 1,143    |          |        |        | 563      |         
|                                                 |                                                                                | Increase/(decrease) in accounts payable and other
	liabilities |                                           |         | 1,305    |          |        |         | (1,788   | )        |        |        | 5,654    |         
|                                                 |                                                                                |                                                                |                                           |         |          |          |        |         |          |          |        |       
|                                                 |                                                                                |                                                                | Net cash provided by operating activities |         |          | 21,410   |        |         |          | 16,307   |        |        |          | 23,863   |  
|                                                 |                                                                                |                                                                |                                           |         |          |          |        |         |          |          |        |       
|Cash Flows from Investing Activities:            |                                                                                |                                                                |                                           |         |          |          |        |         |          |          |        |       
|                                                 | Loans:                                                                         |                                                                |                                           |         |          |          |        |         |          |          |        |        |         
|                                                 |                                                                                | New loans funded                                               |                                           |         | (666,368 | )        |        |         | (753,066 | )        |        |        | (714,073 | )       
|                                                 |                                                                                | Payoffs                                                        |                                           |         | 574,641  |          |        |         | 551,851  |          |        |        | 544,156  |         
|                                                 |                                                                                | Sales proceeds                                                 |                                           |         | 27,765   |          |        |         | 14,961   |          |        |        | 3,000    |         
|                                                 |                                                                                | Purchases                                                      |                                           |         | (55,458  | )        |        |         | (8,568   | )        |        |        | (1,155   | )       
|                                                 |                                                                                | Principal payments                                             |                                           |         | 17,976   |          |        |         | 24,355   |          |        |        | 24,806   |         
|                                                 |                                                                                | Other, net                                                     |                                           |         | (3,018   | )        |        |         | 466      |          |        |        | 7,092    |         
|                                                 | Real estate owned, net:                                                        |                                                                |                                           |         |          |          |        |         |          |          |        |        |         
|                                                 |                                                                                | Sales proceeds                                                 |                                           |         | 2,969    |          |        |         | 5,105    |          |        |        | 10,385   |         
|                                                 |                                                                                | Capitalized costs                                              |                                           |         | (4       | )        |        |         | (62      | )        |        |        | (149     | )       
|                                                 |                                                                                | Other, net                                                     |                                           |         |         |          |        |         |         |          |        |        | (30      | )       
|                                                 | Purchase of FHLB stock                                                         |                                                                |                                           | (2,528  | )        |          |        | (630    | )        |          |        | (7,721 | )       
|                                                 | Redemption of FHLB stock                                                       |                                                                |                                           |        |          |          |        | 3,612   |          |          |        |       |         
|                                                 | Office property and equipment:                                                 |                                                                |                                           |         |          |          |        |         |          |          |        |        |         
|                                                 |                                                                                | Sales proceeds                                                 |                                           |         |         |          |        |         | 51       |          |        |        | 233      |         
|                                                 |                                                                                | Additions                                                      |                                           |         | (1,414   | )        |        |         | (1,337   | )        |        |        | (2,031   | )       
|                                                 |                                                                                |                                                                |                                           |         |          |          |        |         |          |          |        |       
|                                                 |                                                                                |                                                                | Net cash used in investing activities     |         |          | (105,439 | )      |         |          | (163,262 | )      |        |          | (135,487 | )
|                                                 |                                                                                |                                                                |                                           |         |          |          |        |         |          |          |        |       
|Cash Flows from Financing Activities:            |                                                                                |                                                                |                                           |         |          |          |        |         |          |          |        |       
|                                                 | Deposit activity, net                                                          |                                                                |                                           | (15,211 | )        |          |        | 128,221 |          |          |        | 67,185 |         
|                                                 | Net increase in FHLB advances                                                  |                                                                |                                           | 100,000 |          |          |        | 35,000  |          |          |        | 85,000 |         
|                                                 | Net proceeds from exercise of stock options and
	warrants                      |                                                                |                                           | 461     |          |          |        | 1,117   |          |          |        | 633    |         
|                                                 | Collection of ESOP loan                                                        |                                                                |                                           |        |          |          |        |        |          |          |        | 79     |         
|                                                 | Reduction in senior notes                                                      |                                                                |                                           | (13,580 | )        |          |        | (642    | )        |          |        |       |         
|                                                 | Proceeds from capital securities                                               |                                                                |                                           | 14,000  |          |          |        |        |          |          |        |       |         
|                                                 | Treasury stock purchases                                                       |                                                                |                                           | (2,977  | )        |          |        | (3,544  | )        |          |        |       |         
|                                                 |                                                                                |                                                                |                                           |         |          |          |        |         |          |          |        |       
|                                                 |                                                                                |                                                                | Net cash provided by financing activities |         |          | 82,693   |        |         |          | 160,152  |        |        |          | 152,897  |  
|                                                 |                                                                                |                                                                |                                           |         |          |          |        |         |          |          |        |       
|(Decrease)/increase in cash and cash equivalents |                                                                                |                                                                | (1,336                                    | )       |          |          | 13,197 |         |          |          | 41,273 |       
|Cash and cash equivalents, beginning of year     |                                                                                |                                                                | 99,919                                    |         |          |          | 86,722 |         |          |          | 45,449 |       
|                                                 |                                                                                |                                                                |                                           |         |          |          |        |         |          |          |        |       
|Cash and cash equivalents, end of year           |                                                                                | $                                                              | 98,583                                    |         |          | $        | 99,919 |         |          | $        | 86,722 |       
|                                                 |                                                                                |                                                                |                                           |         |          |          |        |         |          |          |        |       
|Supplemental Cash Flow Information:              |                                                                                |                                                                |                                           |         |          |          |        |         |          |          |        |       
|                                                 | Cash paid during the year for:                                                 |                                                                |                                           |         |          |          |        |         |          |          |        |        |         
|                                                 |                                                                                | Interest                                                       |                                           | $       | 85,241   |          |        | $       | 87,204   |          |        | $      | 73,214   |         
|                                                 |                                                                                | Income taxes, net                                              |                                           |         | 10,500   |          |        |         | 11,050   |          |        |        | 4,233    |         
|                                                 | Non-cash investing and financing activities:                                   |                                                                |                                           |         |          |          |        |         |          |          |        |        |         
|                                                 |                                                                                | Real estate acquired in settlement of loans                    |                                           |         | 1,312    |          |        |         | 3,277    |          |        |        | 13,649   |         
|                                                 |                                                                                | Loans originated to finance sales of real estate
	owned        |                                           |         |         |          |        |         |         |          |        |        | 1,500    |         
|                                                 |                                                                                | Loans originated to refinance existing Bank loans              |                                           |         | 50,274   |          |        |         | 28,229   |          |        |        | 48,008   |         
|                                                 |                                                                                | Tax benefit for exercised stock options                        |                                           |         | 1,971    |          |        |         |         |          |        |        |         |         

See Accompanying Notes to Consolidated Financial
Statements

A-6



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES






NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


Note 1  Summary of Significant
Accounting Policies



| |                      
| | ---------------------
| | Basis of Presentation

The consolidated financial statements are
prepared in accordance with accounting principles generally
accepted in the United States of America (GAAP) and
general practices within the banking industry. The following is
a summary of significant principles used in the preparation of
the accompanying financial statements.



| |                            
| | ---------------------------
| | Principles of Consolidation

The consolidated financial statements include the
accounts of Hawthorne Financial Corporation and its wholly owned
subsidiaries, Hawthorne Savings, F.S.B. (Bank) and
HFC Capital Trust I/II, which are collectively referred to
herein as the Company. All significant intercompany
transactions and balances have been eliminated in consolidation.



| |                     
| | --------------------
| | Nature of Operations

The Company is principally engaged in the
business of attracting deposits from the general public and
using those deposits, together with borrowings and other funds,
to originate residential and income property real estate loans.
The Companys principal sources of revenue are interest
earned on mortgage loans and fees generated from various deposit
account services and miscellaneous loan processing activities.
The Companys principal expenses are interest paid on
deposit accounts and the costs necessary to operate the Company.



| |                                                             
| | ------------------------------------------------------------
| | Use of Estimates in the Preparation of
	Financial Statements

The preparation of financial statements in
conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets,
liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the period. Actual results could
differ from those estimates. Significant estimates include the
allowance for credit losses, valuation of real estate owned.
Other estimates include fair value of stock options and fair
values of financial instruments.



| |                          
| | -------------------------
| | Cash and Cash Equivalents

In the consolidated statements of financial
condition and cash flows, cash and cash equivalents include
cash, amounts due from banks and overnight investments. Office
of Thrift and Supervision (OTS) regulations no
longer require a savings association to maintain an average
daily balance of liquid assets. In July 2001, the OTS issued a
final rule that eliminated the 4% liquidity requirement and
replaced it with a general requirement that thrifts maintain
sufficient liquidity to ensure safety and soundness.



| |                      
| | ---------------------
| | Investment Securities

The Company has authority to invest in a variety
of investment securities, including U.S. Government and agency
securities, mortgage-backed securities and corporate securities.
However, in recent years the Companys strategy has been to
deploy its assets through loan originations, rather than
purchases of investment securities. As a result, the investment
activity has been steadily decreasing over the last six years,
and during 2001, 2000 and 1999 there was no investment activity.
The Company classifies all securities acquired as
available-for-sale under GAAP, and thus the securities are
carried at fair value, with unrealized gains and losses excluded
from income and reported as a separate component of
stockholders equity, net of taxes.

A-7



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                 
| | ----------------
| | Loans Receivable

Loans are generally carried at principal amounts,
less net deferred loan fees and costs. Net deferred loan fees
and costs include deferred unamortized fees, less direct
incremental loan origination costs. The Company defers all loan
fees and costs, net of certain direct costs associated with
originating loans, and recognizes these net deferred fees into
interest revenue as a yield adjustment over the term of the
loans using the interest method for permanent loans. When a loan
is paid off, any unamortized net deferred fees and costs are
recognized in interest income.

Interest on loans, including impaired loans, is
recognized in revenue as earned and is accrued only if deemed
collectible. Loans 90 days or more delinquent, or when
collection of interest or principal becomes uncertain, and loans
classified substandard for which interest payment reserves were
established from loan funds rather than borrower funds, are
placed on nonaccrual status, meaning that the Company stops
accruing interest on such loans and reverses any interest
previously accrued but not collected. A nonaccrual loan may be
restored to accrual status when delinquent principal and
interest payments are brought current, the loan is paying in
accordance with its payment terms for a period, typically
between three to six months, and future monthly principal and
interest payments are expected to be collected.

The Company considers a loan to be impaired when
it is probable that it will be unable to collect all amounts due
according to the contractual terms of the loan agreement. Once a
loan is determined to be impaired, the impairment is measured
based on the present value of the expected future cash flows
discounted at the loans effective interest rate, or the
fair value of the collateral if the loan is collateral
dependent. All loans on nonaccrual status are considered to be
impaired, however, not all impaired loans are on nonaccrual
status. To remain on accrual status, payments on impaired loans
must be current.

When the measurement of the impaired loan is less
than the recorded amount of the loan, an impairment is
recognized by recording a provision with a corresponding charge
to the allowance for credit losses.

All loans are classified as held-for-investment
as the Company has the current intent and ability to hold these
loans in their portfolio until maturity.



| |                            
| | ---------------------------
| | Allowance for Credit Losses

In accordance with the SEC Staff Accounting
Bulletin No. 102, Selected Loan Loss Allowance
Methodology and Documentation Issues, and the newly
released Federal Financial Institutions Examination Council
(FFIEC) guidelines, management establishes specific
allowances for credit losses on individual loans when it has
determined that recovery of the Companys gross investment
is not probable and when the amount of loss can be reasonably
determined. On a quarterly basis, management completes a loan
loss allowance analysis that provides for an adequate balance in
the allowance for credit losses. Management evaluates the
allowance for credit losses in accordance with GAAP, within the
guidance established by SFAS No. 5, Accounting for
Contingencies, and SFAS No. 114, as amended by SFAS
No. 118, Accounting by Creditors for Impairment of a
Loan, as well as standards established by regulatory
Interagency Policy Statements on the Allowance for Loan and
Lease Losses (ALLL). In making this determination,
management considers (1) the status of the asset,
(2) the probable future status of the asset, (3) the
value of the asset or underlying collateral and
(4) managements intent with respect to the asset. In
quantifying the loss, if any, associated with individual loans
and REO, management utilizes external sources of information
(i.e., appraisals, price opinions from real estate
professionals, comparable sales data and internal estimates). In
establishing specific allowances for impaired loans, in
accordance with SFAS No. 114, management estimates the
revenues expected to be generated from disposal of the
Companys collateral or owned property, less construction
and renovation costs (if any), holding costs and transaction
costs. Other methods can be used to estimate impairment (market
price or present value of expected future cash flows discounted
at the loans original interest rate).

A-8



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company maintains an allowance for credit
losses, which is not tied to individual loans or properties
(General Valuation Allowances, or GVA). GVAs are
maintained for each of the Companys principal loan
segments and supplemented by periodic additions through
provisions for credit losses. In measuring the adequacy of the
Companys GVA, management considers (1) the
Companys historical loss experience for each loan
portfolio segment and in total, (2) the historical
migration of loans within each portfolio segment and in total
(i.e., from performing to nonperforming, from nonperforming to
REO), (3) observable trends in the performance of each loan
portfolio segment, (4) observable trends in the
regions economy and in its real property markets, and
(5) additional analyses to validate the reasonableness of
the credit losses. The GVA level, based on the OTS Examiner
Benchmark and review of peer information, is used to establish a
range, which supports the reasonableness of the Banks GVA
balance. The GVA includes an unallocated amount. The unallocated
allowance is based upon managements evaluation of various
conditions, the effects of which are not directly measured in
the determination of the formula and specific allowances. The
evaluation of the inherent loss with respect to these conditions
is subject to a higher degree of uncertainty because they are
not identified with specific problem credits or portfolio
segments. The conditions evaluated in connection with the
unallocated allowance include other general economic and
business conditions affecting our key lending areas.



| |                  
| | -----------------
| | Real Estate Owned

Properties acquired through foreclosure, or deed
in lieu of foreclosure (real estate owned), are
transferred to REO and carried at the lower of cost or estimated
fair value less the estimated costs to sell the property. The
fair value of the property is based upon a current appraisal.
Subsequent to foreclosure, management periodically performs
valuations and the REO property is carried at the lower of
carrying value or fair value, less costs to sell. The
determination of a propertys estimated fair value
incorporates (1) revenues projected to be realized from
disposal of the property, (2) construction and renovation
costs, (3) marketing and transaction costs and
(4) holding costs (e.g., property taxes, insurance and
homeowners association dues). Any subsequent declines in
the fair value of the REO property after the date of transfer
are recorded through a write-down of the asset. Revenue
recognition upon disposition of the property is dependent upon
the sale having met certain criteria relating to the
buyers initial investment in the property sold. Gains and
losses from sales of real estate owned properties are reflected
in Income/(loss) from real estate operations, net in
the consolidated statements of income.



| |                              
| | -----------------------------
| | Office Property and Equipment

Company property and equipment are stated at cost
less accumulated depreciation and amortization. Depreciation and
amortization are computed on a straight-line basis over the
estimated useful lives of the various classes of assets. The
ranges of useful lives for the principal classes of assets are
as follows:

|                                 |  |                                    
|-------------------------------- |  | -----------------------------------
|Buildings                        |  | 20-30 years                        
|Computers and related software   |  | 3-5 years                          
|Facsimiles, copiers and printers |  | 3-7 years                          
|Furniture and fixtures           |  | 7 years                            
|Leasehold improvements           |  | Shorter of 5 years or term of lease
|Automobiles                      |  | 3 years                            



| |               
| | --------------
| | Parent Company

In connection with the issuance of its 1997
12.50% Senior Notes (Senior Notes), the Company
capitalized $2.5 million of issuance costs. To date, the
Company amortized $0.6 million of its Senior Notes issuance
costs, excluding $0.5 million related to the accelerated
write-off of prepaid issuance costs due to the

A-9



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

repurchase of Senior Notes, which are being
amortized over seven years, the life of the debt, or through the
period in which the debt is retired. See Note
11  Capital and Debt Offerings.

