##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K



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|  |  |                                                                                             
|- |  | --------------------------------------------------------------------------------------------
|þ |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
| 
|  |  | For the fiscal year ended December 31,
    2002                                             
| 
|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(Address of principal executive
    offices) |  | 90245(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 June 28, 2002 (the last business day
of the most recently completed second fiscal quarter), the
aggregate market value of voting and non-voting stock held by
nonaffiliates of the registrant was approximately $174,107,784
(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.

Indicate by check mark whether the registrant is
an accelerated filer as defined in Rule 12b-2 of the
Act.     Yes þ          No o

The number of shares of Common Stock, par value
$0.01 per share, of the Registrant outstanding as of
March 21, 2003 was 7,671,715 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 2003 Annual Meeting of Stockholders.



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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. Controls and Procedures                                                             
|                                                                | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|CERTIFICATION                                                  
|CERTIFICATION                                                  
|CONSOLIDATED FINANCIAL STATEMENTS, INDEPENDENT AUDITORS REPORT
|INDEPENDENT AUDITORS REPORT                                   
|CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION                 
|CONSOLIDATED STATEMENTS OF INCOME                              
|CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY                
|CONSOLIDATED STATEMENTS OF CASH FLOWS                          
|CONSOLIDATED STATEMENTS OF CASH FLOWS                          
|STATEMENTS OF FINANCIAL CONDITION                              
|STATEMENTS OF INCOME                                           
|STATEMENTS OF CASH FLOWS                                       
|EXHIBIT 4.21                                                   
|EXHIBIT 4.22                                                   
|EXHIBIT 4.23                                                   
|EXHIBIT 4.24                                                   
|EXHIBIT 4.25                                                   
|EXHIBIT 4.26                                                   
|EXHIBIT 4.27                                                   
|EXHIBIT 4.28                                                   
|EXHIBIT 4.29                                                   
|EXHIBIT 4.30                                                   
|EXHIBIT 4.31                                                   
|EXHIBIT 4.32                                                   
|EXHIBIT 4.33                                                   
|EXHIBIT 4.34                                                   
|EXHIBIT 10.6                                                   
|EXHIBIT 21.1                                                   
|EXHIBIT 23.1                                                   
|EXHIBIT 99.1                                                   
|EXHIBIT 99.2                                                   
|EXHIBIT 99.3                                                   



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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION

ANNUAL REPORT ON FORM 10-K


|         |  |                                                                                           |  |      |    | 
|-------- |  | ----------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                           |  | Page
|         |  |                                                                                           |  |     
|PART I  
|Item 1.  |  | Business                                                                                  |  |      | 1  | 
|Item 2.  |  | Properties                                                                                |  |      | 32 | 
|Item 3.  |  | Legal Proceedings                                                                         |  |      | 33 | 
|Item 4.  |  | Submission of Matters to a Vote of Security
    Holders                                   |  |      | 34 | 
|Item 4A. |  | Executive Officers                                                                        |  |      | 34 | 
|PART II 
|Item 5.  |  | Market for Registrants Common Equity and
    Related Stockholder Matters                 |  |      | 36 | 
|Item 6.  |  | Selected Financial Data                                                                   |  |      | 37 | 
|Item 7.  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |  |      | 39 | 
|Item 7A. |  | Quantitative and Qualitative Disclosure about
    Market Risks                            |  |      | 57 | 
|Item 8.  |  | Financial Statements and Supplementary Data                                               |  |      | 58 | 
|Item 9.  |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |  |      | 59 | 
|PART III
|Item 10. |  | Directors and Executive Officers of the Registrant                                        |  |      | 59 | 
|Item 11. |  | Executive Compensation                                                                    |  |      | 59 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners
    and Management                        |  |      | 59 | 
|Item 13. |  | Certain Relationships and Related Transactions                                            |  |      | 59 | 
|PART IV 
|Item 14. |  | Controls and Procedures                                                                   |  |      | 59 | 
|Item 15. |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                       |  |      | 60 | 

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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. The Company operates in
    the coastal counties of Southern California. Accordingly,
    deterioration in the economic conditions in these counties 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 the
    Companys market may affect its borrowers ability to
    perform, and necessitate further provisions for potential loan
    losses.                                                                                                                                                                                                                 
|
| |  | 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, investments,
    deposits, and borrowings are affected by market interest rates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |   | 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
    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 continue to 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.
|
| |  | Risks Associated with Litigation.We are, and have been involved, from
    time to time, in various claims, complaints, proceedings and
    litigation relating to activities arising from the normal course
    of our operations, including those discussed herein. Further,
    our business is primarily conducted in California, which is one
    of the most highly litigious states in the country. If new facts
    are developed that would change our current assessment of the
    litigation matters that we are currently involved in, or                                                                                                                                                                                                                                                                                                                                           

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | if we become subject to significant new
    litigation, we may incur legal and related costs that could
    affect our results.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Competition.The
    financial services business in the Companys market areas
    is highly competitive, and is becoming increasingly competitive
    due to changes in regulation, technological advances, and the
    accelerating pace of consolidation among financial services
    providers. The Company faces competition both in attracting
    deposits and in making loans. The Company competes for loans
    principally through the interest rates and loan fees we charge
    and the efficiency and quality of services we provide.
    Increasing levels of competition in the banking and financial
    services businesses may reduce the Companys market share,
    cause the interest rates and fees we charge for the
    Companys loans and deposit products to fall or impact the
    Companys ability to retain loans and/or deposits. This may
    in turn affect the Companys net interest income, net
    interest margin, noninterest income and the Companys
    results of operations.                                                                                                                                                                                                                                                                                                     
|
| |  | 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 Initiatives.The Company is continually in the
    process of evaluating and implementing strategic initiatives
    designed to enhance its franchise value. The Companys
    business performance is highly dependent on successfully
    executing these initiatives and the Companys strategic
    plan. There are no guarantees regarding the Companys
    success in implementing these initiatives, or in anticipating
    changes in the economy and taking advantage of opportunities or
    fully avoiding risks.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Investment
    Securities.The securities in the
    Banks investment portfolio (primarily Mortgage Backed
    Securities) are classified as available-for-sale.
    Changes in the fair value of the investment portfolio result
    from numerous and often uncontrollable events such as changes in
    interest rates, prepayment speeds, market perception of risk in
    the economy and other factors. To the extent that the Bank
    continues to have both the ability and intent to hold these
    securities for yield enhancement, changes in the fair value will
    be included as a component of stockholders equity. If the
    decline in fair value, if any, is deemed to be other than
    temporary, it will be treated as a permanent
    impairment and reflected in earnings. The Banks
    investment securities portfolio is also subject to interest rate
    risk. Fluctuations in interest rates may cause actual
    prepayments to vary from the estimated prepayments over the life
    of the security. This may result in adjustments to the
    amortization of premiums or accretion of discounts related to
    these instruments, consequently changing the net yield on such
    securities. Reinvestment risk is also associated with the cash
    flows from such securities.
|
| |  | Amortization of Intangible Assets/ Impairment
    of Goodwill.The Company acquired
    First Fidelity Bancorp, Inc. on August 23, 2002, and as a
    result recorded an intangible assets of $1.5 million and
    $23.0 million for goodwill. See Business
    Combinations, Goodwill and Acquired Intangible Assets. The
    Company is required to assess goodwill and other intangible
    assets annually for impairment, or more frequently if impairment
    indicators arise. If it were deemed that an impairment occurred,
    the Company would be required to take a charge against earnings
    to write down the assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | 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.