Income Taxes

The Company and its subsidiary have historically
filed a consolidated federal income tax return and a combined
state franchise tax return on a fiscal year ending
December 31.

Deferred tax assets and liabilities represent the
tax effects, calculated at currently effective tax rates, of
future deductible or taxable amounts attributable to events that
have been recognized on a cumulative basis in the financial
statements. If it is more likely than not that any of a deferred
tax asset will not be realized, a valuation allowance is
recorded.

Stock Based Compensation Plans

The Company has elected to apply the provisions
of APB Opinion No. 25 and provide the pro forma disclosure
requirements of SFAS No. 123 in the footnotes to its
consolidated financial statements. SFAS No. 123 requires
pro forma disclosure of net income and, if presented, earnings
per share, as if the fair-value based method of accounting
defined in this statement had been applied. APB Opinion
No. 25 and related interpretations requires accounting for
stock compensation awards based on their intrinsic value as of
the grant date.

Impairment of Long-Lived Assets

Long-lived assets and certain identifiable
intangibles related to those assets to be held and used are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be
recoverable. SFAS No. 121 requires that certain long-lived
assets and identifiable intangibles to be disposed of be
reported at the lower of historical cost or fair value, less
costs to sell.

Recent Accounting Pronouncements

SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, is
effective for all fiscal years beginning after June 15,
2000. SFAS No. 133, as amended and interpreted, establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other
contracts and for hedging activities. Under SFAS No. 133,
certain contracts that were not formerly considered derivatives
may now meet the definition of a derivative. The Company adopted
SFAS No. 133 effective January 1, 2001. The adoption
of SFAS No. 133 did not have a significant impact on the
financial position, results of operations, or cash flows of the
Company.

In September 2000, the Financial Accounting
Standards Board (FASB) issued SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, which is effective for
transfers and servicing of financial assets and extinguishments
of liabilities occurring after March 31, 2001, and for
disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000.
The adoption of SFAS No. 140 did not have a significant
impact on the financial position, results of operations, or cash
flows of the Company.

In July 2001, the FASB issued SFAS No. 141,
Business Combinations, which requires the purchase
method of accounting for business combinations initiated after
June 30, 2001 and eliminates the pooling-of-interests
method. The adoption of SFAS No. 141 did not have a
significant impact on the financial position, results of
operations, or cash flows of the Company.

In July 2001, the FASB issued SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS
No. 142 establishes new standards for goodwill acquired in
a business combination and eliminates amortization of

A-10



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

goodwill and instead sets forth methods to
periodically evaluate goodwill for impairment. The provisions of
SFAS No. 142 are to be applied starting with fiscal years
beginning after December 15, 2001. The adoption of SFAS
No. 142 will not have a significant impact on the financial
position, result of operations, or cash flows of the Company.

In August 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which is effective for fiscal years
beginning after December 15, 2001. This pronouncement
supercedes SFAS No. 121 and the accounting and reporting
provisions of Accounting Principles Board Opinion No. 30
for the disposal of a segment of a business. The Company is
currently evaluating the impact that the adoption of SFAS
No. 144 may have on its financial position, result of
operations or cash flows.

Reclassifications

Certain amounts in the 2000 and 1999 consolidated
financial statements have been reclassified to conform with 2001
presentation.

A-11



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Earnings Per Share Calculation

The table below sets forth the Companys
earnings per share calculations for the years ended
December 31, 2001, 2000 and 1999. In the following table,
(1) Warrants refers to the Warrants issued by
the Company in December 1995, which are currently exercisable,
and which expire December 11, 2005, and
(2) Options refer to stock options previously
granted to employees of the Company and which were outstanding
at each measurement date. See Note 10 and
Note 11.

In July 1998, the Company completed an offering
of 2,012,500 shares of its common stock (including
262,500 shares issued upon exercise by the underwriters of
their overallotment option) at a price of $15.00 per share,
realizing net proceeds (after offering costs) of approximately
$27.6 million. As an additional result of this offering,
the exercise price of the Warrants was reduced to $2.128 per
share and the number of shares of common stock purchasable upon
the exercise of the Warrants was increased to 2,512,188.

|                                                      |                         |                          |        |       |   |      |        |       |   |   |        |       |  
|----------------------------------------------------- | ----------------------- | ------------------------ | ------ | ----- | - | ---- | ------ | ----- | - | - | ------ | ----- | -
|                                                      |                         |                         
|                                                      |                         | Years Ended December 31,
|                                                      |                         |                         
|                                                      |                         | 2001                     |        | 2000  |   | 1999
|(In thousands, except per share data)                 |                         |                          |        |       |   |     
|Average shares outstanding:                           |                         |                          |        |       |   |      |        |       |   |   |        |      
|                                                      | Basic                   |                          |        | 5,291 |   |      |        | 5,300 |   |   |        | 5,288 |  
|                                                      | Warrants                |                          |        | 2,342 |   |      |        | 2,486 |   |   |        | 2,496 |  
|                                                      | Options(1)              |                          |        | 587   |   |      |        | 360   |   |   |        | 445   |  
|                                                      | Less: Treasury stock(2) |                          |        | (655  | ) |      |        | (775  | ) |   |        | (532  | )
|                                                      |                         |                          |        |       |   |      |        |       |   |   |        |      
|                                                      | Diluted                 |                          |        | 7,565 |   |      |        | 7,371 |   |   |        | 7,697 |  
|                                                      |                         |                          |        |       |   |      |        |       |   |   |        |      
|Net income before extraordinary item                  |                         | $                        | 17,302 |       |   | $    | 14,284 |       |   | $ | 10,200 |      
|                                                      |                         |                          |        |       |   |      |        |       |   |   |        |      
|Net income after extraordinary item                   |                         | $                        | 16,833 |       |   | $    | 14,284 |       |   | $ | 10,200 |      
|                                                      |                         |                          |        |       |   |      |        |       |   |   |        |      
|Basic earnings per share before extraordinary item    |                         | $                        | 3.27   |       |   | $    | 2.69   |       |   | $ | 1.93   |      
|Extraordinary item (net of taxes)                     |                         |                          | (0.09  | )     |   |      |       |       |   |   |       |      
|                                                      |                         |                          |        |       |   |      |        |       |   |   |        |      
|Basic earnings per share after extraordinary item     |                         | $                        | 3.18   |       |   | $    | 2.69   |       |   | $ | 1.93   |      
|                                                      |                         |                          |        |       |   |      |        |       |   |   |        |      
|Diluted earnings per share before extraordinary
	item |                         | $                        | 2.29   |       |   | $    | 1.94   |       |   | $ | 1.33   |      
|Extraordinary item (net of taxes)                     |                         |                          | (0.06  | )     |   |      |       |       |   |   |       |      
|                                                      |                         |                          |        |       |   |      |        |       |   |   |        |      
|Diluted earnings per share after extraordinary
	item  |                         | $                        | 2.23   |       |   | $    | 1.94   |       |   | $ | 1.33   |      
|                                                      |                         |                          |        |       |   |      |        |       |   |   |        |      
|Year end shares outstanding:                          |                         |                          |        |       |   |      |        |       |   |   |        |      
|                                                      | Basic                   |                          |        | 5,360 |   |      |        | 5,175 |   |   |        | 5,326 |  
|                                                      | Warrants                |                          |        | 2,179 |   |      |        | 2,486 |   |   |        | 2,486 |  
|                                                      | Options(3)              |                          |        | 636   |   |      |        | 446   |   |   |        | 403   |  
|                                                      | Less: Treasury stock(2) |                          |        | (646  | ) |      |        | (619  | ) |   |        | (584  | )
|                                                      |                         |                          |        |       |   |      |        |       |   |   |        |      
|                                                      | Diluted                 |                          |        | 7,529 |   |      |        | 7,488 |   |   |        | 7,631 |  
|                                                      |                         |                          |        |       |   |      |        |       |   |   |        |      
|Basic book value per share                            |                         | $                        | 22.47  |       |   | $    | 20.13  |       |   | $ | 17.33  |      
|                                                      |                         |                          |        |       |   |      |        |       |   |   |        |      
|Diluted book value per share                          |                         | $                        | 16.00  |       |   | $    | 13.91  |       |   | $ | 12.10  |      
|                                                      |                         |                          |        |       |   |      |        |       |   |   |        |      



---



|    |                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Excludes 12,083, 225,327 and 385,000 options
	outstanding for the year ended December 31, 2001, 2000 and
	1999, respectively, for which the exercise price exceeded the
	average market price of the Companys common stock during
	the periods.
|   
|(2) | Under the treasury stock method, it is assumed
	that the Company will use proceeds from the pro forma exercise
	of the Warrants and Options to acquire actual shares currently
	outstanding, thus increasing                                    

A-12



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                                                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | treasury stock. In this calculation, treasury
	stock was assumed repurchased at the average closing stock price
	for the respective period.                                                                               
|   
|(3) | Excludes 15,000, 160,000 and 330,000 options
	outstanding at December 31, 2001, 2000 and 1999,
	respectively, for which the exercise price exceeded the average
	market price of the Companys common stock at period-end.

Note 2  Cash and Cash
Equivalents

The table below reflects cash and cash
equivalents for the dates indicated:

|                        |       |              |        |        |  |   |        |        | 
|----------------------- | ----- | ------------ | ------ | ------ |  | - | ------ | ------ | 
|                        |       |             
|                        |       | December 31,
|                        |       |             
|                        |       | 2001         |        | 2000  
|(Dollars in thousands)  |       |              |        |       
|Cash and due from banks |       | $            | 18,583 |        |  | $ | 19,919 |       
|Federal funds sold      |       |              | 80,000 |        |  |   | 80,000 |       
|                        |       |              |        |        |  |   |        |       
|                        | Total |              | $      | 98,583 |  |   | $      | 99,919 | 
|                        |       |              |        |        |  |   |        |       

Note 3  Investment
Securities

As of December 31, 2001 and 2000, the
Company did not have any investment securities. The Company has
authority to invest in a variety of investment securities,
including U.S. Government and agency securities, mortgage-backed
securities and corporate securities. However, in recent years
the Companys strategy has been to deploy its assets
through loan originations, rather than purchases of investment
securities. As a result, there was no investment activity in
2001, 2000 and 1999.

Note 4  Loans Receivable

The Companys loan portfolio consists almost
exclusively of loans secured by real estate located in Southern
California. The table below sets forth the composition of the
Companys loan portfolio as of the dates indicated.

|                            |                                |                           |           |          |           |   |           |          |           | 
|--------------------------- | ------------------------------ | ------------------------- | --------- | -------- | --------- | - | --------- | -------- | --------- | 
|                            |                                |                          
|                            |                                | December 31,             
|                            |                                |                          
|                            |                                | 2001                      |           | 2000    
|(Dollars in thousands)      |                                |                           |           |         
|Single family residential   |                                | $                         | 918,877   |          |           | $ | 888,416   |         
|Income property:            |                                |                           |           |          |           |   |           |         
|                            | Multi-family(1)                |                           |           | 255,183  |           |   |           | 253,039  |          
|                            | Commercial(1)                  |                           |           | 248,092  |           |   |           | 200,372  |          
|                            | Development(2)                 |                           |           | 227,190  |           |   |           | 203,894  |          
|Single family construction: |                                |                           |           |          |           |   |           |         
|                            | Single family residential(3)   |                           |           | 159,224  |           |   |           | 195,983  |          
|                            | Tract                          |                           |           |         |           |   |           | 3,495    |          
|Land(4)                     |                                |                           | 50,984    |          |           |   | 46,520    |         
|Other                       |                                |                           | 11,482    |          |           |   | 15,390    |         
|                            |                                |                           |           |          |           |   |           |         
|                            |                                | Gross loans receivable(5) |           |          | 1,871,032 |   |           |          | 1,807,109 | 
|Less:                       |                                |                           |           |          |           |   |           |         
|                            | Undisbursed funds              |                           |           | (137,484 | )         |   |           | (171,789 | )        
|                            | Deferred (fees) and costs, net |                           |           | 6,337    |           |   |           | 2,197    |          
|                            | Allowance for credit losses    |                           |           | (30,602  | )         |   |           | (29,450  | )        
|                            |                                |                           |           |          |           |   |           |         
|Net loans receivable        |                                | $                         | 1,709,283 |          |           | $ | 1,608,067 |         
|                            |                                |                           |           |          |           |   |           |         



---



| | 
| | 
| | 



|    |                                                     
|--- | ----------------------------------------------------
|(1) | Includes term loans secured by improved
	properties.

A-13



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Predominantly loans to finance the construction
	of income-producing improvements.                                                                                                                 
|   
|(3) | Predominantly loans for the construction of
	individual and custom homes.                                                                                                                          
|   
|(4) | The Company expects that a majority of these
	loans will be converted into construction loans, and the
	land-secured loans repaid with the proceeds of these
	construction loans, within 12 months.
|   
|(5) | Gross loans receivable includes the principal
	balance of loans outstanding, plus outstanding but unfunded loan
	commitments, predominantly in connection with construction loans.                 

The table below summarizes the maturities for
fixed rate loans and the repricing intervals for adjustable rate
loans as of December 31, 2001:

|                       |                    |                        |   |                 |         |       |   |           |           |  |   |           |           | 
|---------------------- | ------------------ | ---------------------- | - | --------------- | ------- | ----- | - | --------- | --------- |  | - | --------- | --------- | 
|                       |                    |                       
|                       |                    | Principal Balance     
|                       |                    |                       
|                       |                    | Fixed Rate             |   | Adjustable Rate |         | Total
|(Dollars in thousands) |                    |                        |   |                 |         |      
|Interval:              |                    |                        |   |                 |         |       |   |           |           |  |   |          
|                       | <3 months          |                        | $ | 26,585          |         |       | $ | 1,326,057 |           |  | $ | 1,352,642 |          
|                       | > 3 to 6 months    |                        |   | 1,733           |         |       |   | 357,980   |           |  |   | 359,713   |          
|                       | > 6 to 12 months   |                        |   | 5,179           |         |       |   | 21,831    |           |  |   | 27,010    |          
|                       | > 1 to 2 years     |                        |   | 2,152           |         |       |   |          |           |  |   | 2,152     |          
|                       | > 2 to 5 years     |                        |   | 8,303           |         |       |   |          |           |  |   | 8,303     |          
|                       | > 5 to 10 years    |                        |   | 19,526          |         |       |   |          |           |  |   | 19,526    |          
|                       | > 10 to 20 years   |                        |   | 14,876          |         |       |   |          |           |  |   | 14,876    |          
|                       | More than 20 years |                        |   | 86,810          |         |       |   |          |           |  |   | 86,810    |          
|                       |                    |                        |   |                 |         |       |   |           |           |  |   |          
|                       |                    | Gross loans receivable |   | $               | 165,164 |       |   | $         | 1,705,868 |  |   | $         | 1,871,032 | 
|                       |                    |                        |   |                 |         |       |   |           |           |  |   |          

The contractual weighted average interest rates
on loans at December 31, 2001 and 2000 were 7.69% and
8.98%, respectively.