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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 Bank owns 100% of HS Financial Services
Corporation (HSFSC), a subsidiary of Hawthorne
Savings. The Company also owns 100% of HFC Capital Trust I,
HFC Capital Trust II, HFC Capital Trust III and HFC
Capital Trust IV, which are statutory business trusts and
wholly owned subsidiaries of the Company.

The Bank specializes in real estate secured loans
throughout the coastal counties of Southern California, which
are funded predominately with retail deposits and advances from
the Federal Home Loan Bank of San Francisco
(FHLB). As of March 28, 2003, the Bank operates
thirteen full service retail offices located in the coastal
counties of Southern California. The Bank concentrates on
providing superior customer service as it continues to enhance
the products and services offered to its retail customers. In
August 2002, the Company successfully completed the acquisition
of First Fidelity Bancorp, Inc. (First Fidelity).



| |                  
| | -----------------
| | 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 by the Board
of Governors of the Federal Reserve System (Federal
Reserve Board) concerning reserves required to be
maintained against deposits and certain other matters.

HSFSC is a California corporation that was
incorporated on April 11, 2002, and is a wholly-owned
subsidiary of Hawthorne Savings, F.S.B. HSFSC, which commenced
operations in July 2002, offers uninsured investments to its
customers and engages in limited insurance agent activities.
HSFSC is a licensed life insurance agent for the purpose of
receiving commissions on the sale of fixed rate annuities.
Licensed representatives of HSFSC sell mutual funds and variable
rate annuities in the Banks offices through a licensed
third party vendor, Duerr Financial Services, a registered
broker-dealer. Income to date from this subsidiary has been
insignificant.

The Banks website address is
www.hawthornesavings.com. We make available free of
charge on the Banks website the Companys annual
report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and the Companys press
releases, as soon as reasonably practicable after such reports
are filed with the SEC. None of the information on, or
hyperlinked from the Banks website, is incorporated into
this Annual Report on Form 10-K.



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

The Companys only operating segment is the
Bank, which is headquartered in El Segundo, California. The Bank
offers a variety of consumer banking products through its
network of retail branches, which includes the traditional range
of checking and savings accounts, money market accounts and
certificates of deposit. The Bank currently has thirteen retail
branches, seven of which are located in the South Bay region of
Los Angeles

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##### Table of Contents



County. The Bank also has two branches in Orange
County, two branches in San Diego County and two branches
in the San Fernando Valley, one of which is in Ventura
County.


In connection with its principal business
activities, the Company, through the Bank, generates revenues
principally from the interest and fees earned on its loans, from
the interest earned on its investment securities portfolio and,
to a much lesser extent, the interest earned on its portfolio of
overnight liquid investments. The Companys costs, through
the Bank, include primarily interest paid to depositors and to
other providers of borrowed funds, including trust preferred
securities at the holding company level, and general and
administrative expenses.

The Bank specializes in originating real estate
secured loans, particularly in the coastal counties of Southern
California, including: 1) permanent loans collateralized by
single family residential property, 2) permanent loans
secured by multi-family residential and commercial real estate,
and 3) loans for the construction of multi-family
residential, commercial and individual single family residential
properties and the acquisition and development of land for the
construction of such projects. In the ordinary course of
business, the Bank purchases loans consistent with its current
underwriting standards. See Item 1 
Business  Statistical Financial Data  Loan
Portfolio.

During 2002, the Bank significantly increased its
investment portfolio, which primarily consists of mortgage
backed securities (MBS) and collateralized mortgage
obligations (CMO). The Bank funds its loans and
investments predominantly with retail deposits generated through
its thirteen full service retail offices and FHLB advances.
Scheduled payments of loans and investment securities are a
reasonably stable source of funds, while prepayments on loans
and investment securities and deposit streams are subject to
significant fluctuations.



| |                            
| | ---------------------------
| | Market Area and Competition

The Banks current loan origination
activities are governed by established policies and procedures
intended to mitigate the risks inherent to the types of
collateral and borrowers financed by the Bank. The Banks
strategic focus includes (1) an effective, efficient and
responsive transaction execution, which is consistent with the
Bank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 its portfolio all
new loan originations. Management believes that this combination
of competitive, organizational and strategic distinctions
contribute to the Bank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.

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,
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 pricing 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.

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##### Table of Contents



The Bank competes for deposit funds with other
Southern California-based financial companies, including banks,
savings associations, credit unions 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. The Banks cross-sell ratio (deposit and loan
products per household) was 2.44 at December 31, 2002,
compared with 2.37 at December 31, 2001. The higher the
cross-sell ratio, the more likely the customer is to stay with
the Bank, which management believes increases the Banks
franchise value.

Supervision and Regulation



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

Savings and loan holding companies and savings
associations are extensively regulated under both federal and
state laws. 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.

The Companys securities are registered with
the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended (the Exchange Act).
As such, the Company is subject to the information, proxy
solicitation, insider trading, corporate governance, and other
requirements and restrictions of the Exchange Act.

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. Recent 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. In that
event, the activities of the Company and any of its subsidiaries
that are not SAIF-insured savings associations could become
subject to restrictions applicable to bank holding companies,
unless each also qualifies as a QTL or domestic building and
loan association and was acquired in a supervisory acquisition.
Furthermore, if the Company was in the future to sell control of
the Bank to any other company, such company would not succeed to
the Companys grandfathered status 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

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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.




| |                               
| | ------------------------------
| | The Sarbanes-Oxley Act of 2002

On July 30, 2002, President Bush signed into
law the Sarbanes-Oxley Act of 2002. This new legislation
addresses accounting oversight and corporate governance matters,
including:



| |   |                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the creation of a five-member oversight board
    appointed by the Securities & Exchange Commission
    (SEC) that will set standards for accountants and
    have investigative and disciplinary powers;              
|
| |  | the prohibition of accounting firms from
    providing various types of consulting services to public clients
    and requiring accounting firms to rotate partners among public
    client assignments every five years;
|
| |  | increased penalties for financial crimes;                                                                                                                                                                                
|
| |  | expanded disclosure of corporate operations and
    internal controls, including conflict of interest policies, and
    certification of financial statements;                                                           
|
| |  | enhanced controls on and reporting of insider
    trading; and                                                                                                                                                           
|
| |  | statutory separations between investment bankers
    and analysts.                                                                                                                                                       

Various aspects of the new legislation are
dependent on subsequent rule making by the SEC. The Company
currently does not anticipate a significant impact on its
operations, however, the Company continues to evaluate what the
impact of the new legislation and its implementing regulations
will have upon its operations, including a likely increase in
certain outside professional costs.



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

On October 26, 2001, President Bush signed
the USA Patriot Act of 2001 (the Patriot Act). The
Patriot Act is intended to strengthen U.S. law
enforcements and the intelligence communities
abilities to work cohesively to combat terrorism on a variety of
fronts. The potential impact of the Patriot Act on financial
institutions of all kinds is significant and wide ranging. The
Patriot Act contains sweeping anti-money laundering and
financial transparency laws in addition to current requirements,
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 businesses filed with the
    Treasury Departments Financial Crimes Enforcement Network
    for cash transactions exceeding $10,000; and                            
|
| |  | the filing of suspicious activities reports
    involving securities by brokers and dealers if they believe a
    customer may be violating U.S. laws and regulations.                       

On July 23, 2002, the Treasury Department
proposed regulations requiring institutions to incorporate into
their written money laundering plans, a board approved customer
identification program implementing reasonable procedures for
(a) verifying the identity of any person seeking to open an
account, to the extent

4



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##### Table of Contents



reasonable and practicable; (b) maintaining
records of the information used to verify the persons
identity; and (c) determining whether the person appears on
any list of known or suspected terrorists or terrorist
organizations. The regulations also define account
as a formal banking or business relationship established to
provide ongoing services, dealings, or other financial
transactions.


The Company is not able to predict the impact of
such laws 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
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.

The 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.

The 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
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.

While the GLB has not had a material adverse
effect on the operations of the Company and the Bank in the
near-term, 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.

5



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##### Table of Contents



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, 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 affect how consumer
information is transmitted through diversified financial
companies and conveyed to outside vendors. The Bank has
implemented privacy policies in accordance with the law. Since
enactment, a number of states have implemented their own
versions of the privacy law, and privacy legislation is pending
in California that, if enacted, would impose more stringent
requirements on the Company and its subsidiaries.



| |                       
| | ----------------------
| | 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.

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 were required to pay assessments to the
FDIC at an annual rate for the fourth quarter of 2002 at
approximately $0.0170 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.

6



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##### Table of Contents



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.

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 the condition of its
holding company, affiliates, subsidiaries, or other persons, or
savings associations with which it has significant business
relationships.

7



---



##### Table of Contents



The following table reflects that the Banks
regulatory capital exceeded all minimum regulatory capital
requirements applicable to it as of December 31, 2002.

|                                            |                                     |                  |           |              |   |                    |      |   |  |         |           |         |   |  |      |   |  |   |           |         |   |  |       |   | 
|------------------------------------------- | ----------------------------------- | ---------------- | --------- | ------------ | - | ------------------ | ---- | - |  | ------- | --------- | ------- | - |  | ---- | - |  | - | --------- | ------- | - |  | ----- | - | 
|                                            |                                     |                  |           |              |   |                   
|                                            |                                     | Tangible Capital |           | Core Capital |   | Risk-based Capital
|                                            |                                     |                  |           |              |   |                   
|                                            |                                     | Balance          |           | %            |   | Balance            |      | % |  | Balance |           | %      
|(Dollars in thousands)                      |                                     |                  |           |              |   |                    |      |   |  |         |           |        
|Core capital                                |                                     | $                | 209,221   |              |   |                    |      |   |  | $       | 209,221   |         |   |  |      |   |  | $ | 209,221   |         |   |  |       |  
|Adjustments:                                |                                     |                  |           |              |   |                    |      |   |  |         |           |         |   |  |      |   |  |   |           |         |   |  |       |  
|                                            | Goodwill                            |                  |           | (22,970      | ) |                    |      |   |  |         |           | (22,970 | ) |  |      |   |  |   |           | (22,970 | ) |  |       |   | 
|                                            | Deposit intangible, net of tax      |                  |           | (805         | ) |                    |      |   |  |         |           | (805    | ) |  |      |   |  |   |           | (805    | ) |  |       |   | 
|                                            | General allowance for credit losses |                  |           |             |   |                    |      |   |  |         |           |        |   |  |      |   |  |   |           | 22,233  |   |  |       |   | 
|                                            | Other(1)                            |                  |           | (1,504       | ) |                    |      |   |  |         |           | (1,504  | ) |  |      |   |  |   |           | (1,504  | ) |  |       |   | 
|                                            |                                     |                  |           |              |   |                    |      |   |  |         |           |         |   |  |      |   |  |   |           |         |   |  |       |  
|Regulatory capital                          |                                     |                  | 183,942   |              |   |                    | 7.46 | % |  |         | 183,942   |         |   |  | 7.46 | % |  |   | 206,175   |         |   |  | 11.68 | %
|Capital requirements to be well capitalized |                                     |                  | n/a       |              |   |                    | n/a  |   |  |         | 123,329   |         |   |  | 5.00 |   |  |   | 176,579   |         |   |  | 10.00 |  
|                                            |                                     |                  |           |              |   |                    |      |   |  |         |           |         |   |  |      |   |  |   |           |         |   |  |       |  
|Excess capital(2)                           |                                     | $                | 183,942   |              |   |                    | 7.46 | % |  | $       | 60,613    |         |   |  | 2.46 | % |  | $ | 29,596    |         |   |  | 1.68  | %
|                                            |                                     |                  |           |              |   |                    |      |   |  |         |           |         |   |  |      |   |  |   |           |         |   |  |       |  
|Adjusted assets(3)                          |                                     | $                | 2,466,573 |              |   |                    |      |   |  | $       | 2,466,573 |         |   |  |      |   |  | $ | 1,765,791 |         |   |  |       |  
|                                            |                                     |                  |           |              |   |                    |      |   |  |         |           |         |   |  |      |   |  |   |           |         |   |  |       |  



---



|    |                                                                                                                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes unrealized (gain) on certain
    available-for-sale investment securities, net of taxes.                                                                                                                                                                                                                                          
|   
|(2) | Excess capital is defined as the percentage over
    well capitalized under Prompt Correction Action
    (PCA) rules.                                                                                                                                                                                                                    
|   
|(3) | 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, 2002, 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

8



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##### Table of Contents



undercapitalized, require it to comply with
certain restrictions applicable to significantly
undercapitalized institutions. Finally, under an interagency
agreement, the FDIC can examine any institution that has a
substandard regulatory examination score or is considered
undercapitalized, without the express permission of the
institutions primary regulator.


As of December 31, 2002, 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, 2002, 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, 2002: |                                              |        |   |                   |  |                   |  |                   |   |            |   |         |  |  |  |      |   |  |   |         |  |  |  |      
|                         | Total capital to risk weighted assets        |        | $ | 206,175           |  |                   |  | 11.68             | % |            | $ | 141,263 |  |  |  | 8.00 | % |  | $ | 176,579 |  |  |  | 10.00 | %
|                         | Core capital to adjusted tangible assets     |        |   | 183,942           |  |                   |  | 7.46              | % |            |   | 98,663  |  |  |  | 4.00 | % |  |   | 123,329 |  |  |  | 5.00  | %
|                         | Tangible capital to adjusted tangible assets |        |   | 183,942           |  |                   |  | 7.46              | % |            |   | 36,999  |  |  |  | 1.50 | % |  |   | n/a     |  |  |  | n/a   |  
|                         | Tier 1 capital to risk weighted assets       |        |   | 183,942           |  |                   |  | 10.42             | % |            |   | n/a     |  |  |  | n/a  |   |  |   | 105,947 |  |  |  | 6.00  | %
|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  | %

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 October 1, 2002, FRB regulations aimed at
curbing such lending became effective. 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; and                                                                                                                                        
|
| |  | 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.