The table below summarizes nonaccrual loans for
the dates indicated:

|                            |                           |              |       |        |        |   |        |        |        | 
|--------------------------- | ------------------------- | ------------ | ----- | ------ | ------ | - | ------ | ------ | ------ | 
|                            |                           |             
|                            |                           | December 31,
|                            |                           |             
|                            |                           | 2001         |       | 2000  
|(Dollars in thousands)      |                           |              |       |       
|Single family residential   |                           | $            | 6,438 |        |        | $ | 13,954 |       
|Income property:            |                           |              |       |        |        |   |        |       
|                            | Development               |              |       | 11,469 |        |   |        | 10,987 |       
|Single family construction: |                           |              |       |        |        |   |        |       
|                            | Single family residential |              |       | 2,187  |        |   |        | 2,712  |       
|Land                        |                           |              | 572   |        |        |   | 3,930  |       
|Other                       |                           |              |      |        |        |   | 18     |       
|                            |                           |              |       |        |        |   |        |       
|                            |                           | Total(1)     |       | $      | 20,666 |   |        | $      | 31,601 | 
|                            |                           |              |       |        |        |   |        |       



---



| | 
| | 
| | 



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | At December 31, 2001 and December 31,
	2000, nonaccrual loans included six loans totaling
	$4.7 million and 10 loans totaling $7.1 million,
	respectively, in bankruptcy. There were no troubled debt
	restructured loans (TDRs) on nonaccrual status at
	December 31, 2001, compared with $3.7 million at
	December 31, 2000. Excludes $4.7 million and
	$15.1 million of TDRs that were paying in accordance with
	their modified terms at December 31, 2001 and 2000,
	respectively.

The interest income recognized on loans that were
on nonaccrual status at December 31, 2001, 2000 and 1999,
was $0.2 million, $1.7 million and $2.3 million,
respectively. If these loans had been performing for the

A-14



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

entire year, the income recognized would have
been $1.8 million, $3.3 million and $4.5 million
for 2001, 2000 and 1999, respectively.

The table below summarizes the amounts of
interest income that would have been recognized on TDRs had
borrowers paid at the original loan interest rate throughout
each of the years below, the interest income that would have
been recognized based upon the modified interest rate, and the
interest income that was included in the consolidated statements
of operations for the periods indicated. For this purpose, a TDR
is a loan with respect to which (1) the original interest
rate was changed for a defined period of time, (2) the
loans maturity was extended due to borrowers
financial difficulty, and/or (3) the Company agreed to
suspend principal or interest payments for a defined period of
time.

|                              |                   |           |        |          |  |          |       |            |  |   |       |       |  |   |       |       | 
|----------------------------- | ----------------- | --------- | ------ | -------- |  | -------- | ----- | ---------- |  | - | ----- | ----- |  | - | ----- | ----- | 
|                              |                   | Principal |        | Original |  | Modified |       | Recognized
|                              |                   | Balance   |        | Interest |  | Interest |       | Interest  
|(Dollars in thousands)        |                   |           |        |          |  |          |       |           
|Year ended December 31, 2001: |                   |           |        |          |  |          |       |            |  |   |       |       |  |   |       |      
|                              | Permanent loans   |           | $      | 4,702    |  |          | $     | 469        |  |   | $     | 381   |  |   | $     | 381   | 
|                              |                   |           |        |          |  |          |       |            |  |   |       |       |  |   |       |      
|Year ended December 31, 2000: |                   |           |        |          |  |          |       |            |  |   |       |       |  |   |       |      
|                              | Permanent loans   |           | $      | 18,787   |  |          | $     | 2,049      |  |   | $     | 1,804 |  |   | $     | 1,273 | 
|                              |                   |           |        |          |  |          |       |            |  |   |       |       |  |   |       |      
|Year ended December 31, 1999: |                   |           |        |          |  |          |       |            |  |   |       |       |  |   |       |      
|                              | Development loans |           | $      | 5,072    |  |          | $     | 684        |  |   | $     | 681   |  |   | $     | 392   | 
|                              | Permanent loans   |           |        | 29,766   |  |          |       | 3,319      |  |   |       | 2,842 |  |   |       | 1,636 | 
|                              |                   |           |        |          |  |          |       |            |  |   |       |       |  |   |       |      
|                              |                   | $         | 34,838 |          |  | $        | 4,003 |            |  | $ | 3,523 |       |  | $ | 2,028 |      
|                              |                   |           |        |          |  |          |       |            |  |   |       |       |  |   |       |      

The table below summarizes the activity within
the allowance for credit losses on loans for the periods
indicated:

|                           |                             |                         |        |        |   |      |        |        |   |   |        |        |  
|-------------------------- | --------------------------- | ----------------------- | ------ | ------ | - | ---- | ------ | ------ | - | - | ------ | ------ | -
|                           |                             |                        
|                           |                             | Year Ended December 31,
|                           |                             |                        
|                           |                             | 2001                    |        | 2000   |   | 1999
|(Dollars in thousands)     |                             |                         |        |        |   |     
|Balance, beginning of year |                             | $                       | 29,450 |        |   | $    | 24,285 |        |   | $ | 17,111 |       
|                           | Provision for credit losses |                         |        | 3,400  |   |      |        | 6,000  |   |   |        | 12,000 |  
|                           | Charge-offs                 |                         |        | (2,358 | ) |      |        | (1,084 | ) |   |        | (4,872 | )
|                           | Recoveries                  |                         |        | 110    |   |      |        | 249    |   |   |        | 46     |  
|                           |                             |                         |        |        |   |      |        |        |   |   |        |       
|Balance, end of year       |                             | $                       | 30,602 |        |   | $    | 29,450 |        |   | $ | 24,285 |       
|                           |                             |                         |        |        |   |      |        |        |   |   |        |       

Management believes the level of allowance for
credit losses on loans is adequate to absorb losses inherent in
the loan portfolio; however, circumstances might change which
could adversely affect the performance of the loan portfolio
resulting in increasing loan losses which cannot be reasonably
predicted at December 31, 2001.

A-15



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The recorded investment in loans considered to be
impaired under SFAS No. 114 as amended by SFAS No. 118, at
December 31 was as follows:

|                                                      |                                        |                         |        |        |  |      |        |        |  |   |        |        | 
|----------------------------------------------------- | -------------------------------------- | ----------------------- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                                                      |                                        |                        
|                                                      |                                        | At or For the          
|                                                      |                                        | Year Ended December 31,
|                                                      |                                        |                        
|                                                      |                                        | 2001                    |        | 2000   |  | 1999
|(Dollars in thousands)                                |                                        |                         |        |        |  |     
|Impaired loans with specific valuation allowances     |                                        | $                       | 18,554 |        |  | $    | 11,364 |        |  | $ | 3,991  |       
|Impaired loans without specific valuation
	allowances |                                        |                         | 5,679  |        |  |      | 26,583 |        |  |   | 49,615 |       
|Total allowance allocated to impaired loans           |                                        |                         | (3,870 | )      |  |      | (6,945 | )      |  |   | (6,499 | )     
|                                                      |                                        |                         |        |        |  |      |        |        |  |   |        |       
|                                                      | Total impaired loans, net of allowance |                         | $      | 20,363 |  |      | $      | 31,002 |  |   | $      | 47,107 | 
|                                                      |                                        |                         |        |        |  |      |        |        |  |   |        |       
|Average investment in impaired loans                  |                                        | $                       | 31,300 |        |  | $    | 38,000 |        |  | $ | 65,500 |       
|Interest income recognized on impaired loans          |                                        | $                       | 1,030  |        |  | $    | 2,775  |        |  | $ | 3,417  |       

In December 2000, a $5.2 million specific
allowance was identified for one impaired nonaccrual commercial
loan, whose major tenant filed for Chapter 11 bankruptcy
protection. The required allowance was reclassified from general
allowance to specific allowance. A 51% controlling interest in
this tenant was acquired by a strong investor during 2001.
During the third quarter of 2001, the tenant ratified a
renegotiated lease, which enabled the Bank to revise its
internal valuation and consequently, reduce the specific
allowance for this loan to $3.0 million as of
December 31, 2001.

The table below reconciles the principal balance
of impaired loans and TDRs for the dates indicated:

|                                             |                    |              |         |       |       |   |         |        |        | 
|-------------------------------------------- | ------------------ | ------------ | ------- | ----- | ----- | - | ------- | ------ | ------ | 
|                                             |                    |             
|                                             |                    | December 31,
|                                             |                    |             
|                                             |                    | 2001         |         | 2000 
|(Dollars in thousands)                       |                    |              |         |      
|Total impaired loans                         |                    | $            | 24,233  |       |       | $ | 37,947  |       
|Impaired loans 90 days or more delinquent    |                    |              | (660    | )     |       |   | (10,042 | )     
|                                             |                    |              |         |       |       |   |         |       
|                                             |                    |              | 23,573  |       |       |   | 27,905  |       
|Impaired loans which are not performing TDRs |                    |              | (19,067 | )     |       |   | (12,972 | )     
|                                             |                    |              |         |       |       |   |         |       
|                                             | Performing TDRs(1) |              |         | 4,506 |       |   |         | 14,933 |       
|TDRs which are classified(2)                 |                    |              | 196     |       |       |   | 3,854   |       
|                                             |                    |              |         |       |       |   |         |       
|                                             |                    | Total TDRs   |         | $     | 4,702 |   |         | $      | 18,787 | 
|                                             |                    |              |         |       |       |   |         |       



---



|    |                                                                       
|--- | ----------------------------------------------------------------------
|(1) | TDRs not classified and not on nonaccrual.                            
|   
|(2) | Includes accruing TDRs of $0.2 million at
	December 31, 2001 and 2000.



| |                              
| | -----------------------------
| | Concentrations of Credit Risk

At December 31, 2001, the Banks
loans-to-one-borrower limit was $27.3 million based upon
the 15% of unimpaired capital and surplus measurement. At
December 31, 2001, the Banks largest relationships
consisted of one borrower with outstanding commitments of
$18.8 million, which consisted of approximately
5 loans, with $9.5 million secured by commercial real
estate in the Banks lending area, $8.9 million
secured by non-residential collateral and one unsecured
commercial loan. All of these loans were performing in
accordance with their terms.

Approximately 97.8% and 97.4% of the Banks
loan portfolio were concentrated in Southern California at
December 31, 2001 and 2000, respectively.

A-16



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 5  Real Estate
Operations

Real estate acquired in satisfaction of loans is
transferred to real estate owned at estimated fair values, less
any estimated disposal costs. The difference between the fair
value of the real estate collateral and the loan balance at the
time of transfer is recorded as a loan charge off if fair value
is lower. Any subsequent declines in the fair value of the REO
after the date of transfer were recorded through a write-down of
the asset. Prior to 2000, any subsequent declines in the fair
value of the REO after the date of transfer were recorded
through the establishment of, or additions to allowance.

The table below summarizes REO for the dates
indicated:

|                             |  |              |       |      |  |   |       | 
|---------------------------- |  | ------------ | ----- | ---- |  | - | ----- | 
|                             |  |             
|                             |  | December 31,
|                             |  |             
|                             |  | 2001         |       | 2000
|(Dollars in thousands)       |  |              |       |     
|Single family residential(1) |  | $            | 1,312 |      |  | $ | 2,859 | 
|                             |  |              |       |      |  |   |       | 



---



|    |                                                                                           
|--- | ------------------------------------------------------------------------------------------
|(1) | The Company held one and five properties as of
	December 31, 2001 and, 2000, respectively.

The table below summarizes activity in the
allowance for losses on real estate owned for the periods
indicated:

|                                                  |                      |                         |   |      |  |      |    |     |   |   |    |     |  
|------------------------------------------------- | -------------------- | ----------------------- | - | ---- |  | ---- | -- | --- | - | - | -- | --- | -
|                                                  |                      |                        
|                                                  |                      | Year Ended December 31,
|                                                  |                      |                        
|                                                  |                      | 2001                    |   | 2000 |  | 1999
|(Dollars in thousands)                            |                      |                         |   |      |  |     
|Total allowance for losses at beginning of period |                      | $                       |  |      |  | $    | 29 |     |   | $ | 45 |    
|                                                  | Provision for losses |                         |   |     |  |      |    |    |   |   |    | 80  |  
|                                                  | Charge-offs          |                         |   |     |  |      |    | (29 | ) |   |    | (96 | )
|                                                  |                      |                         |   |      |  |      |    |     |   |   |    |    
|Total allowance for losses at end of period       |                      | $                       |  |      |  | $    |   |     |   | $ | 29 |    
|                                                  |                      |                         |   |      |  |      |    |     |   |   |    |    

The following table sets forth the costs and
revenues attributable to the Companys REO properties for
the periods indicated. The compensatory and legal costs directly
associated with the Companys property management and
disposal operations are included in general and administrative
expenses.

|                                                 |                                     |                          |     |      |   |      |      |      |   |   |      |      |  
|------------------------------------------------ | ----------------------------------- | ------------------------ | --- | ---- | - | ---- | ---- | ---- | - | - | ---- | ---- | -
|                                                 |                                     |                         
|                                                 |                                     | Years Ended December 31,
|                                                 |                                     |                         
|                                                 |                                     | 2001                     |     | 2000 |   | 1999
|(Dollars in thousands)                           |                                     |                          |     |      |   |     
|Expenses associated with real estate operations: |                                     |                          |     |      |   |      |      |      |   |   |      |     
|                                                 | Repairs, maintenance and renovation |                          | $   | (22  | ) |      | $    | (294 | ) |   | $    | (219 | )
|                                                 | Insurance and property taxes        |                          |     | (10  | ) |      |      | (18  | ) |   |      | (132 | )
|                                                 |                                     |                          |     |      |   |      |      |      |   |   |      |     
|                                                 |                                     |                          | (32 | )    |   |      | (312 | )    |   |   | (351 | )   
|Net income/(loss) from sales of REO              |                                     |                          | 106 |      |   |      | (166 | )    |   |   | 754  |     
|Property operations, net                         |                                     |                          | 131 |      |   |      | 30   |      |   |   | 1    |     
|Charge-off/provision for losses on REO           |                                     |                          |    |      |   |      | (476 | )    |   |   | (80  | )   
|                                                 |                                     |                          |     |      |   |      |      |      |   |   |      |     
|Income/(loss) from real estate operations, net   |                                     | $                        | 205 |      |   | $    | (924 | )    |   | $ | 324  |     
|                                                 |                                     |                          |     |      |   |      |      |      |   |   |      |     

A-17



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 6  Office Property and
Equipment  At Cost

The following table summarizes property and
equipment for the dates indicated:

|                           |                                           |              |       |         |        |   |       |         |        | 
|-------------------------- | ----------------------------------------- | ------------ | ----- | ------- | ------ | - | ----- | ------- | ------ | 
|                           |                                           |             
|                           |                                           | December 31,
|                           |                                           |             
|                           |                                           | 2001         |       | 2000   
|(Dollars in thousands)     |                                           |              |       |        
|Office buildings           |                                           | $            | 1,188 |         |        | $ | 1,415 |        
|Furniture and equipment    |                                           |              | 7,095 |         |        |   | 6,449 |        
|Computer hardware/software |                                           |              | 3,844 |         |        |   | 3,486 |        
|Leasehold improvements     |                                           |              | 3,631 |         |        |   | 3,482 |        
|                           |                                           |              |       |         |        |   |       |        
|                           |                                           | Total        |       |         | 15,758 |   |       |         | 14,832 | 
|Less:                      |                                           |              |       |         |        |   |       |        
|                           | Accumulated depreciation and amortization |              |       | (11,711 | )      |   |       | (10,214 | )     
|                           |                                           |              |       |         |        |   |       |        
|                           |                                           |              | 4,047 |         |        |   | 4,618 |        
|Land                       |                                           |              | 190   |         |        |   | 190   |        
|                           |                                           |              |       |         |        |   |       |        
|                           |                                           | Net          |       | $       | 4,237  |   |       | $       | 4,808  | 
|                           |                                           |              |       |         |        |   |       |        

The Company recognized $2.7 million,
$2.8 million and $2.3 million of depreciation and
amortization expense for the years ended December 31, 2001,
2000, and 1999, respectively.

Note 7  Deposits

The table below summarizes the Companys
deposit portfolio by original term, weighted average interest
rates (WAIR) and weighted average remaining
maturities in months (WARM) as of the dates
indicated:

|                         |                              |                               |       |                   |         |           |  |       |       |            |   |         |   |      |   |      |  |   |   |         |         |           |  |       |       |        |   |      |   |      |   |    |  |   | 
|------------------------ | ---------------------------- | ----------------------------- | ----- | ----------------- | ------- | --------- |  | ----- | ----- | ---------- | - | ------- | - | ---- | - | ---- |  | - | - | ------- | ------- | --------- |  | ----- | ----- | ------ | - | ---- | - | ---- | - | -- |  | - | 
|                         |                              |                               |       |                  
|                         |                              | December 31, 2001             |       | December 31, 2000
|                         |                              |                               |       |                  
|                         |                              | Balance(1)                    |       | Percent           |         | WAIR      |  | WARM  |       | Balance(1) |   | Percent |   | WAIR |   | WARM
|(Dollars in thousands)   |                              |                               |       |                   |         |           |  |       |       |            |   |         |   |      |   |     
|Transaction accounts:    |                              |                               |       |                   |         |           |  |       |       |            |   |         |   |      |   |      |  |   |   |         |         |           |  |       |       |        |   |      |   |      |   |   
|                         | Noninterest-bearing checking |                               | $     | 35,634            |         |           |  | 2.97  | %     |            |   |        |   |      |   |     |  |   | $ | 32,994  |         |           |  | 2.71  | %     |        |   |     |   |      |   |   | 
|                         | Checking/ NOW                |                               |       | 57,687            |         |           |  | 4.81  | %     |            |   | 1.98    | % |      |   |     |  |   |   | 42,774  |         |           |  | 3.52  | %     |        |   | 2.67 | % |      |   |   | 
|                         | Passbook                     |                               |       | 40,751            |         |           |  | 3.39  | %     |            |   | 1.91    | % |      |   |     |  |   |   | 25,868  |         |           |  | 2.13  | %     |        |   | 2.00 | % |      |   |   | 
|                         | Money Market                 |                               |       | 240,391           |         |           |  | 20.04 | %     |            |   | 2.85    | % |      |   |     |  |   |   | 213,757 |         |           |  | 17.60 | %     |        |   | 5.20 | % |      |   |   | 
|                         |                              |                               |       |                   |         |           |  |       |       |            |   |         |   |      |   |      |  |   |   |         |         |           |  |       |       |        |   |      |   |      |   |   
|                         |                              | Total transaction accounts    |       |                   | 374,463 |           |  |       | 31.21 | %          |   |         |   |      |   |      |  |   |   |         | 315,393 |           |  |       | 25.96 | %      |   |      |   |      |   |    |  |  
|                         |                              |                               |       |                   |         |           |  |       |       |            |   |         |   |      |   |      |  |   |   |         |         |           |  |       |       |        |   |      |   |      |   |   
|Certificates of deposit: |                              |                               |       |                   |         |           |  |       |       |            |   |         |   |      |   |      |  |   |   |         |         |           |  |       |       |        |   |      |   |      |   |   
|                         | 7 day maturities             |                               |       | 55,396            |         |           |  | 4.62  | %     |            |   | 2.33    | % |      |   |     |  |   |   | 20,905  |         |           |  | 1.72  | %     |        |   | 4.04 | % |      |   |   | 
|                         | Less than 6 months           |                               |       | 21,291            |         |           |  | 1.77  | %     |            |   | 2.42    | % |      |   | 2    |  |   |   | 11,248  |         |           |  | 0.93  | %     |        |   | 4.93 | % |      |   | 2  | 
|                         | 6 months to 1 year           |                               |       | 268,100           |         |           |  | 22.35 | %     |            |   | 3.75    | % |      |   | 3    |  |   |   | 106,193 |         |           |  | 8.74  | %     |        |   | 6.18 | % |      |   | 4  | 
|                         | 1 year to 2 years            |                               |       | 459,408           |         |           |  | 38.30 | %     |            |   | 4.66    | % |      |   | 6    |  |   |   | 744,058 |         |           |  | 61.25 | %     |        |   | 6.43 | % |      |   | 6  | 
|                         | Greater than 2 years         |                               |       | 20,987            |         |           |  | 1.75  | %     |            |   | 4.82    | % |      |   | 16   |  |   |   | 17,059  |         |           |  | 1.40  | %     |        |   | 5.35 | % |      |   | 14 | 
|                         |                              |                               |       |                   |         |           |  |       |       |            |   |         |   |      |   |      |  |   |   |         |         |           |  |       |       |        |   |      |   |      |   |   
|                         |                              | Total certificates of deposit |       |                   | 825,182 |           |  |       | 68.79 | %          |   |         |   |      |   |      |  |   |   |         | 899,463 |           |  |       | 74.04 | %      |   |      |   |      |   |    |  |  
|                         |                              |                               |       |                   |         |           |  |       |       |            |   |         |   |      |   |      |  |   |   |         |         |           |  |       |       |        |   |      |   |      |   |   
|                         |                              |                               | Total |                   | $       | 1,199,645 |  |       |       | 100.00     | % |         |   | 3.59 | % |      |  | 5 |   |         | $       | 1,214,856 |  |       |       | 100.00 | % |      |   | 5.71 | % |    |  | 6 | 
|                         |                              |                               |       |                   |         |           |  |       |       |            |   |         |   |      |   |      |  |   |   |         |         |           |  |       |       |        |   |      |   |      |   |   



---



|    |                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Deposits in excess of $100,000, excluding the
	$60.0 million of State deposits placed by the State of
	California with the Company, were 28.00% of total deposits at
	December 31, 2001, compared to 29.87% of total deposits at
	December 31, 2000.

A-18



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The table below summarizes interest expense on
deposits, by type of account, for the periods indicated:

|                        |       |                         |        |        |  |      |        |        |  |   |        |        | 
|----------------------- | ----- | ----------------------- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                        |       |                        
|                        |       | Year Ended December 31,
|                        |       |                        
|                        |       | 2001                    |        | 2000   |  | 1999
|(Dollars in thousands)  |       |                         |        |        |  |     
|Checking/ NOW           |       | $                       | 1,246  |        |  | $    | 1,006  |        |  | $ | 801    |       
|Passbook                |       |                         | 892    |        |  |      | 582    |        |  |   | 918    |       
|Money Market            |       |                         | 8,442  |        |  |      | 8,986  |        |  |   | 6,803  |       
|Certificates of deposit |       |                         | 49,442 |        |  |      | 52,939 |        |  |   | 42,309 |       
|                        |       |                         |        |        |  |      |        |        |  |   |        |       
|                        | Total |                         | $      | 60,022 |  |      | $      | 63,513 |  |   | $      | 50,831 | 
|                        |       |                         |        |        |  |      |        |        |  |   |        |       

The following tables set forth the remaining
maturities of the certificates of deposit outstanding for the
periods indicated:

|                       |               |                                                          |         |            |         |               |        |          |         |       |         |        |         |  |        |        |        |  |         |         |         | 
|---------------------- | ------------- | -------------------------------------------------------- | ------- | ---------- | ------- | ------------- | ------ | -------- | ------- | ----- | ------- | ------ | ------- |  | ------ | ------ | ------ |  | ------- | ------- | ------- | 
|                       |               |                                                         
|                       |               | Certificates of Deposit Outstanding at December 31, 2001
|                       |               |                                                         
|                       |               | Three                                                    |         | Over Three |         | Over Six      |        |         
|                       |               | Months                                                   |         | Through    |         | Through       |        | Over One |         |      
|                       |               | or Less                                                  |         | Six Months |         | Twelve Months |        | Year     |         | Total
|(Dollars in thousands) |               |                                                          |         |            |         |               |        |          |         |      
|Balances< $100,000     |               |                                                          |         |            |         |               |        |          |         |       |         |        |         |  |        |        |        |  |         |        
|                       | 4.00% or less |                                                          | $       | 76,092     |         |               | $      | 31,582   |         |       | $       | 54,687 |         |  | $      | 23,773 |        |  | $       | 186,134 |        
|                       | 4.01% - 5.00% |                                                          |         | 69,211     |         |               |        | 51,267   |         |       |         | 59,922 |         |  |        | 23,191 |        |  |         | 203,591 |        
|                       | 5.01% - 6.00% |                                                          |         | 84,346     |         |               |        | 1,976    |         |       |         | 10,554 |         |  |        | 2,525  |        |  |         | 99,401  |        
|                       | 6.01% - 7.00% |                                                          |         | 37,181     |         |               |        | 779      |         |       |         | 434    |         |  |        | 1,713  |        |  |         | 40,107  |        
|                       | 7.01% or more |                                                          |         |           |         |               |        |         |         |       |         |       |         |  |        |       |        |  |         |        |        
|                       |               |                                                          |         |            |         |               |        |          |         |       |         |        |         |  |        |        |        |  |         |        
|                       |               |                                                          | 266,830 |            |         |               | 85,604 |          |         |       | 125,597 |        |         |  | 51,202 |        |        |  | 529,233 |        
|Balances> $100,000     |               |                                                          |         |            |         |               |        |          |         |       |         |        |         |  |        |        |        |  |         |        
|                       | 4.00% or less |                                                          |         | 93,853     |         |               |        | 11,955   |         |       |         | 21,006 |         |  |        | 7,482  |        |  |         | 134,296 |        
|                       | 4.01% - 5.00% |                                                          |         | 30,321     |         |               |        | 22,190   |         |       |         | 29,138 |         |  |        | 10,841 |        |  |         | 92,490  |        
|                       | 5.01% - 6.00% |                                                          |         | 37,893     |         |               |        | 615      |         |       |         | 3,985  |         |  |        | 1,475  |        |  |         | 43,968  |        
|                       | 6.01% - 7.00% |                                                          |         | 24,067     |         |               |        | 208      |         |       |         | 378    |         |  |        | 542    |        |  |         | 25,195  |        
|                       | 7.01% or more |                                                          |         |           |         |               |        |         |         |       |         |       |         |  |        |       |        |  |         |        |        
|                       |               |                                                          |         |            |         |               |        |          |         |       |         |        |         |  |        |        |        |  |         |        
|                       |               |                                                          | 186,134 |            |         |               | 34,968 |          |         |       | 54,507  |        |         |  | 20,340 |        |        |  | 295,949 |        
|                       |               |                                                          |         |            |         |               |        |          |         |       |         |        |         |  |        |        |        |  |         |        
|                       |               | Total                                                    |         | $          | 452,964 |               |        | $        | 120,572 |       |         | $      | 180,104 |  |        | $      | 71,542 |  |         | $       | 825,182 | 
|                       |               |                                                          |         |            |         |               |        |          |         |       |         |        |         |  |        |        |        |  |         |        

|                       |               |                                                          |         |         |         |      |        |        |        |      |     |       |     |  |     |     |     |  |     |     |     |  |         |         |         | 
|---------------------- | ------------- | -------------------------------------------------------- | ------- | ------- | ------- | ---- | ------ | ------ | ------ | ---- | --- | ----- | --- |  | --- | --- | --- |  | --- | --- | --- |  | ------- | ------- | ------- | 
|                       |               |                                                         
|                       |               | Certificates of Deposit Outstanding at December 31, 2001
|                       |               |                                                         
|                       |               | 2002                                                     |         | 2003    |         | 2004 |        | 2005   |        | 2006 |     | Total
|(Dollars in thousands) |               |                                                          |         |         |         |      |        |        |        |      |     |      
|Balances< $100,000     |               |                                                          |         |         |         |      |        |        |        |      |     |       |     |  |     |     |     |  |     |     |     |  |         |        
|                       | 4.00% or less |                                                          | $       | 162,361 |         |      | $      | 23,526 |        |      | $   | 202   |     |  | $   |    |     |  | $   | 45  |     |  | $       | 186,134 |        
|                       | 4.01% - 5.00% |                                                          |         | 180,400 |         |      |        | 22,743 |        |      |     | 304   |     |  |     | 4   |     |  |     | 140 |     |  |         | 203,591 |        
|                       | 5.01% - 6.00% |                                                          |         | 96,876  |         |      |        | 1,941  |        |      |     | 205   |     |  |     | 272 |     |  |     | 107 |     |  |         | 99,401  |        
|                       | 6.01% - 7.00% |                                                          |         | 38,394  |         |      |        | 1,712  |        |      |     |      |     |  |     | 1   |     |  |     |    |     |  |         | 40,107  |        
|                       | 7.01% or more |                                                          |         |        |         |      |        |       |        |      |     |      |     |  |     |    |     |  |     |    |     |  |         |        |        
|                       |               |                                                          |         |         |         |      |        |        |        |      |     |       |     |  |     |     |     |  |     |     |     |  |         |        
|                       |               |                                                          | 478,031 |         |         |      | 49,922 |        |        |      | 711 |       |     |  | 277 |     |     |  | 292 |     |     |  | 529,233 |        
|Balances> $100,000     |               |                                                          |         |         |         |      |        |        |        |      |     |       |     |  |     |     |     |  |     |     |     |  |         |        
|                       | 4.00% or less |                                                          |         | 126,814 |         |      |        | 7,482  |        |      |     |      |     |  |     |    |     |  |     |    |     |  |         | 134,296 |        
|                       | 4.01% - 5.00% |                                                          |         | 81,649  |         |      |        | 10,841 |        |      |     |      |     |  |     |    |     |  |     |    |     |  |         | 92,490  |        
|                       | 5.01% - 6.00% |                                                          |         | 42,493  |         |      |        | 1,375  |        |      |     | 100   |     |  |     |    |     |  |     |    |     |  |         | 43,968  |        
|                       | 6.01% - 7.00% |                                                          |         | 24,653  |         |      |        | 542    |        |      |     |      |     |  |     |    |     |  |     |    |     |  |         | 25,195  |        
|                       | 7.01% or more |                                                          |         |        |         |      |        |       |        |      |     |      |     |  |     |    |     |  |     |    |     |  |         |        |        
|                       |               |                                                          |         |         |         |      |        |        |        |      |     |       |     |  |     |     |     |  |     |     |     |  |         |        
|                       |               |                                                          | 275,609 |         |         |      | 20,240 |        |        |      | 100 |       |     |  |    |     |     |  |    |     |     |  | 295,949 |        
|                       |               |                                                          |         |         |         |      |        |        |        |      |     |       |     |  |     |     |     |  |     |     |     |  |         |        
|                       |               | Total                                                    |         | $       | 753,640 |      |        | $      | 70,162 |      |     | $     | 811 |  |     | $   | 277 |  |     | $   | 292 |  |         | $       | 825,182 | 
|                       |               |                                                          |         |         |         |      |        |        |        |      |     |       |     |  |     |     |     |  |     |     |     |  |         |        