9



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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 who 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 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, 2002, the Banks
loans-to-one-borrower limit was $30.9 million based upon
the 15% of unimpaired capital and surplus measurement. At
December 31, 2002, the Banks largest relationship
consisted of one borrower with outstanding commitments of
$16.8 million, which consisted of approximately 7 loans,
with $15.2 million secured by income property development
real estate, $1.3 million secured by multi-family real
estate and $0.3 million secured by land. 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 the Banks
assets which the Code requires investments of 60% of the
Banks 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, 2002, 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

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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 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. Under the OTSs capital
distribution limitations, 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

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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. Based upon its most recent
examination, the Bank received an outstanding rating.


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.

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, 2002, the Bank had $34.7 million in FHLB
stock, which was in compliance with this requirement.

The GLB 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 the 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.                                                                                                                                                                                                                                                                            

The new capital plan of the FHLB was approved by
the Federal Housing Finance Board on June 12, 2002. The
FHLB has not yet established an implementation date for the new
capital plan. The Bank will receive at least 240 days
written notice of the implementation date. The new capital plan
incorporates a single class of stock and requires each member to
own stock in amount equal to the greater of a membership stock
requirement, or an activity based stock requirement. The new
capital stock is redeemable on five years written notice,
subject to certain conditions.

Management does not believe that the initial
implementation of the FHLB new capital plan as approved will
have a material impact upon the Companys financial
condition, cash flows, or results of operations. However, the
Bank could be required to purchase as much as 50% additional
capital stock or sell as much as 50% of its proposed capital
stock requirement at the discretion of the FHLB.

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,

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NOW, and Super NOW checking accounts) and
non-personal time deposits. At December 31, 2002, 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.



| |                    
| | -------------------
| | Regulation of HSFSC

HSFSC is also subject to regulation by the OTS
and other applicable federal and state agencies, including the
California Department of Insurance. HSFSC offers securities
through an unaffiliated brokerage, which is regulated by the
SEC, the National Association of Securities Dealers, Inc. and
state securities regulators.

Employees

The Company employed 357 full time equivalent
employees at December 31, 2002. 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 Bank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. At December 31, 2002, approximately
$1.2 billion, or 91.28% of the Banks total loan
portfolio was tied to adjustable rate indices, such as MTA,
LIBOR, Prime, COFI and CMT. The Banks portfolio of
adjustable rate loans includes approximately $287.7 million
of loans with an initial fixed rate term of three to five years
prior to transitioning to a semi-annual adjustable rate loan
(hybrid ARMs). The net loan portfolio grew from
$1.7 billion at December 31, 2001, to
$2.1 billion at December 31, 2002, which was primarily
due to the acquisition of First Fidelity.

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

|                            |                                |              |           |         |   |         |        |       |  |         |           |          |   |         |        |       |  |         |           |          |   |  |        |       |  |   |           |          |   |  |        |       |  |   |           |          |   |  |        |       | 
|--------------------------- | ------------------------------ | ------------ | --------- | ------- | - | ------- | ------ | ----- |  | ------- | --------- | -------- | - | ------- | ------ | ----- |  | ------- | --------- | -------- | - |  | ------ | ----- |  | - | --------- | -------- | - |  | ------ | ----- |  | - | --------- | -------- | - |  | ------ | ----- | 
|                            |                                |             
|                            |                                | December 31,
|                            |                                |             
|                            |                                |              |           |         |   |         |        |       |  |        
|                            |                                | 2002         |           | 2001    |   | 2000    |        | 1999  |  | 1998   
|                            |                                |              |           |         |   |         |        |       |  |        
|                            |                                | Balance      |           | %       |   | Balance |        | %     |  | Balance |           | %        |   | Balance |        | %     |  | Balance |           | %       
|(Dollars in thousands)      |                                |              |           |         |   |         |        |       |  |         |           |          |   |         |        |       |  |         |           |         
|Single family residential   |                                | $            | 854,220   |         |   |         | 38.32  | %     |  | $       | 918,877   |          |   |         | 49.12  | %     |  | $       | 888,416   |          |   |  | 49.17  | %     |  | $ | 683,250   |          |   |  | 40.99  | %     |  | $ | 576,032   |          |   |  | 35.88  | %    
|Income property:            |                                |              |           |         |   |         |        |       |  |         |           |          |   |         |        |       |  |         |           |          |   |  |        |       |  |   |           |          |   |  |        |       |  |   |           |          |   |  |        |      
|                            | Multi-family(1)                |              |           | 690,137 |   |         |        | 30.96 |  |         |           | 255,183  |   |         |        | 13.64 |  |         |           | 253,039  |   |  |        | 14.00 |  |   |           | 222,616  |   |  |        | 13.36 |  |   |           | 250,876  |   |  |        | 15.62 | 
|                            | Commercial(1)                  |              |           | 391,538 |   |         |        | 17.57 |  |         |           | 248,092  |   |         |        | 13.26 |  |         |           | 200,372  |   |  |        | 11.09 |  |   |           | 232,938  |   |  |        | 13.98 |  |   |           | 222,558  |   |  |        | 13.86 | 
|                            | Development(2)                 |              |           | 134,969 |   |         |        | 6.06  |  |         |           | 227,190  |   |         |        | 12.14 |  |         |           | 203,894  |   |  |        | 11.28 |  |   |           | 148,092  |   |  |        | 8.88  |  |   |           | 78,425   |   |  |        | 4.88  | 
|Single family construction: |                                |              |           |         |   |         |        |       |  |         |           |          |   |         |        |       |  |         |           |          |   |  |        |       |  |   |           |          |   |  |        |       |  |   |           |          |   |  |        |      
|                            | Single family residential(3)   |              |           | 114,637 |   |         |        | 5.14  |  |         |           | 159,224  |   |         |        | 8.51  |  |         |           | 195,983  |   |  |        | 10.85 |  |   |           | 274,697  |   |  |        | 16.48 |  |   |           | 275,888  |   |  |        | 17.18 | 
|                            | Tract                          |              |           |        |   |         |        |      |  |         |           |         |   |         |        |      |  |         |           | 3,495    |   |  |        | 0.19  |  |   |           | 24,056   |   |  |        | 1.44  |  |   |           | 85,942   |   |  |        | 5.35  | 
|Land(4)                     |                                |              | 32,612    |         |   |         | 1.46   |       |  |         | 50,984    |          |   |         | 2.72   |       |  |         | 46,520    |          |   |  | 2.57   |       |  |   | 59,095    |          |   |  | 3.55   |       |  |   | 69,581    |          |   |  | 4.33   |      
|Other                       |                                |              | 10,978    |         |   |         | 0.49   |       |  |         | 11,482    |          |   |         | 0.61   |       |  |         | 15,390    |          |   |  | 0.85   |       |  |   | 22,053    |          |   |  | 1.32   |       |  |   | 46,615    |          |   |  | 2.90   |      
|                            |                                |              |           |         |   |         |        |       |  |         |           |          |   |         |        |       |  |         |           |          |   |  |        |       |  |   |           |          |   |  |        |       |  |   |           |          |   |  |        |      
|Gross loans receivable(5)   |                                |              | 2,229,091 |         |   |         | 100.00 | %     |  |         | 1,871,032 |          |   |         | 100.00 | %     |  |         | 1,807,109 |          |   |  | 100.00 | %     |  |   | 1,666,797 |          |   |  | 100.00 | %     |  |   | 1,605,917 |          |   |  | 100.00 | %    
|                            |                                |              |           |         |   |         |        |       |  |         |           |          |   |         |        |       |  |         |           |          |   |  |        |       |  |   |           |          |   |  |        |       |  |   |           |          |   |  |        |      
|Less:                       |                                |              |           |         |   |         |        |       |  |         |           |          |   |         |        |       |  |         |           |          |   |  |        |       |  |   |           |          |   |  |        |       |  |   |           |          |   |  |        |      
|                            | Undisbursed funds              |              |           | (90,596 | ) |         |        |       |  |         |           | (137,484 | ) |         |        |       |  |         |           | (171,789 | ) |  |        |       |  |   |           | (196,249 | ) |  |        |       |  |   |           | (256,096 | ) |  |        |       | 
|                            | Deferred (fees) and costs, net |              |           | 11,069  |   |         |        |       |  |         |           | 6,337    |   |         |        |       |  |         |           | 2,197    |   |  |        |       |  |   |           | (1,295   | ) |  |        |       |  |   |           | (5,919   | ) |  |        |       | 
|                            | Allowance for credit losses    |              |           | (35,309 | ) |         |        |       |  |         |           | (30,602  | ) |         |        |       |  |         |           | (29,450  | ) |  |        |       |  |   |           | (24,285  | ) |  |        |       |  |   |           | (17,111  | ) |  |        |       | 
|                            |                                |              |           |         |   |         |        |       |  |         |           |          |   |         |        |       |  |         |           |          |   |  |        |       |  |   |           |          |   |  |        |       |  |   |           |          |   |  |        |      
|Net loans receivable        |                                | $            | 2,114,255 |         |   |         |        |       |  | $       | 1,709,283 |          |   |         |        |       |  | $       | 1,608,067 |          |   |  |        |       |  | $ | 1,444,968 |          |   |  |        |       |  | $ | 1,326,791 |          |   |  |        |      
|                            |                                |              |           |         |   |         |        |       |  |         |           |          |   |         |        |       |  |         |           |          |   |  |        |       |  |   |           |          |   |  |        |       |  |   |           |          |   |  |        |      



---



|    |                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Predominantly term loans secured by improved
    properties, with respect to which the properties cash
    flows are sufficient to service the Bank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 Bank 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.                 

14



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| |  |                                                                                           
| |  | ------------------------------------------------------------------------------------------
| |  | The table below sets forth the Banks
    average loan size by loan portfolio composition.

|                                                 |                           |                   |       |                   |    |           |       |           |       |  |       |     |    |   |       |       |       | 
|------------------------------------------------ | ------------------------- | ----------------- | ----- | ----------------- | -- | --------- | ----- | --------- | ----- |  | ----- | --- | -- | - | ----- | ----- | ----- | 
|                                                 |                           |                   |       |                  
|                                                 |                           | December 31, 2002 |       | December 31, 2001
|                                                 |                           |                   |       |                  
|                                                 |                           | Number of         |       | Average           |    | Number of |       | Average  
|                                                 |                           | Loans             |       | Loan Size         |    | Loans     |       | Loan Size
|(Dollars in thousands)                           |                           |                   |       |                   |    |           |       |          
|Single family residential                        |                           |                   | 1,484 |                   |    | $         | 576   |           |       |  | 1,654 |     |    | $ | 556   |      
|Income property:                                 |                           |                   |       |                   |    |           |       |           |       |  |       |     |    |   |       |      
|                                                 | Multi-family              |                   |       | 1,309             |    |           |       | 527       |       |  |       | 537 |    |   |       | 475   |      
|                                                 | Commercial                |                   |       | 394               |    |           |       | 994       |       |  |       | 93  |    |   |       | 2,668 |      
|                                                 | Development:              |                   |       |                   |    |           |       |           |       |  |       |     |    |   |       |       |      
|                                                 |                           | Multi-family      |       |                   | 26 |           |       |           | 3,294 |  |       |     | 33 |   |       |       | 4,121 | 
|                                                 |                           | Commercial        |       |                   | 12 |           |       |           | 4,110 |  |       |     | 19 |   |       |       | 4,849 | 
|Single family construction:                      |                           |                   |       |                   |    |           |       |           |       |  |       |     |    |   |       |      
|                                                 | Single family residential |                   |       | 74                |    |           |       | 1,549     |       |  |       | 98  |    |   |       | 1,625 |      
|Land                                             |                           |                   | 28    |                   |    |           | 1,165 |           |       |  | 32    |     |    |   | 1,593 |      
|Other                                            |                           |                   | 3     |                   |    |           | 1,967 |           |       |  | 3     |     |    |   | 1,967 |      
|                                                 |                           |                   |       |                   |    |           |       |           |       |  |       |     |    |   |       |      
|Total loans, excluding overdrafts                |                           |                   | 3,330 |                   |    |           | 668   |           |       |  | 2,469 |     |    |   | 756   |      
|                                                 |                           |                   |       |                   |    |           |       |           |       |  |       |     |    |   |       |      
|Overdraft & overdraft protection
    outstanding |                           |                   | 756   |                   |    |           | 1     |           |       |  | 635   |     |    |   | 1     |      
|                                                 |                           |                   |       |                   |    |           |       |           |       |  |       |     |    |   |       |      