A-19



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 8  FHLB
Advances

A primary alternate funding source for the
Company is a credit line with the FHLB with a maximum advance of
up to 40% of the Companys total assets based on qualifying
collateral. The FHLB system functions as a source of credit to
savings institutions which are members of the FHLB. Advances are
secured by the Companys mortgage loans and the capital
stock of the FHLB owned by the Company. Subject to the
FHLBs advance policies and requirements, these advances
can be requested for any business purpose in which the Company
is authorized to engage. In granting advances, the FHLB
considers a members creditworthiness and other relevant
factors. At December 31, 2001, the Company had an approved
line of credit with the FHLB for a maximum advance of up to 40%
of total assets ($749.3 million as of December 31,
2001) based on qualifying collateral. The table below summarizes
the balance and rate of FHLB advances for the dates indicated:

|                       |            |              |   |          |         |           |  |          |      |   |   |         |         |  |  |      |      |  
|---------------------- | ---------- | ------------ | - | -------- | ------- | --------- |  | -------- | ---- | - | - | ------- | ------- |  |  | ---- | ---- | -
|                       |            |             
|                       |            | December 31,
|                       |            |             
|                       |            |              |   |         
|                       |            | 2001         |   | 2000    
|                       |            |              |   |         
|                       |            |              |   | Average  |         |           |  | Average 
|                       |            |              |   | Rate at  |         |           |  | Rate at 
|                       |            | Principal    |   | Year End |         | Principal |  | Year End
|(Dollars in thousands) |            |              |   |          |         |           |  |         
|Original Term:         |            |              |   |          |         |           |  |          |      |   |   |         |         |  |  |     
|                       | 12 Months  |              | $ |         |         |           |  | 0.00     | %    |   | $ | 25,000  |         |  |  | 5.81 | %   
|                       | 24 Months  |              |   | 40,000   |         |           |  | 2.89     | %    |   |   | 25,000  |         |  |  | 6.56 | %   
|                       | 36 Months  |              |   | 185,000  |         |           |  | 2.88     | %    |   |   | 100,000 |         |  |  | 6.73 | %   
|                       | 60 Months  |              |   | 135,000  |         |           |  | 5.92     | %    |   |   | 135,000 |         |  |  | 5.92 | %   
|                       | 84 Months  |              |   | 25,000   |         |           |  | 4.18     | %    |   |   |        |         |  |  | 0.00 | %   
|                       | 120 Months |              |   | 99,000   |         |           |  | 5.19     | %    |   |   | 99,000  |         |  |  | 5.19 | %   
|                       |            |              |   |          |         |           |  |          |      |   |   |         |         |  |  |     
|                       |            | Total        |   | $        | 484,000 |           |  |          | 4.27 | % |   | $       | 384,000 |  |  |      | 5.98 | %
|                       |            |              |   |          |         |           |  |          |      |   |   |         |         |  |  |     

The following table sets forth the remaining
maturities of FHLB advances as of December 31, 2001:

|                       |  |       |         |            |  |       |         |  |  |   |         | 
|---------------------- |  | ----- | ------- | ---------- |  | ----- | ------- |  |  | - | ------- | 
|                       |  | Fixed |         | Adjustable |  |      
|                       |  | Rate  |         | Rate       |  | Total
|(Dollars in thousands) |  |       |         |            |  |      
|Year:                  |  |       |         |            |  |       |         |  |  |   |         | 
|2002                   |  | $     |        |            |  | $     | 25,000  |  |  | $ | 25,000  | 
|2003                   |  |       | 70,000  |            |  |       | 100,000 |  |  |   | 170,000 | 
|2004                   |  |       | 90,000  |            |  |       |        |  |  |   | 90,000  | 
|2005                   |  |       | 75,000  |            |  |       |        |  |  |   | 75,000  | 
|2006                   |  |       |        |            |  |       |        |  |  |   |        | 
|Thereafter             |  |       | 124,000 |            |  |       |        |  |  |   | 124,000 | 
|                       |  |       |         |            |  |       |         |  |  |   |         | 
|                       |  | $     | 359,000 |            |  | $     | 125,000 |  |  | $ | 484,000 | 
|                       |  |       |         |            |  |       |         |  |  |   |         | 

The following table summarizes information
relating to the Companys FHLB advances for the periods or
dates indicated:

|                                                 |  |                         |         |      |  |      |         |   |  |   |         |  
|------------------------------------------------ |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                 |  |                        
|                                                 |  | Year Ended December 31,
|                                                 |  |                        
|                                                 |  | 2001                    |         | 2000 |  | 1999
|(Dollars in thousands)                           |  |                         |         |      |  |     
|Average balance during the year                  |  | $                       | 407,836 |      |  | $    | 346,983 |   |  | $ | 343,205 |  
|Average interest rate during the year            |  |                         | 5.07    | %    |  |      | 5.82    | % |  |   | 5.18    | %
|Maximum month-end balance during the year        |  | $                       | 484,000 |      |  | $    | 384,000 |   |  | $ | 379,000 |  
|Loans collateralizing the agreements at year end |  | $                       | 858,276 |      |  | $    | 751,628 |   |  | $ | 799,866 |  

A-20



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 9  Income Taxes

The provision for income taxes consist of the
following components for the periods indicated:

|                                         |         |                          |        |        |        |        |        |        |        |        |       |        |       |       | 
|---------------------------------------- | ------- | ------------------------ | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ----- | ------ | ----- | ----- | 
|                                         |         |                         
|                                         |         | Years Ended December 31,
|                                         |         |                         
|                                         |         | 2001                     |        | 2000   |        | 1999  
|(Dollars in thousands)                   |         |                          |        |        |        |       
|Current income tax expense:              |         |                          |        |        |        |        |        |        |        |        |       |       
|                                         | Federal |                          | $      | 10,752 |        |        | $      | 9,203  |        |        | $     | 7,409  |      
|                                         | State   |                          |        | 3,356  |        |        |        | 2,129  |        |        |       | 2      |      
|                                         |         |                          |        |        |        |        |        |        |        |        |       |       
|                                         |         | Total current            |        |        | 14,108 |        |        |        | 11,332 |        |       |        | 7,411 |      
|Deferred income tax (benefit) expense:   |         |                          |        |        |        |        |        |        |        |        |       |       
|                                         | Federal |                          |        | (341   | )      |        |        | (1,843 | )      |        |       | (1,168 | )    
|                                         | State   |                          |        | (1,155 | )      |        |        | 1,179  |        |        |       | 1,787  |      
|                                         |         |                          |        |        |        |        |        |        |        |        |       |       
|                                         |         | Total deferred           |        |        | (1,496 | )      |        |        | (664   | )      |       |        | 619   |      
|                                         |         |                          |        |        |        |        |        |        |        |        |       |       
|Income tax provision                     |         |                          | 12,612 |        |        |        | 10,668 |        |        |        | 8,030 |       
|Income tax benefit on extraordinary item |         |                          | (342   | )      |        |        |       |        |        |        |      |       
|                                         |         |                          |        |        |        |        |        |        |        |        |       |       
|                                         |         |                          | Total  |        | $      | 12,270 |        |        | $      | 10,668 |       |        | $     | 8,030 | 
|                                         |         |                          |        |        |        |        |        |        |        |        |       |       

The table below summarizes the components of the
net deferred income tax assets for the dates indicated:

|                                 |              |              |       |        |         |   |       |        |         |  
|-------------------------------- | ------------ | ------------ | ----- | ------ | ------- | - | ----- | ------ | ------- | -
|                                 |              |             
|                                 |              | December 31,
|                                 |              |             
|                                 |              | 2001         |       | 2000  
|(Dollars in thousands)           |              |              |       |       
|Deferred income tax liabilities: |              |              |       |        |         |   |       |       
|                                 | Loan fees    |              | $     | (7,339 | )       |   | $     | (7,523 | )      
|                                 | FHLB stock   |              |       | (2,943 | )       |   |       | (2,390 | )      
|                                 | Depreciation |              |       | (204   | )       |   |       | (438   | )      
|                                 | Other        |              |       | (700   | )       |   |       | (888   | )      
|                                 |              |              |       |        |         |   |       |       
|                                 |              | Total        |       |        | (11,186 | ) |       |        | (11,239 | )
|Deferred income tax assets:      |              |              |       |        |         |   |       |       
|                                 | Bad debts    |              |       | 12,424 |         |   |       | 10,826 |        
|                                 | Other        |              |       | 3,125  |         |   |       | 3,280  |        
|                                 |              |              |       |        |         |   |       |       
|                                 |              | Total        |       |        | 15,549  |   |       |        | 14,106  |  
|                                 |              |              |       |        |         |   |       |       
|Deferred tax assets              |              | $            | 4,363 |        |         | $ | 2,867 |       
|                                 |              |              |       |        |         |   |       |       

A-21



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The table below summarizes the differences
between the statutory income tax and the Companys
effective tax for the periods indicated:

|                                         |                                                        |                          |        |       |        |      |        |       |        |   |       |       |       | 
|---------------------------------------- | ------------------------------------------------------ | ------------------------ | ------ | ----- | ------ | ---- | ------ | ----- | ------ | - | ----- | ----- | ----- | 
|                                         |                                                        |                         
|                                         |                                                        | Years Ended December 31,
|                                         |                                                        |                         
|                                         |                                                        | 2001                     |        | 2000  |        | 1999
|(Dollars in thousands)                   |                                                        |                          |        |       |        |     
|Federal income tax                       |                                                        | $                        | 10,470 |       |        | $    | 8,733  |       |        | $ | 6,379 |      
|Addition resulting from:                 |                                                        |                          |        |       |        |      |        |       |        |   |       |      
|                                         | California franchise tax, net of federal income
	taxes |                          |        | 1,937 |        |      |        | 1,785 |        |   |       | 1,163 |      
|                                         | Other                                                  |                          |        | 205   |        |      |        | 150   |        |   |       | 488   |      
|                                         |                                                        |                          |        |       |        |      |        |       |        |   |       |      
|Income tax provision                     |                                                        |                          | 12,612 |       |        |      | 10,668 |       |        |   | 8,030 |      
|Income tax benefit on extraordinary item |                                                        |                          | (342   | )     |        |      |       |       |        |   |      |      
|                                         |                                                        |                          |        |       |        |      |        |       |        |   |       |      
|                                         |                                                        | Total                    |        | $     | 12,270 |      |        | $     | 10,668 |   |       | $     | 8,030 | 
|                                         |                                                        |                          |        |       |        |      |        |       |        |   |       |      

Note 10  Stockholders
Equity



| |                       
| | ----------------------
| | Employee Benefit Plans

The Company previously had an Employee Stock
Ownership Plan (ESOP) that previously covered
substantially all employees over 21 years of age who met
minimum service requirements. As of December 15, 1995, the
Company froze the ESOP and all accounts became fully vested and
nonforfeitable. At December 31, 2001, the ESOP owned 85,530
shares of the Companys common stock.

Effective April 1, 1996, the ESOP was
amended to include a 401(k) plan. The Company makes a matching
contribution equal to 100% of the amount each participant elects
to defer up to a maximum of 5% of the participants
compensation for the calendar quarter. Employees are eligible to
participate if they were employed by the Company on
March 1, 1996, or have been employed for 6 months,
worked at least 500 hours, and are over 21 years of age.
Contributions under the plan were $0.5 million,
$0.4 million and $0.4 million for the years ended
December 31, 2001, 2000 and 1999, respectively.

Deferred Compensation Plan

In October 2000, the Bank adopted a Deferred
Compensation Plan (the Plan) in order to provide
specified benefits to a select group of management and highly
compensated employees. Under the Plan, participants are allowed
to defer up to 100% of their annual salary and bonuses. The Bank
does not currently match participants deferrals. The
balance in each participants deferred compensation account
earns interest at a rate equal to the interest rate on 10-Year
Treasury notes as in effect on the last date of the calendar
year quarter immediately preceding the valuation date, plus
2.50%. The interest crediting rate was 7.52% and 8.30%,
respectively, for the years ended December 31, 2001 and
2000. The expense of funding the deferred compensation plan was
$0.4 million and $0.1 million, respectively, for the
years ended December 31, 2001 and 2000.

Stock Option Plans

On May 21, 2001, the Company merged its two
stock option plans (Option Plans) into the Hawthorne
Financial Corporation 2001 Stock Incentive Plan (Stock
Incentive Plan), one of which provides for the issuance of
stock options to directors and employees of the Company and the
other of which provides for the issuance of stock options to
employees other than certain executive officers of the Company.
At December 31, 2001, the Stock Incentive Plan provides for
the issuance of 1,018,900 maximum aggregate shares of Company
common stock upon exercise of options. The exercise price of any
option may not be less than the fair market

A-22



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

value of the common stock on the date of grant
and the term of any option may not exceed 10 years. As of
February 28, 2002, the number of stock options available
under the Stock Incentive Plan was 259,400.

Presented below is a summary of the transactions
under the stock option plans described above for the periods
indicated:

|                                 |                     |                         |         |                |   |        |       |                |  |        |         |                |   |   |       |       |  |  |         |          |   |   |       |       | 
|-------------------------------- | ------------------- | ----------------------- | ------- | -------------- | - | ------ | ----- | -------------- |  | ------ | ------- | -------------- | - | - | ----- | ----- |  |  | ------- | -------- | - | - | ----- | ----- | 
|                                 |                     |                        
|                                 |                     | Year Ended December 31,
|                                 |                     |                        
|                                 |                     |                         |         |                |   |       
|                                 |                     | 2001                    |         | 2000           |   | 1999  
|                                 |                     |                         |         |                |   |       
|                                 |                     |                         |         | Weighted       |   |        |       | Weighted       |  |        |         | Weighted      
|                                 |                     |                         |         | Average        |   |        |       | Average        |  |        |         | Average       
|                                 |                     | Shares                  |         | Exercise Price |   | Shares |       | Exercise Price |  | Shares |         | Exercise Price
|                                 |                     |                         |         |                |   |        |       |                |  |        |         |               
|Outstanding, beginning of year   |                     |                         | 606,300 |                |   | $      | 9.58  |                |  |        | 787,800 |                |   | $ | 10.79 |       |  |  | 882,300 |          |   | $ | 10.19 |      
|                                 | Granted             |                         |         | 206,650        |   |        |       | 17.44          |  |        |         | 301,500        |   |   |       | 8.51  |  |  |         | 135,000  |   |   |       | 14.36 | 
|                                 | Exercised           |                         |         | (84,150        | ) |        |       | 5.28           |  |        |         | (235,500       | ) |   |       | 4.74  |  |  |         | (110,000 | ) |   |       | 5.24  | 
|                                 | Canceled or expired |                         |         | (77,750        | ) |        |       | 12.22          |  |        |         | (247,500       | ) |   |       | 16.72 |  |  |         | (119,500 | ) |   |       | 15.47 | 
|                                 |                     |                         |         |                |   |        |       |                |  |        |         |                |   |   |       |       |  |  |         |          |   |   |       |      
|Outstanding, end of year         |                     |                         | 651,050 |                |   | $      | 12.32 |                |  |        | 606,300 |                |   | $ | 9.58  |       |  |  | 787,800 |          |   | $ | 10.79 |      
|                                 |                     |                         |         |                |   |        |       |                |  |        |         |                |   |   |       |       |  |  |         |          |   |   |       |      
|Options exercisable, end of year |                     |                         | 129,817 |                |   |        |       |                |  |        | 142,300 |                |   |   |       |       |  |  | 480,733 |          |   |   |       |      
|                                 |                     |                         |         |                |   |        |       |                |  |        |         |                |   |   |       |       |  |  |         |          |   |   |       |      

The table below summarizes information about
stock options outstanding and exercisable at December 31,
2001:

|                |               |             |  |                       |         |             |  |                  |      |  |  |  |         |  |  |   |       | 
|--------------- | ------------- | ----------- |  | --------------------- | ------- | ----------- |  | ---------------- | ---- |  |  |  | ------- |  |  | - | ----- | 
|                |               |             |  |                       |         |            
|                |               |             |  |                       |         | Exercisable
|                |               |             |  | Weighted Average      |         |            
|Range of        |               | Number      |  | Remaining Contractual |         | Number      |  | Weighted Average
|Exercise Prices |               | Outstanding |  | Life (years)          |         | Outstanding |  | Price           
|                |               |             |  |                       |         |             |  |                 
|$               | 4.65          |             |  |                       | 30,000  |             |  |                  | 1.92 |  |  |  | 30,000  |  |  | $ | 4.65  | 
|                | 5.26          |             |  |                       | 19,150  |             |  |                  | 4.00 |  |  |  | 19,150  |  |  |   | 5.26  | 
|                | 7.74 - 9.91   |             |  |                       | 270,500 |             |  |                  | 6.37 |  |  |  | 30,667  |  |  |   | 8.42  | 
|                | 13.73         |             |  |                       | 35,000  |             |  |                  | 6.12 |  |  |  |        |  |  |   |      | 
|                | 15.09 - 16.31 |             |  |                       | 106,400 |             |  |                  | 5.73 |  |  |  | 50,000  |  |  |   | 16.31 | 
|                | 16.80 - 19.39 |             |  |                       | 190,000 |             |  |                  | 9.57 |  |  |  |        |  |  |   |      | 
|                |               |             |  |                       |         |             |  |                  |      |  |  |  |         |  |  |   |       | 
|                |               |             |  |                       | 651,050 |             |  |                  | 6.91 |  |  |  | 129,817 |  |  | $ | 9.61  | 
|                |               |             |  |                       |         |             |  |                  |      |  |  |  |         |  |  |   |       | 

A-23



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

If compensation costs for the Stock Incentive
Plan and Stock Option Plans and had been determined based on the
fair value at the grant date for awards in 2001, 2000 and 1999,
consistent with the provisions of SFAS No. 123, the
Companys net income and net earnings per share would have
been reduced to the pro forma amounts as follows:

|                                                      |             |                          |      |        |  |      |      |        |  |   |      |        | 
|----------------------------------------------------- | ----------- | ------------------------ | ---- | ------ |  | ---- | ---- | ------ |  | - | ---- | ------ | 
|                                                      |             |                         
|                                                      |             | Years Ended December 31,
|                                                      |             |                         
|                                                      |             | 2001                     |      | 2000   |  | 1999
|                                                      |             |                          |      |        |  |     
|(Dollars in thousands except per share data)          |             |                         
|Net earnings after extraordinary item:                |             |                          |      |        |  |      |      |        |  |   |      |       
|                                                      | As reported |                          | $    | 16,833 |  |      | $    | 14,284 |  |   | $    | 10,200 | 
|                                                      | Pro forma   |                          | $    | 16,587 |  |      | $    | 14,022 |  |   | $    | 8,677  | 
|Basic earnings per share after extraordinary item:    |             |                          |      |        |  |      |      |        |  |   |      |       
|                                                      | As reported |                          | $    | 3.18   |  |      | $    | 2.69   |  |   | $    | 1.93   | 
|                                                      | Pro forma   |                          | $    | 3.14   |  |      | $    | 2.65   |  |   | $    | 1.64   | 
|Diluted earnings per share after extraordinary
	item: |             |                          |      |        |  |      |      |        |  |   |      |       
|                                                      | As reported |                          | $    | 2.23   |  |      | $    | 1.94   |  |   | $    | 1.33   | 
|                                                      | Pro forma   |                          | $    | 2.19   |  |      | $    | 1.90   |  |   | $    | 1.13   | 
|Weighted average fair value at date of grant          |             | $                        | 6.34 |        |  | $    | 3.71 |        |  | $ | 6.62 |       

The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions:

|                        |  |                          |                     |      |  |      |                    |  |  |  |                    | 
|----------------------- |  | ------------------------ | ------------------- | ---- |  | ---- | ------------------ |  |  |  | ------------------ | 
|                        |  |                         
|                        |  | Years Ended December 31,
|                        |  |                         
|                        |  | 2001                     |                     | 2000 |  | 1999
|                        |  |                          |                     |      |  |     
|Dividend yield          |  |                          | n/a                 |      |  |      | n/a                |  |  |  | n/a                | 
|Expected life           |  |                          | 6 months to 5 years |      |  |      | 2 years to 4 years |  |  |  | 4 years to 8 years | 
|Expected volatility     |  |                          | 61.12%              |      |  |      | 56.46%             |  |  |  | 30.55%             | 
|Risk-free interest rate |  |                          | 3.38%               |      |  |      | 4.76%              |  |  |  | 6.76%              | 

Note 11  Capital and Debt
Offerings

On December 31, 1997, the Company sold
$40.0 million of 12.50% Senior Notes due 2004 (Senior
Notes) in a private placement (the 1997
Offering), which included registration rights. Interest on
the Senior Notes is payable semi-annually. On or after
December 31, 2002, the Senior Notes will be redeemable at
any time at the option of the Company, in whole or in part, at
the redemption price of 106.25% for the twelve-month period
beginning December 31, 2002, and 103.125% thereafter.

In September 2001, the Company authorized up to
$5.0 million for the repurchase of shares of its common
stock and to retire Senior Notes. This increased the amount
previously authorized. The Company announced two 5% repurchase
authorizations in March 2000 and July 2000, which authorized an
aggregate of approximately 541,000 shares, and an additional
77,000 shares in April 2001. As of December 31, 2001,
cumulative repurchases included 555,319 shares at an average
price of $11.74.

In July 1998, the Company sold 2,012,500 shares
of its common stock (including 262,500 shares, issued upon
exercise by the underwriters of their over allotment option) at
a price of $15.00 per share, realizing net proceeds (after
offering costs) of approximately $27.6 million. As a result
of this offering, the exercise price of the Warrants was reduced
to $2.128 and the number of shares of common stock acquirable
upon the exercise of the Warrants was increased to 2,512,188.

On March 28, 2001 and November 28,
2001, HFC Capital Trust I (Trust I) and HFC Capital
Trust II (Trust II), respectively, statutory
business trusts and wholly owned subsidiaries of the Company,
issued $9.0 million of 10.18% fixed rate capital securities
(the Capital Securities I) and $5.0 million of
floating rate

A-24



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

capital securities (the Capital Securities
II), respectively. The Capital Securities, which were
issued in separate private placement transactions, represent
undivided preferred beneficial interests in the assets of the
respective Trusts. The Company is the owner of all the
beneficial interests represented by the common securities of
Trust I and Trust II (the Common Securities I and
Common Securities II) (together with the
Capital Securities I and Capital Securities
II and, collectively the Trust Securities).
Trust I and Trust II exist for the sole purpose of issuing the
Trust Securities and investing the proceeds thereof in 10.18%
fixed rate and floating rate, respectively, junior subordinated
deferrable interest debentures (the Junior Subordinated
Debentures I and Junior Subordinated Debentures
II) issued by the Company and engaging in certain other
limited activities. Interest on the Capital Securities is
payable semi-annually.

The Junior Subordinated Debentures I held by
Trust I will mature on June 8, 2031, at which time the Company
is obligated to redeem the Capital Securities I. The Capital
Securities I are callable, in whole or in part, at par value
after ten years. The proceeds were used to repurchase, in a
market transaction, $7.2 million of its Senior Notes at an
average price of 101.4% of par value. See Note 17 
Extraordinary Item.

The floating rate on the Capital Securities II,
with an initial start rate of 5.97%, reprices semi-annually
based on the index of six month LIBOR plus a spread of 3.75%,
with a cap of 11.00% through December 8, 2006. The Junior
Subordinated Debentures II held by Trust II will mature on
December 8, 2031, at which time the Company is obligated to
redeem the Capital Securities II. The Capital Securities II are
callable, in whole or in part, at par value after five years.
The proceeds were used to repurchase, in a market transaction,
$4.0 million of its Senior Notes at an average price of
105.0% of par value. See Note 17  Extraordinary
Item.

Note 12  Regulatory
Matters

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

Quantitative measures established by regulation
to ensure capital adequacy require the Bank to maintain minimum
amounts and ratios (set forth in the following table) of total
and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined) and to average assets (as
defined). Management believes, as of December 31, 2001 and
2000, that the Bank meets all capital adequacy requirements to
which it is subject.

A-25



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

As of December 31, 2001 and 2000, the Bank
is categorized as well capitalized under the
regulatory framework for Prompt Corrective Action
(PCA) Rules based on the most recent notification
from the OTS. There are no conditions or events subsequent to
December 31, 2001, that management believes have changed
the Banks category. The Bank has agreed to maintain
minimum core capital and risk-based capital ratios of 6.5% and
11.0%, respectively. The following table compares the
Banks actual capital ratios to those required by
regulatory agencies to meet the minimum capital requirements
required by the OTS and to be categorized as well
capitalized under the PCA Rules for the periods indicated.

|                         |                                              |        |   |                   |  |                   |  |                   |   |            |   |         |  |  |  |      |   |  |   |         |  |  |  |       |  
|------------------------ | -------------------------------------------- | ------ | - | ----------------- |  | ----------------- |  | ----------------- | - | ---------- | - | ------- |  |  |  | ---- | - |  | - | ------- |  |  |  | ----- | -
|                         |                                              |        |   |                   |  |                   |  |                   |   |           
|                         |                                              |        |   |                   |  |                   |  |                   |   | To be Well
|                         |                                              |        |   |                   |  |                   |  | Capitalized Under
|                         |                                              |        |   | For Capital       |  | Prompt Corrective
|                         |                                              | Actual |   | Adequacy Purposes |  | Action Provisions
|                         |                                              |        |   |                   |  |                  
|                         |                                              | Amount |   | Ratios            |  | Amount            |  | Ratios            |   | Amount     |   | Ratios 
|                         |                                              |        |   |                   |  |                   |  |                   |   |            |   |        
|                         |                                              |        |   |                   |  |                   |  |                   |   |            |   |        
|                         |                                              |        |   |                   |  |                   |  |                   |   |           
|(Dollars in thousands)   |                                              |        |   |                   |  |                   |  |                   |   |           
|As of December 31, 2001: |                                              |        |   |                   |  |                   |  |                   |   |            |   |         |  |  |  |      |   |  |   |         |  |  |  |      
|                         | Total capital to risk weighted assets        |        | $ | 169,278           |  |                   |  | 12.70             | % |            | $ | 106,619 |  |  |  | 8.00 | % |  | $ | 133,274 |  |  |  | 10.00 | %
|                         | Core capital to adjusted tangible assets     |        |   | 154,981           |  |                   |  | 8.36              | % |            |   | 74,153  |  |  |  | 4.00 | % |  |   | 92,692  |  |  |  | 5.00  | %
|                         | Tangible capital to adjusted tangible assets |        |   | 154,981           |  |                   |  | 8.36              | % |            |   | 27,807  |  |  |  | 1.50 | % |  |   | n/a     |  |  |  | n/a   |  
|                         | Tier 1 capital to risk weighted assets       |        |   | 154,981           |  |                   |  | 11.63             | % |            |   | n/a     |  |  |  | n/a  |   |  |   | 79,965  |  |  |  | 6.00  | %
|As of December 31, 2000: |                                              |        |   |                   |  |                   |  |                   |   |            |   |         |  |  |  |      |   |  |   |         |  |  |  |      
|                         | Total capital to risk weighted assets        |        | $ | 151,914           |  |                   |  | 12.23             | % |            | $ | 99,407  |  |  |  | 8.00 | % |  | $ | 124,259 |  |  |  | 10.00 | %
|                         | Core capital to adjusted tangible assets     |        |   | 140,387           |  |                   |  | 8.01              | % |            |   | 70,078  |  |  |  | 4.00 | % |  |   | 87,598  |  |  |  | 5.00  | %
|                         | Tangible capital to adjusted tangible assets |        |   | 140,387           |  |                   |  | 8.01              | % |            |   | 26,279  |  |  |  | 1.50 | % |  |   | n/a     |  |  |  | n/a   |  
|                         | Tier 1 capital to risk weighted assets       |        |   | 140,387           |  |                   |  | 11.30             | % |            |   | n/a     |  |  |  | n/a  |   |  |   | 74,555  |  |  |  | 6.00  | %

Note 13  Commitments and
Contingencies

Litigation

In April 2001, the Superior Court of the State of
California, County of Los Angeles granted Plaintiffs
motion to reinstate a construction defect case entitled Stone
Water Terrace HOA v. Hawthorne Savings and Loan Association,in which the Bank was named as a defendant. The case had
previously been dismissed because Plaintiff failed to take
certain actions to prosecute its case. In this action, Plaintiff
alleges, under several theories of recovery, that the Bank is
responsible for construction defects in a multi-unit condominium
complex. The Bank initially provided construction loans to the
developer, but took over the completion of a portion of the
project after the developer defaulted. Plaintiff seeks damages
in an unspecified amount, plus punitive damages. The Bank denies
the allegations in the complaint and has cross-complained
against all of the subcontractors for indemnity. Discovery has
not commenced, but Plaintiffs have indicated that damages may
exceed $800,000. Although the Bank intends to vigorously defend
its position in these actions and to seek indemnification from
the responsible parties, there can be no assurances that the
Company will prevail. In addition, the inherent uncertainty of
jury or judicial verdicts makes it impossible to determine with
certainty the Companys maximum exposure in this action,
although based upon the information developed to date, the
Company believes its exposure will not exceed the amounts
indicated by Plaintiffs. However, it is probable that the
Company will incur substantial legal fees defending this matter.

The Company is involved in a variety of other
litigation matters in the ordinary course of its business, and
anticipates that it will become involved in new litigation
matters from time to time in the future. Based on the current
assessment of these other matters, management does not presently
believe that any one of these existing other matters is likely
to have material adverse impact on the Companys financial
condition, result of operations or cash flows. However, the
Company will incur legal and related costs concerning the
litigation and may from time to time determine to settle some or
all of the cases, regardless of managements assessment

A-26



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

of the Companys legal position. The amount
of legal defense costs and settlements in any period will depend
on many factors, including the status of cases (and the number
of cases that are in trial or about to be brought to trial) and
the opposing parties aggressiveness in pursuing their
cases and their perception of their legal position. Further, the
inherent uncertainty of jury or judicial verdicts makes it
impossible to determine with certainty the Companys
maximum cost in any pending litigation. Accordingly, the
Companys litigation costs and expenses may vary materially
from period to period, and no assurance can be given that these
costs will not be material in any particular period.

Lending commitments

At December 31, 2001, the Company had
commitments to fund the undisbursed portion of existing
construction and land loans of $113.5 million and income
property and estate loans of $5.3 million. The commitments
to fund the undisbursed portion of existing lines of credit,
excluding construction and land lines of credit, totaled
$18.7 million.