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

|                                      |                             |                           |                                 |                        |   |           |           |            |        |        |           |   |    |   |           |        |        |        |           | 
|------------------------------------- | --------------------------- | ------------------------- | ------------------------------- | ---------------------- | - | --------- | --------- | ---------- | ------ | ------ | --------- | - | -- | - | --------- | ------ | ------ | ------ | --------- | 
|                                      |                             |                           |                                 |                       
|                                      |                             | December 31, 2002         |                                 | December 31, 2001     
|                                      |                             |                           |                                 |                       
|                                      |                             | Number of                 |                                 | Gross                  |   | Number of |           | Gross     
|                                      |                             | Loans                     |                                 | Commitment             |   | Loans     |           | Commitment
|(Dollars in thousands)                |                             |                           |                                 |                        |   |           |           |           
|Loans in excess of $10.0 million:     |                             |                           |                                 |                        |   |           |           |            |        |        |           |   |    |   |           |       
|                                      | Income property:            |                           |                                 |                        |   |           |           |            |        |        |           |   |    |   |           |        |       
|                                      |                             | Commercial                |                                 |                        | 1 |           |           | $          | 11,789 |        |           |   | 2  |   |           | $      | 22,699 |       
|                                      |                             | Development:              |                                 |                        |   |           |           |            |        |        |           |   |    |   |           |        |        |       
|                                      |                             |                           | Multi-family                    |                        |   |          |           |            |        |       |           |   |    | 2 |           |        | $      | 23,107 |          
|                                      |                             |                           | Commercial                      |                        |   | 2         |           |            |        | 21,836 |           |   |    | 3 |           |        |        | 33,370 |          
|                                      |                             |                           |                                 |                        |   |           |           |            |        |        |           |   |    |   |           |       
|                                      |                             |                           | 3                               |                        |   |           | 33,625    |            |        |        | 7         |   |    |   | 79,176    |       
|                                      |                             |                           |                                 |                        |   |           |           |            |        |        |           |   |    |   |           |       
|                                      |                             |                           | Percentage of total gross loans |                        |   |           |           |            |        | 1.51   | %         |   |    |   |           |        |        | 4.23   | %        
|Loans between $5.0 and $10.0 million: |                             |                           |                                 |                        |   |           |           |            |        |        |           |   |    |   |           |       
|                                      | Single family residential   |                           |                                 | 3                      |   |           |           | 22,984     |        |        |           | 4 |    |   |           | 25,036 |       
|                                      | Income property:            |                           |                                 |                        |   |           |           |            |        |        |           |   |    |   |           |        |       
|                                      |                             | Multi-family              |                                 |                        | 3 |           |           |            | 18,865 |        |           |   | 1  |   |           |        | 7,651  |       
|                                      |                             | Commercial                |                                 |                        | 5 |           |           |            | 32,462 |        |           |   | 10 |   |           |        | 74,078 |       
|                                      |                             | Development:              |                                 |                        |   |           |           |            |        |        |           |   |    |   |           |        |        |       
|                                      |                             |                           | Multi-family                    |                        |   | 6         |           |            |        | 38,678 |           |   |    | 7 |           |        |        | 45,473 |          
|                                      |                             |                           | Commercial                      |                        |   | 4         |           |            |        | 23,445 |           |   |    | 5 |           |        |        | 31,072 |          
|                                      | Single family construction: |                           |                                 |                        |   |           |           |            |        |        |           |   |    |   |           |        |       
|                                      |                             | Single family residential |                                 |                        | 2 |           |           |            | 11,240 |        |           |   | 2  |   |           |        | 12,915 |       
|                                      | Land                        |                           |                                 |                       |   |           |           |           |        |        |           | 2 |    |   |           | 11,200 |       
|                                      |                             |                           |                                 |                        |   |           |           |            |        |        |           |   |    |   |           |       
|                                      |                             |                           | 23                              |                        |   |           | 147,674   |            |        |        | 31        |   |    |   | 207,425   |       
|                                      |                             |                           |                                 |                        |   |           |           |            |        |        |           |   |    |   |           |       
|                                      |                             |                           | Percentage of total gross loans |                        |   |           |           |            |        | 6.62   | %         |   |    |   |           |        |        | 11.09  | %        
|Loans less than $5.0 million          |                             |                           |                                 |                        |   |           | 2,047,792 |            |        |        |           |   |    |   | 1,584,431 |       
|                                      |                             |                           |                                 |                        |   |           |           |            |        |        |           |   |    |   |           |       
|                                      |                             |                           | Percentage of total gross loans |                        |   |           |           |            |        | 91.87  | %         |   |    |   |           |        |        | 84.68  | %        
|                                      |                             |                           |                                 | Gross loans receivable |   |           |           |            |        | $      | 2,229,091 |   |    |   |           |        |        | $      | 1,871,032 | 
|                                      |                             |                           |                                 |                        |   |           |           |            |        |        |           |   |    |   |           |       

15



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##### Table of Contents



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

|                            |                           |                   |                      |                   |        |           |       |         |      |        |         |         |         |           |       |       |      |        |  
|--------------------------- | ------------------------- | ----------------- | -------------------- | ----------------- | ------ | --------- | ----- | ------- | ---- | ------ | ------- | ------- | ------- | --------- | ----- | ----- | ---- | ------ | -
|                            |                           |                   |                      |                  
|                            |                           | December 31, 2002 |                      | December 31, 2001
|                            |                           |                   |                      |                  
|                            |                           | Balance           |                      | Percent           |        | Balance   |       | Percent
|(Dollars in thousands)      |                           |                   |                      |                   |        |           |       |        
|Single family residential   |                           | $                 | 851,268              |                   |        |           | 39.81 | %       |      | $      | 913,255 |         |         |           | 52.68 | %    
|Income property:            |                           |                   |                      |                   |        |           |       |         |      |        |         |         |         |           |       |      
|                            | Multi-family              |                   |                      | 689,100           |        |           |       | 32.22   | %    |        |         | 254,530 |         |           |       | 14.68 | %   
|                            | Commercial                |                   |                      | 387,354           |        |           |       | 18.11   | %    |        |         | 235,156 |         |           |       | 13.57 | %   
|                            | Development:              |                   |                      |                   |        |           |       |         |      |        |         |         |         |           |       |       |     
|                            |                           | Multi-family      |                      |                   | 57,037 |           |       |         | 2.67 | %      |         |         | 102,682 |           |       |       | 5.92 | %     
|                            |                           | Commercial        |                      |                   | 41,168 |           |       |         | 1.93 | %      |         |         | 68,431  |           |       |       | 3.95 | %     
|Single family construction: |                           |                   |                      |                   |        |           |       |         |      |        |         |         |         |           |       |      
|                            | Single family residential |                   |                      | 75,218            |        |           |       | 3.52    | %    |        |         | 104,158 |         |           |       | 6.01  | %   
|Land                        |                           |                   | 32,612               |                   |        |           | 1.52  | %       |      |        | 48,719  |         |         |           | 2.81  | %    
|Other                       |                           |                   | 4,738                |                   |        |           | 0.22  | %       |      |        | 6,617   |         |         |           | 0.38  | %    
|                            |                           |                   |                      |                   |        |           |       |         |      |        |         |         |         |           |       |      
|                            |                           |                   | Total loan principal |                   | $      | 2,138,495 |       |         |      | 100.00 | %       |         | $       | 1,733,548 |       |       |      | 100.00 | %
|                            |                           |                   |                      |                   |        |           |       |         |      |        |         |         |         |           |       |      



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

The Bank offers first mortgage loans secured by
single family (one-to-four unit) residential (SFR)
properties located in the Banks principal lending area of
the coastal counties of Southern California. The Bank originates
single family residential loans principally through contact
with, and submissions by, approved independent mortgage brokers.
The Bank pays a fee, generally ranging from 0.5% to 1.0% of the
loan amount, to these mortgage brokers in connection with such
loan fundings. The Bank offers primarily adjustable rate
mortgage loan products with interest rates that adjust monthly
or semi-annually, after an initial introductory period. These
loans generally provide for a prepayment penalty of six months
interest for the first one to three years after origination.
These adjustable rate products generally provide for floors and
overall caps on the increase or decrease in interest rates at an
adjustment date and over the term of the loan. A portion of the
Banks adjustable rate mortgage loans have introductory
terms below the fully indexed rates. In underwriting these
loans, the Bank qualifies the borrowers based upon the fully
indexed rate.

At December 31, 2002, $854.2 million,
or 38.32% of the total gross loan portfolio was secured by
single-family residential properties (89.82% secured by
owner-occupied properties), compared with $918.9 million,
or 49.12% of the total gross loan portfolio at December 31,
2001.

The Bank generally originates SFR loans in
amounts of 75% of the appraised value, or the selling price of
the property securing the loan, whichever is lower.



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

The Bank originates loans secured by multi-family
properties and commercial properties, such as office buildings,
retail properties, industrial properties and various special
purpose properties principally through contact with, and
submissions by, approved independent mortgage brokers. The Bank
pays a rebate, generally ranging from 0.10% to 1.0% of the loan
amount, to these mortgage brokers in connection with such loan
fundings. Additionally, in the ordinary course of business, the
Bank purchases income property loans consistent with its current
underwriting standards.