Leases

The Company has entered into agreements to lease
certain office facilities under noncancelable operating leases
that expire at various dates to the year 2010. The leases
generally provide that the Company pays common area maintenance
expenses (CAM), including property taxes, insurance
and other items. Current rental commitments for the remaining
terms of these noncancelable leases as of December 31, 2001
are as follows:

|                       |  |        |       | 
|---------------------- |  | ------ | ----- | 
|Year                   |  | Amount
|                       |  |       
|(Dollars in thousands) |  |        |       | 
|2002                   |  | $      | 1,823 | 
|2003                   |  |        | 1,841 | 
|2004                   |  |        | 1,803 | 
|2005                   |  |        | 1,586 | 
|2006                   |  |        | 307   | 
|Thereafter             |  |        | 986   | 
|                       |  |        |       | 
|Total                  |  | $      | 8,346 | 
|                       |  |        |       | 

Lease expense, excluding CAM expenses, for office
facilities was $1.9 million, $1.6 million and
$1.7 million for the years ended December 31, 2001,
2000 and 1999, respectively.

Note 14  Off-Balance Sheet
Activity

The Company is a party to credit-related
financial instruments with off-balance-sheet risk in the normal
course of business to meet the financing needs of its customers.
The financial instruments include letters of credit. These
commitments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the
consolidated statements of financial condition. The contractual
amounts of the commitments reflect the extent of involvement the
Company has in the financial instruments. The Company follows
the same credit policies in making commitments as it does for
on-balance sheet instruments.

On January 10, 2002, the FHLB issued two
$33.0 million Letters of Credit (LC) to the Company to
replace the $66.0 million LC issued on June 25, 2001,
which matured on January 9, 2002. The purpose of the LCs is
to fulfill the collateral requirements for two
$30.0 million deposits placed by the State of California
with the Company. The LCs are issued in favor of the State
Treasurer of the State of California and will

A-27



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

mature on April 10, 2002 and July 12,
2002. There were no issuance fees associated with these letters
of credit; however, a maintenance fee of 15 basis points per
annum is paid monthly by the Company.

Note 15  Estimated Fair Value
Information

The following disclosure of the estimated fair
value of financial instruments is made in accordance with the
requirements of SFAS No. 107, Disclosures about Fair
Value of Financial Instruments. The Company, using
available market information and appropriate valuation
methodologies, has determined the estimated fair value amounts.
However, considerable judgment is 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.
The use of different market assumptions and or estimation
methodologies may have a material effect on the estimated fair
value amounts.

|                                                         |                             |                              |   |            |         |          |   |            |         |  |   |           |         |  |   |           |         | 
|-------------------------------------------------------- | --------------------------- | ---------------------------- | - | ---------- | ------- | -------- | - | ---------- | ------- |  | - | --------- | ------- |  | - | --------- | ------- | 
|                                                         |                             |                             
|                                                         |                             | Year Ended December 31,     
|                                                         |                             |                             
|                                                         |                             |                              |   |           
|                                                         |                             | 2001                         |   | 2000      
|                                                         |                             |                              |   |           
|                                                         |                             | Carrying                     |   | Estimated  |         | Carrying |   | Estimated 
|                                                         |                             | Amount                       |   | Fair Value |         | Amount   |   | Fair Value
|(Dollars in thousands)                                   |                             |                              |   |            |         |          |   |           
|Assets:                                                  |                             |                              |   |            |         |          |   |            |         |  |   |           |         |  |   |          
|                                                         | Cash and cash equivalents   |                              | $ | 98,583     |         |          | $ | 98,583     |         |  | $ | 99,919    |         |  | $ | 99,919    |        
|                                                         | Investment in FHLB stock    |                              |   | 24,464     |         |          |   | 24,464     |         |  |   | 20,730    |         |  |   | 20,730    |        
|                                                         | Loans receivable, net       |                              |   | 1,709,283  |         |          |   | 1,741,696  |         |  |   | 1,608,067 |         |  |   | 1,645,338 |        
|                                                         | Accrued interest receivable |                              |   | 9,677      |         |          |   | 9,677      |         |  |   | 11,040    |         |  |   | 11,040    |        
|Liabilities:                                             |                             |                              |   |            |         |          |   |            |         |  |   |           |         |  |   |          
|                                                         | Deposits:                   |                              |   |            |         |          |   |            |         |  |   |           |         |  |   |           |        
|                                                         |                             | Noninterest-bearing checking |   |            | 35,634  |          |   |            | 35,634  |  |   |           | 32,994  |  |   |           | 32,994  | 
|                                                         |                             | Checking/ NOW                |   |            | 57,687  |          |   |            | 57,687  |  |   |           | 42,774  |  |   |           | 42,774  | 
|                                                         |                             | Passbook                     |   |            | 40,751  |          |   |            | 40,751  |  |   |           | 25,868  |  |   |           | 25,868  | 
|                                                         |                             | Money market                 |   |            | 240,391 |          |   |            | 240,391 |  |   |           | 213,757 |  |   |           | 213,757 | 
|                                                         |                             | Certificates of deposit      |   |            | 825,182 |          |   |            | 827,998 |  |   |           | 899,463 |  |   |           | 898,640 | 
|                                                         | FHLB advances               |                              |   | 484,000    |         |          |   | 498,786    |         |  |   | 384,000   |         |  |   | 389,295   |        
|                                                         | Senior notes                |                              |   | 25,778     |         |          |   | 27,325     |         |  |   | 39,358    |         |  |   | 39,752    |        
|                                                         | Capital securities          |                              |   | 14,000     |         |          |   | 14,000     |         |  |   |          |         |  |   |          |        
|                                                         | Accrued interest payable    |                              |   | 933        |         |          |   | 933        |         |  |   | 1,351     |         |  |   | 1,351     |        
|Off-balance sheet credit related financial
	instruments: |                             |                              |   |            |         |          |   |            |         |  |   |           |         |  |   |          
|                                                         | Letter of credit            |                              |   | 66,000     |         |          |   | 66,000     |         |  |   |          |         |  |   |          |        

The methods and assumptions used to estimate the
fair value of each class of financial instruments for which it
is practicable to estimate that value are explained below:

For cash and cash equivalents, accrued interest
receivable and accrued interest payable, the carrying amounts
approximate fair values due to the short term nature of these
instruments.

The carrying amount of loans receivable is their
contractual amounts outstanding reduced by net deferred loan
origination fees and the allowance for loan losses
(Note 4). Adjustable rate loans consist primarily of loans
whose interest rates float with changes in either a specified
banks reference rate or current market indices.

The fair value of both adjustable and fixed rate
loans was estimated by discounting the remaining contractual
cash flows using the estimated current rate at which similar
loans would be made to borrowers

A-28



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

with similar credit risk characteristics over the
same remaining maturities, reduced by net deferred loan
origination fees and the allocable portion of the allowance for
the credit losses. The estimated current rate for discounting
purposes was not adjusted for any change in borrowers
credit risks since the origination of such loans. Rather, the
allocable portion of the allowance for credit losses is
considered to provide for such changes in estimating fair value.

The fair value of nonaccrual loans (Note 4) has
been estimated at the carrying amount of these loans, as it is
not practicable to reasonably assess the credit risk adjustment
that would be applied in the market place for such loans.

For FHLB stock, the carrying amount approximates
fair value, as the stock may be sold back to the FHLB at the
carrying value.

The withdrawable amounts for noninterest-bearing
checking, checking/ NOW, passbook and money market accounts are
considered stated at their estimated fair value. The fair value
of fixed-maturity certificates of deposit is estimated using the
rates currently offered for deposits of similar remaining
maturities.

The fair value of FHLB advances and capital
securities are estimated using the rates currently offered on
similar instruments with similar terms. The letter of credit has
no interest rate associated with it, therefore, the carrying
amount approximates the fair value.

The fair value of the Senior Notes is based on
quoted market price.

Additionally, commitments to originate mortgages
are excluded from this presentation because such commitments are
typically at market terms, are typically for adjustable rate
loans, and are generally cancelable by the borrower without
significant fees or costs upon cancellation.

The fair value estimates presented herein are
based on pertinent information available to management as of
December 31, 2001 and 2000. Although management is not
aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial
statements since that date and, therefore, current estimates of
fair value may differ significantly from the amounts presented.

Note 16  Related Parties

In the ordinary course of business, the Company
paid a director-related company for recruitment services. In
managements opinion, the recruitment services were made
under terms consistent with the Companys policies
regarding recruitment firms. Recruitment fees paid to the
director-related company in 2001, 2000 and 1999, totaled
$0.1 million, $0.1 million and $0.2 million,
respectively.

In the ordinary course of business, the Company
granted loans to certain executive officers and directors and
extended credit in the form of overdraft protection lines. In
managements opinion, such loans and commitments to lend
were made under terms that are consistent with the
Companys normal lending policies.

During the year ended December 31, 2001,
there were no loans granted to executive officers and directors.
During the years ended December 31, 2000 and 1999, the
Company granted $0.2 million and $0.2 million,
respectively, in loans to executive officers and directors. In
2001, as stipulated in the deferred compensation loan agreement,
the Company forgave $0.1 million of the $0.2 million
loan granted in 2000, thereby reducing the principal balance to
$0.1 million at December 31, 2001. During 1999, the
$0.2 million loan granted in 1999 was paid in full.

Note 17  Extraordinary
Item

During the year ended December 31, 2001, the
Company repurchased $13.6 million of its Senior Notes at an
average price of 102.5% of par value. Payment of the premium and
recognition of the prepaid offering costs

A-29



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

associated with the Senior Notes, resulted in an
extraordinary loss of $0.5 million, net of related income
taxes of $0.3 million, or approximately $0.06 per diluted
share.

Note 18  Parent Company Only
Financial Statements

STATEMENTS OF FINANCIAL CONDITION

|                                      |                                                                                                                                             |                                                                            |                                            |         |        |         |   |         |        |         | 
|------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | ------------------------------------------ | ------- | ------ | ------- | - | ------- | ------ | ------- | 
|                                      |                                                                                                                                             |                                                                           
|                                      |                                                                                                                                             | December 31,                                                              
|                                      |                                                                                                                                             |                                                                           
|                                      |                                                                                                                                             | 2001                                                                       |                                            | 2000   
|(Dollars in thousands)                |                                                                                                                                             |                                                                            |                                            |        
|Assets:                               |                                                                                                                                             |                                                                            |                                            |         |        |         |   |        
|                                      | Cash at the Bank and cash equivalents                                                                                                       |                                                                            | $                                          | 2,828   |        |         | $ | 2,126   |       
|                                      | Loan receivable, net                                                                                                                        |                                                                            |                                            | 152     |        |         |   | 228     |       
|                                      | Investment in subsidiaries                                                                                                                  |                                                                            |                                            | 155,460 |        |         |   | 140,387 |       
|                                      | Other assets                                                                                                                                |                                                                            |                                            | 2,384   |        |         |   | 1,457   |       
|                                      |                                                                                                                                             |                                                                            |                                            |         |        |         |   |        
|                                      |                                                                                                                                             |                                                                            | Total assets                               |         | $      | 160,824 |   |         | $      | 144,198 | 
|                                      |                                                                                                                                             |                                                                            |                                            |         |        |         |   |        
|Liabilities and Stockholders Equity: |                                                                                                                                             |                                                                            |                                            |         |        |         |   |        
|Liabilities:                          |                                                                                                                                             |                                                                            |                                            |         |        |         |   |        
|                                      | Senior notes                                                                                                                                |                                                                            | $                                          | 25,778  |        |         | $ | 39,358  |       
|                                      | Capital securities                                                                                                                          |                                                                            |                                            | 14,455  |        |         |   |        |       
|                                      | Accounts payable and other liabilities                                                                                                      |                                                                            |                                            | 142     |        |         |   | 679     |       
|                                      |                                                                                                                                             |                                                                            |                                            |         |        |         |   |        
|                                      |                                                                                                                                             |                                                                            | Total liabilities                          |         |        | 40,375  |   |         |        | 40,037  | 
|Stockholders Equity:                 |                                                                                                                                             |                                                                            |                                            |         |        |         |   |        
|                                      | Common stock  $0.01 par value;
	authorized 20,000,000 shares; issued and outstanding, 5,920,226
	shares (2001) and 5,566,801 shares (2000) |                                                                            |                                            | 59      |        |         |   | 56      |       
|                                      | Capital in excess of par
	value  common stock                                                                                              |                                                                            |                                            | 44,524  |        |         |   | 42,095  |       
|                                      | Retained earnings                                                                                                                           |                                                                            |                                            | 82,435  |        |         |   | 65,602  |       
|                                      | Less:                                                                                                                                       |                                                                            |                                            |         |        |         |   |         |       
|                                      |                                                                                                                                             | Treasury stock, at cost  560,719
	shares (2001) and 391,406 shares (2000) |                                            |         | (6,569 | )       |   |         | (3,592 | )      
|                                      |                                                                                                                                             |                                                                            |                                            |         |        |         |   |        
|                                      |                                                                                                                                             |                                                                            | Total stockholders equity                 |         |        | 120,449 |   |         |        | 104,161 | 
|                                      |                                                                                                                                             |                                                                            |                                            |         |        |         |   |        
|                                      |                                                                                                                                             |                                                                            | Total liabilities and stockholders equity |         | $      | 160,824 |   |         | $      | 144,198 | 
|                                      |                                                                                                                                             |                                                                            |                                            |         |        |         |   |        

A-30



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 18  Parent Company Only
Financial Statements (continued)

STATEMENTS OF INCOME

|                                                     |                     |                          |        |      |  |      |        |    |  |   |        |      |  
|---------------------------------------------------- | ------------------- | ------------------------ | ------ | ---- |  | ---- | ------ | -- |  | - | ------ | ---- | -
|                                                     |                     |                         
|                                                     |                     | Years Ended December 31,
|                                                     |                     |                         
|                                                     |                     | 2001                     |        | 2000 |  | 1999
|(Dollars in thousands)                               |                     |                          |        |      |  |     
|Interest revenues from investments                   |                     | $                        | 41     |      |  | $    | 38     |    |  | $ | 55     |     
|Interest costs                                       |                     |                          | 4,716  |      |  |      | 4,989  |    |  |   | 5,000  |     
|                                                     |                     |                          |        |      |  |      |        |    |  |   |        |     
|Net interest income                                  |                     |                          | (4,675 | )    |  |      | (4,951 | )  |  |   | (4,945 | )   
|Noninterest revenues/(expenses), net:                |                     |                          |        |      |  |      |        |    |  |   |        |     
|                                                     | Operating           |                          |        |     |  |      |        |   |  |   |        |     |  
|                                                     | Other non-operating |                          |        | 95   |  |      |        | 25 |  |   |        | (808 | )
|Operating costs                                      |                     |                          | (1,133 | )    |  |      | (1,137 | )  |  |   | (939   | )   
|                                                     |                     |                          |        |      |  |      |        |    |  |   |        |     
|Loss before income taxes and equity in
	subsidiaries |                     |                          | (5,713 | )    |  |      | (6,063 | )  |  |   | (6,692 | )   
|Income tax benefit                                   |                     |                          | 2,397  |      |  |      | 2,620  |    |  |   | 2,903  |     
|                                                     |                     |                          |        |      |  |      |        |    |  |   |        |     
|Loss before equity in subsidiary                     |                     |                          | (3,316 | )    |  |      | (3,443 | )  |  |   | (3,789 | )   
|Equity in net earnings of subsidiary                 |                     |                          | 20,618 |      |  |      | 17,727 |    |  |   | 13,989 |     
|                                                     |                     |                          |        |      |  |      |        |    |  |   |        |     
|Income before extraordinary item                     |                     |                          | 17,302 |      |  |      | 14,284 |    |  |   | 10,200 |     
|Extraordinary item (net of taxes of $342)            |                     |                          | (469   | )    |  |      |       |    |  |   |       |     
|                                                     |                     |                          |        |      |  |      |        |    |  |   |        |     
|Net income                                           |                     | $                        | 16,833 |      |  | $    | 14,284 |    |  | $ | 10,200 |     
|                                                     |                     |                          |        |      |  |      |        |    |  |   |        |     