The Bank offers primarily adjustable rate loan
products and also offers a 3 to 5 year fixed rate loan
product that is fixed for the initial period and adjusted
semi-annually thereafter. These adjustable rate products
generally provide for floors and overall caps on the increase or
decrease in interest rates at an adjustment date and over the
term of the loan. These loans generally provide for prepayment
penalties

16



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##### Table of Contents



associated with them for the first three years
after origination, usually on a declining scale from 3% for the
first year and decreasing by 1% for each subsequent year.


The Bank typically originates multi-family loans
in amounts of 75% of the appraised value of the underlying
property. Maturities on these loans are typically 15 years
with a 30 year amortization period; however, on a limited
basis, on newer properties the Bank may make loans with
maturities up to 30 years. In addition, the Bank generally
requires a debt coverage ratio of at least 120% on multi-family
loans.

The Bank generally originates adjustable rate
commercial loans in amounts up to 75% of the appraised value of
the property. Maturities on commercial loans are typically
10 years with a 25 year amortization period; however,
the Bank may make loans with maturities up to 15 years. The
Bank typically requires a debt coverage ratio of at least 125%
on commercial loans.

Commercial real estate loans are generally larger
and involve a greater degree of risk than SFR loans. Since
payments on loans secured by commercial properties are
frequently reliant upon successful operation of such properties,
repayment of these loans may be significantly affected by
conditions in the real estate market or the economy. The Bank
mitigates these risks through its underwriting standards, which
includes assessment of the repayment ability of the property as
well as the borrower.



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

During 2002, the Bank continued to emphasize its
strategic niche as a provider of bridge loans to both apartment
owners and income property investors. The Banks
experienced construction management group closely manages this
more complex niche, while providing a valuable source of funding
to investors who want to renovate and/or upgrade their
properties. These loans are generally originated in amounts up
to 75% of the appraised value of the property, as stabilized.
These loans generally have terms of eighteen to twenty-four
months and include extension options, subject to the Banks
approval. There are generally no prepayment penalties associated
with these loans.



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

The Bank provides financing for individual home
construction primarily to local builders and, to a lesser
extent, homeowners. These loans are generated through the
Banks standing relationships with local
builders/developers and approved independent mortgage brokers.
These brokers are paid a fee ranging from 0.5% to 1.0% of the
loan amount in connection with certain loan fundings. These
loans are adjustable, have maturities of 1 to 2 years and
typically include extension options of up to six months, subject
to the Banks evaluation and approval.

The Bank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 Banks loan commitments cover
approximately 80.0% 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
Bank records its financing commitment. Loan proceeds are
disbursed as construction progresses and satisfactory
inspections are completed. The Banks inspectors generally
visit projects on a monthly basis to assess the progress of
construction.

Land loans are originated with the intent to
convert the loan into a construction loan and are underwritten
on an individual basis, but typically do not exceed 65% of the
lesser of the actual cost or appraised value. In evaluating the
feasibility of originating a land loan, the Bank considers the
anticipated use of the land, such as the location and the market
environment, as well as the repayment ability of the borrower
and/or guarantor(s), as applicable. These loans generally have
terms of twelve months and include extension options, subject to
the Banks approval.

Financing construction loans typically involve a
greater degree of credit risk than long term financing on
improved owner occupied property. The Banks ability to
mitigate the risk of loss is primarily dependent upon the
accuracy of the initial estimate of the property value upon
completion of development or construction compared to the
estimated cost of the project. If this was inaccurate, the Bank
may be confronted with a

17



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##### Table of Contents



completed project having a value that is
insufficient to ensure full repayment of the Banks loan.
This development and construction risk is partially mitigated by
evaluation of anticipated market demand, assessment of both the
borrowers and developers ability to undertake
construction, monitoring the progress of construction, equity in
the project and secondary support (such as payment guarantees),
as necessary.




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

In the past, the Bank provided financing to
small-to-medium-sized developers of residential subdivisions
located throughout Southern California. Generally, the
Banks tract loans financed land acquisition, site
development and home construction. At December 31, 2002 and
December 31, 2001, there were no tract loans. 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 and Other Lending

During 2001, the Bank launched an overdraft
protection program for its checking account customers. At
December 31, 2002, and December 31, 2001, the
outstanding overdraft protection lines totaled $0.7 million
and $0.4 million, respectively.

New Business Generation

The Bank extends credit pursuant to its lending
policies; some of the areas covered by the lending policies
include loan applications, borrower financial information, and
underwriting standards. Appraisal of real property is either
performed internally or delegated to an independent appraiser,
in which case, the independent appraisal is reviewed by the
Bank. Legal documents are prepared or reviewed by the
Banks in-house legal staff or assigned to outside
attorneys.

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

|                             |                             |                              |              |       |         |        |         |   |       |        |         |   |        |        |         |   |       |      |         |   |         |        |         |   |       |       |        |  
|---------------------------- | --------------------------- | ---------------------------- | ------------ | ----- | ------- | ------ | ------- | - | ----- | ------ | ------- | - | ------ | ------ | ------- | - | ----- | ---- | ------- | - | ------- | ------ | ------- | - | ----- | ----- | ------ | -
|                             |                             |                             
|                             |                             | Year Ended December 31,     
|                             |                             |                             
|                             |                             |                              |              |       |         |       
|                             |                             | 2002                         |              | 2001  |         | 2000  
|                             |                             |                              |              |       |         |       
|                             |                             | Amount                       |              | %     |         | Amount |         | % |       | Amount |         | %
|(Dollars in thousands)       |                             |                              |              |       |         |        |         |   |       |        |         |  
|Single family residential(1) |                             | $                            | 327,658      |       |         |        | 43.36   | % |       | $      | 322,114 |   |        |        | 47.00   | % |       | $    | 361,034 |   |         |        | 47.36   | %
|                             | Income property:            |                              |              |       |         |        |         |   |       |        |         |   |        |        |         |   |       |      |         |   |         |        |         |   |      
|                             |                             | Multi-family(2)              |              |       | 217,044 |        |         |   | 28.72 | %      |         |   | 82,779 |        |         |   | 12.08 | %    |         |   | 63,366  |        |         |   | 8.32  | %    
|                             |                             | Commercial(3)                |              |       | 42,265  |        |         |   | 5.59  | %      |         |   | 62,475 |        |         |   | 9.12  | %    |         |   | 66,118  |        |         |   | 8.68  | %    
|                             |                             | Development(4)               |              |       |         |        |         |   |       |        |         |   |        |        |         |   |       |      |         |   |         |        |         |   |       |      
|                             |                             |                              | Multi-family |       |         | 41,288 |         |   |       | 5.46   | %       |   |        | 43,962 |         |   |       | 6.41 | %       |   |         | 93,462 |         |   |       | 12.27 | %     
|                             |                             |                              | Commercial   |       |         | 30,549 |         |   |       | 4.04   | %       |   |        | 46,732 |         |   |       | 6.82 | %       |   |         | 22,661 |         |   |       | 2.97  | %     
|                             | Single family construction: |                              |              |       |         |        |         |   |       |        |         |   |        |        |         |   |       |      |         |   |         |        |         |   |      
|                             |                             | Single family residential(5) |              |       | 77,450  |        |         |   | 10.25 | %      |         |   | 91,445 |        |         |   | 13.34 | %    |         |   | 121,279 |        |         |   | 15.92 | %    
|Land(6)                      |                             |                              | 19,496       |       |         |        | 2.58    | % |       |        | 35,849  |   |        |        | 5.23    | % |       |      | 34,063  |   |         |        | 4.47    | %
|Other(7)                     |                             |                              |             |       |         |        |        |   |       |        | 14      |   |        |        | 0.00    | % |       |      | 49      |   |         |        | 0.01    | %
|                             |                             |                              |              |       |         |        |         |   |       |        |         |   |        |        |         |   |       |      |         |   |         |        |         |  
|                             |                             |                              |              | Total |         | $      | 755,750 |   |       |        | 100.00  | % |        | $      | 685,370 |   |       |      | 100.00  | % |         | $      | 762,032 |   |       |       | 100.00 | %
|                             |                             |                              |              |       |         |        |         |   |       |        |         |   |        |        |         |   |       |      |         |   |         |        |         |  