A-31



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 18  Parent Company Only
Financial Statements (continued)

STATEMENTS OF CASH FLOWS

|                                                      |                                                           |                                                    |                                                      |         |         |        |       |        |         |       |         |        |         |         |  
|----------------------------------------------------- | --------------------------------------------------------- | -------------------------------------------------- | ---------------------------------------------------- | ------- | ------- | ------ | ----- | ------ | ------- | ----- | ------- | ------ | ------- | ------- | -
|                                                      |                                                           |                                                   
|                                                      |                                                           | Years Ended December 31,                          
|                                                      |                                                           |                                                   
|                                                      |                                                           | 2001                                               |                                                      | 2000    |         | 1999  
|(Dollars in thousands)                                |                                                           |                                                    |                                                      |         |         |       
|Cash Flows from Operating Activities:                 |                                                           |                                                    |                                                      |         |         |        |       |        |         |       |         |       
|                                                      | Net income                                                |                                                    | $                                                    | 16,833  |         |        | $     | 14,284 |         |       | $       | 10,200 |        
|                                                      | Adjustments:                                              |                                                    |                                                      |         |         |        |       |        |         |       |         |        |        
|                                                      |                                                           | Equity in net undistributed earnings of subsidiary |                                                      |         | (20,618 | )      |       |        | (17,727 | )     |         |        | (13,989 | )      
|                                                      |                                                           | Amortization                                       |                                                      |         | 255     |        |       |        | 361     |       |         |        | 361     |        
|                                                      |                                                           | Increase in interest receivable                    |                                                      |         |        |        |       |        | (6      | )     |         |        |        |        
|                                                      |                                                           | Decrease/(increase) in other assets                |                                                      |         | 789     |        |       |        | 2,904   |       |         |        | (2,890  | )      
|                                                      |                                                           | Decrease in accounts payable and other liabilities |                                                      |         | (537    | )      |       |        | (152    | )     |         |        | (9,390  | )      
|                                                      |                                                           | Other                                              |                                                      |         |        |        |       |        |        |       |         |        | (32     | )      
|                                                      |                                                           |                                                    |                                                      |         |         |        |       |        |         |       |         |       
|                                                      |                                                           |                                                    | Net cash used in operating activities                |         |         | (3,278 | )     |        |         | (336  | )       |        |         | (15,740 | )
|                                                      |                                                           |                                                    |                                                      |         |         |        |       |        |         |       |         |       
|Cash Flows from Investing Activities:                 |                                                           |                                                    |                                                      |         |         |        |       |        |         |       |         |       
|                                                      | Net decrease/(increase) in loans receivable               |                                                    |                                                      | 76      |         |        |       | (228   | )       |       |         | 150    |        
|                                                      |                                                           |                                                    |                                                      |         |         |        |       |        |         |       |         |       
|                                                      |                                                           |                                                    | Net cash provided by/(used in) investing
	activities |         |         | 76     |       |        |         | (228  | )       |        |         | 150     |  
|                                                      |                                                           |                                                    |                                                      |         |         |        |       |        |         |       |         |       
|Cash Flows from Financing Activities:                 |                                                           |                                                    |                                                      |         |         |        |       |        |         |       |         |       
|                                                      | Net proceeds from exercise of stock options and
	warrants |                                                    |                                                      | 461     |         |        |       | 1,117  |         |       |         | 633    |        
|                                                      | Treasury stock purchases                                  |                                                    |                                                      | (2,977  | )       |        |       | (3,544 | )       |       |         |       |        
|                                                      | Net collection of ESOP loan                               |                                                    |                                                      |        |         |        |       |       |         |       |         | 79     |        
|                                                      | Cash contribution to subsidiary                           |                                                    |                                                      |        |         |        |       |       |         |       |         | (7,500 | )      
|                                                      | Cash dividends received                                   |                                                    |                                                      | 6,000   |         |        |       | 4,500  |         |       |         | 3,000  |        
|                                                      | Reduction in senior notes                                 |                                                    |                                                      | (13,580 | )       |        |       | (642   | )       |       |         |       |        
|                                                      | Proceeds from capital securities                          |                                                    |                                                      | 14,000  |         |        |       |       |         |       |         |       |        
|                                                      |                                                           |                                                    |                                                      |         |         |        |       |        |         |       |         |       
|                                                      |                                                           |                                                    | Net cash provided by/(used in) financing
	activities |         |         | 3,904  |       |        |         | 1,431 |         |        |         | (3,788  | )
|                                                      |                                                           |                                                    |                                                      |         |         |        |       |        |         |       |         |       
|Net increase/(decrease) in cash and cash
	equivalents |                                                           |                                                    | 702                                                  |         |         |        | 867   |        |         |       | (19,378 | )     
|Cash and cash equivalents, beginning of year          |                                                           |                                                    | 2,126                                                |         |         |        | 1,259 |        |         |       | 20,637  |       
|                                                      |                                                           |                                                    |                                                      |         |         |        |       |        |         |       |         |       
|Cash and cash equivalents, end of year                |                                                           | $                                                  | 2,828                                                |         |         | $      | 2,126 |        |         | $     | 1,259   |       
|                                                      |                                                           |                                                    |                                                      |         |         |        |       |        |         |       |         |       

A-32



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 19  Quarterly Information
(unaudited)

|                                                       |                                     |                             |        |         |       |              |        |             |       |   |        |        |       |   |        |        |       | 
|------------------------------------------------------ | ----------------------------------- | --------------------------- | ------ | ------- | ----- | ------------ | ------ | ----------- | ----- | - | ------ | ------ | ----- | - | ------ | ------ | ----- | 
|                                                       |                                     |                            
|                                                       |                                     | Three Months Ended for 2001
|                                                       |                                     |                            
|                                                       |                                     | March 31                    |        | June 30 |       | September 30 |        | December 31
|(In thousands, except per share data)                  |                                     |                             |        |         |       |              |        |            
|Interest revenues                                      |                                     | $                           | 38,514 |         |       | $            | 36,966 |             |       | $ | 36,581 |        |       | $ | 35,625 |       
|Interest costs                                         |                                     |                             | 24,043 |         |       |              | 22,416 |             |       |   | 20,663 |        |       |   | 18,548 |       
|                                                       |                                     |                             |        |         |       |              |        |             |       |   |        |        |       |   |        |       
|                                                       | Net interest income                 |                             |        | 14,471  |       |              |        | 14,550      |       |   |        | 15,918 |       |   |        | 17,077 |      
|Provision for credit losses                            |                                     |                             | 1,500  |         |       |              | 1,000  |             |       |   | 400    |        |       |   | 500    |       
|                                                       |                                     |                             |        |         |       |              |        |             |       |   |        |        |       |   |        |       
|Net interest income after provision for credit
	losses |                                     |                             | 12,971 |         |       |              | 13,550 |             |       |   | 15,518 |        |       |   | 16,577 |       
|Noninterest revenues                                   |                                     |                             | 1,531  |         |       |              | 1,472  |             |       |   | 1,306  |        |       |   | 1,321  |       
|Income/(loss) from real estate operations, net         |                                     |                             | 160    |         |       |              | 2      |             |       |   | 47     |        |       |   | (4     | )     
|Noninterest expenses:                                  |                                     |                             |        |         |       |              |        |             |       |   |        |        |       |   |        |       
|                                                       | General and administrative expenses |                             |        | 8,861   |       |              |        | 8,710       |       |   |        | 8,614  |       |   |        | 8,242  |      
|                                                       | Other non-operating expense         |                             |        | 110     |       |              |        |            |       |   |        |       |       |   |        |       |      
|                                                       |                                     |                             |        |         |       |              |        |             |       |   |        |        |       |   |        |       
|                                                       |                                     | Total noninterest expenses  |        |         | 8,971 |              |        |             | 8,710 |   |        |        | 8,614 |   |        |        | 8,242 | 
|                                                       |                                     |                             |        |         |       |              |        |             |       |   |        |        |       |   |        |       
|Income before income taxes and extraordinary item      |                                     |                             | 5,691  |         |       |              | 6,314  |             |       |   | 8,257  |        |       |   | 9,652  |       
|Income tax provision                                   |                                     |                             | 2,443  |         |       |              | 2,685  |             |       |   | 3,509  |        |       |   | 3,975  |       
|                                                       |                                     |                             |        |         |       |              |        |             |       |   |        |        |       |   |        |       
|Net income before extraordinary item                   |                                     |                             | 3,248  |         |       |              | 3,629  |             |       |   | 4,748  |        |       |   | 5,677  |       
|Extraordinary item, net of taxes                       |                                     |                             | (255   | )       |       |              |       |             |       |   | (11    | )      |       |   | (203   | )     
|                                                       |                                     |                             |        |         |       |              |        |             |       |   |        |        |       |   |        |       
|Net income after extraordinary item                    |                                     | $                           | 2,993  |         |       | $            | 3,629  |             |       | $ | 4,737  |        |       | $ | 5,474  |       
|                                                       |                                     |                             |        |         |       |              |        |             |       |   |        |        |       |   |        |       
|Basic earnings per share before extraordinary item     |                                     | $                           | 0.63   |         |       | $            | 0.69   |             |       | $ | 0.89   |        |       | $ | 1.06   |       
|                                                       |                                     |                             |        |         |       |              |        |             |       |   |        |        |       |   |        |       
|Basic earnings per share after extraordinary item      |                                     | $                           | 0.58   |         |       | $            | 0.69   |             |       | $ | 0.89   |        |       | $ | 1.02   |       
|                                                       |                                     |                             |        |         |       |              |        |             |       |   |        |        |       |   |        |       
|Diluted earnings per share before extraordinary
	item  |                                     | $                           | 0.43   |         |       | $            | 0.48   |             |       | $ | 0.62   |        |       | $ | 0.75   |       
|                                                       |                                     |                             |        |         |       |              |        |             |       |   |        |        |       |   |        |       
|Diluted earnings per share after extraordinary
	item   |                                     | $                           | 0.40   |         |       | $            | 0.48   |             |       | $ | 0.62   |        |       | $ | 0.72   |       
|                                                       |                                     |                             |        |         |       |              |        |             |       |   |        |        |       |   |        |       

|                                                       |                                     |                             |        |         |       |              |        |             |       |   |        |        |       |   |        |        |       | 
|------------------------------------------------------ | ----------------------------------- | --------------------------- | ------ | ------- | ----- | ------------ | ------ | ----------- | ----- | - | ------ | ------ | ----- | - | ------ | ------ | ----- | 
|                                                       |                                     |                            
|                                                       |                                     | Three Months Ended for 2000
|                                                       |                                     |                            
|                                                       |                                     | March 31                    |        | June 30 |       | September 30 |        | December 31
|                                                       |                                     |                             |        |         |       |              |        |            
|Interest revenues                                      |                                     | $                           | 34,436 |         |       | $            | 36,375 |             |       | $ | 39,190 |        |       | $ | 38,987 |       
|Interest costs                                         |                                     |                             | 19,691 |         |       |              | 20,868 |             |       |   | 23,812 |        |       |   | 24,311 |       
|                                                       |                                     |                             |        |         |       |              |        |             |       |   |        |        |       |   |        |       
|                                                       | Net interest income                 |                             |        | 14,745  |       |              |        | 15,507      |       |   |        | 15,378 |       |   |        | 14,676 |      
|Provision for credit losses                            |                                     |                             | 1,500  |         |       |              | 1,500  |             |       |   | 1,500  |        |       |   | 1,500  |       
|                                                       |                                     |                             |        |         |       |              |        |             |       |   |        |        |       |   |        |       
|Net interest income after provision for credit
	losses |                                     |                             | 13,245 |         |       |              | 14,007 |             |       |   | 13,878 |        |       |   | 13,176 |       
|Noninterest revenues                                   |                                     |                             | 1,760  |         |       |              | 2,134  |             |       |   | 2,965  |        |       |   | 1,235  |       
|Loss from real estate operations, net                  |                                     |                             | (59    | )       |       |              | (90    | )           |       |   | (537   | )      |       |   | (238   | )     
|Noninterest expenses:                                  |                                     |                             |        |         |       |              |        |             |       |   |        |        |       |   |        |       
|                                                       | General and administrative expenses |                             |        | 8,099   |       |              |        | 8,711       |       |   |        | 8,672  |       |   |        | 8,846  |      
|                                                       | Other non-operating expense         |                             |        | 1,828   |       |              |        | 196         |       |   |        | 117    |       |   |        | 55     |      
|                                                       |                                     |                             |        |         |       |              |        |             |       |   |        |        |       |   |        |       
|                                                       |                                     | Total noninterest expenses  |        |         | 9,927 |              |        |             | 8,907 |   |        |        | 8,789 |   |        |        | 8,901 | 
|                                                       |                                     |                             |        |         |       |              |        |             |       |   |        |        |       |   |        |       
|Income before income taxes and extraordinary item      |                                     |                             | 5,019  |         |       |              | 7,144  |             |       |   | 7,517  |        |       |   | 5,272  |       
|Income tax provision                                   |                                     |                             | 2,115  |         |       |              | 3,072  |             |       |   | 3,233  |        |       |   | 2,248  |       
|                                                       |                                     |                             |        |         |       |              |        |             |       |   |        |        |       |   |        |       
|Net income                                             |                                     | $                           | 2,904  |         |       | $            | 4,072  |             |       | $ | 4,284  |        |       | $ | 3,024  |       
|                                                       |                                     |                             |        |         |       |              |        |             |       |   |        |        |       |   |        |       
|Basic earnings per share                               |                                     | $                           | 0.53   |         |       | $            | 0.77   |             |       | $ | 0.81   |        |       | $ | 0.58   |       
|                                                       |                                     |                             |        |         |       |              |        |             |       |   |        |        |       |   |        |       
|Diluted earnings per share                             |                                     | $                           | 0.39   |         |       | $            | 0.57   |             |       | $ | 0.58   |        |       | $ | 0.41   |       
|                                                       |                                     |                             |        |         |       |              |        |             |       |   |        |        |       |   |        |       

A-33



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 20  Subsequent
Event

On March 20, 2002, Hawthorne Financial
Corporation (Hawthorne) and its subsidiary,
Hawthorne Savings, F.S.B. (the Bank), entered into
an Agreement and Plan of Reorganization (Agreement)
with First Fidelity Bancorp, Inc., (First Fidelity)
and its subsidiary, First Fidelity Investment and Loan
Association (Thrift), pursuant to which First
Fidelity will be merged with the Company (or a newly organized
subsidiary of the Company) and the Thrift will be merged into
the Bank (Merger). First Fidelity stockholders will
receive $36.60 per share for their stock, in cash, Hawthorne
stock, or a combination of the two, at the election of the
stockholders, subject to a maximum of approximately 1,266,555
shares of Hawthorne stock in the aggregate to be issued in the
transaction. The transaction, which is subject to regulatory
approval and approval by the stockholders of Hawthorne and First
Fidelity, is anticipated to close during the third quarter of
2002. The Thrift is a California state chartered industrial loan
company with assets of $616.8 million as of
December 31, 2001, and four branches located in Orange
County and San Diego County, California, that specializes in
loans secured by income producing real estate. In connection
with the Agreement, Hawthorne and certain officers and directors
of First Fidelity, in their capacities as shareholders of First
Fidelity, entered into Shareholder Agreements pursuant to which
such officers and directors agreed to vote the shares of First
Fidelity common stock held by them in favor of the Merger.

A-34