---



|    |                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes unfunded commitments of
    $0.2 million, $0.8 million and $0.3 million at
    December 31, 2002, 2001 and 2000, respectively.
|   
|(2) | Includes unfunded commitments of
    $0.7 million, $0.3 million and $0.5 million at
    December 31, 2002 2001 and 2000, respectively. 

18



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##### Table of Contents





|    |                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | Includes unfunded commitments of
    $1.3 million, $1.5 million and $0.9 million at
    December 31, 2002, 2001 and 2000, respectively.                                         
|   
|(4) | Includes unfunded commitments of
    $29.0 million, $38.4 million and $64.9 million at
    December 31, 2002, 2001 and 2000, respectively.                                      
|   
|(5) | Includes unfunded commitments of
    $30.8 million, $44.9 million and $64.8 million at
    December 31, 2002, 2001 and 2000, respectively.                                      
|   
|(6) | There were no unfunded commitments at
    December 31, 2002. Includes unfunded commitments of
    $2.0 million and $0.4 million at December 31,
    2001 and 2000, respectively.
|   
|(7) | Includes unfunded commitments of
    $2.9 million at December 31, 2002. There were no
    unfunded commitments at December 31, 2001 and 2000.                                   

The table below summarizes the maturities for
fixed rate loans and the repricing intervals for adjustable rate
loans as of December 31, 2002.

|                       |                    |                        |   |                 |         |       |   |           |           |  |   |           |           | 
|---------------------- | ------------------ | ---------------------- | - | --------------- | ------- | ----- | - | --------- | --------- |  | - | --------- | --------- | 
|                       |                    |                       
|                       |                    | Principal Balance     
|                       |                    |                       
|                       |                    | Fixed Rate             |   | Adjustable Rate |         | Total
|(Dollars in thousands) |                    |                        |   |                 |         |      
|Interval               |                    |                        |   |                 |         |       |   |           |           |  |   |          
|                       | <3 months          |                        | $ | 9,769           |         |       | $ | 1,259,550 |           |  | $ | 1,269,319 |          
|                       | >3 to 6 months     |                        |   | 2,613           |         |       |   | 725,715   |           |  |   | 728,328   |          
|                       | >6 to 12 months    |                        |   | 6,601           |         |       |   | 49,131    |           |  |   | 55,732    |          
|                       | >1 to 2 years      |                        |   | 7,719           |         |       |   |          |           |  |   | 7,719     |          
|                       | >2 to 5 years      |                        |   | 29,702          |         |       |   | 579       |           |  |   | 30,281    |          
|                       | >5 to 10 years     |                        |   | 47,544          |         |       |   |          |           |  |   | 47,544    |          
|                       | >10 to 20 years    |                        |   | 24,941          |         |       |   |          |           |  |   | 24,941    |          
|                       | More than 20 years |                        |   | 65,227          |         |       |   |          |           |  |   | 65,227    |          
|                       |                    |                        |   |                 |         |       |   |           |           |  |   |          
|                       |                    | Gross loans receivable |   | $               | 194,116 |       |   | $         | 2,034,975 |  |   | $         | 2,229,091 | 
|                       |                    |                        |   |                 |         |       |   |           |           |  |   |          

At December 31, 2002, the Banks
loans-to-one-borrower limit was $30.9 million based upon
the 15% of unimpaired capital and surplus measurement. At
December 31, 2002, the Banks largest relationship
consisted of one borrower with outstanding commitments of
$16.8 million, which consisted of approximately
7 loans, with $15.2 million secured by income property
development real estate, $1.3 million secured by income
property mutli-family real estate and $0.3 million secured
by land. All of these loans were performing in accordance with
their terms.

Approximately 96.7% and 97.8% of the Banks
loan portfolio were concentrated in Southern California at
December 31, 2002 and 2001, respectively.

19



---



##### Table of Contents



The table below sets forth, by contractual
maturity, the Banks loan portfolio at December 31,
2002. The table below reflects contractual loan maturities and
does not consider amortization and prepayments of loan principal.

|                            |                                |              |         |            |        |           |         |          |        |             |         |         |   |   |           |         |     |   |           |         |        | 
|--------------------------- | ------------------------------ | ------------ | ------- | ---------- | ------ | --------- | ------- | -------- | ------ | ----------- | ------- | ------- | - | - | --------- | ------- | --- | - | --------- | ------- | ------ | 
|                            |                                |             
|                            |                                | Maturing in:
|                            |                                |             
|                            |                                | Less than    |         | One to     |        | Five to   |         | Over Ten |        | Total Loans
|                            |                                | One Year     |         | Five Years |        | Ten Years |         | Years    |        | Receivable 
|(Dollars in thousands)      |                                |              |         |            |        |           |         |          |        |            
|Single family residential   |                                | $            | 9,183   |            |        | $         | 14,886  |          |        | $           | 40,188  |         |   | $ | 789,963   |         |     | $ | 854,220   |        
|Income property:            |                                |              |         |            |        |           |         |          |        |             |         |         |   |   |           |         |     |   |           |        
|                            | Multi-family                   |              |         | 7,206      |        |           |         | 55,027   |        |             |         | 169,610 |   |   |           | 458,294 |     |   |           | 690,137 |       
|                            | Commercial                     |              |         | 36,822     |        |           |         | 75,938   |        |             |         | 248,702 |   |   |           | 30,076  |     |   |           | 391,538 |       
|                            | Development                    |              |         |            |        |           |         |          |        |             |         |         |   |   |           |         |     |   |           |         |       
|                            |                                | Multi-family |         |            | 53,976 |           |         |          | 31,173 |             |         |         |  |   |           |         | 506 |   |           |         | 85,655 | 
|                            |                                | Commercial   |         |            | 28,267 |           |         |          | 21,047 |             |         |         |  |   |           |         |    |   |           |         | 49,314 | 
|Single family construction: |                                |              |         |            |        |           |         |          |        |             |         |         |   |   |           |         |     |   |           |        
|                            | Single family residential      |              |         | 83,692     |        |           |         | 30,945   |        |             |         |        |   |   |           |        |     |   |           | 114,637 |       
|Land                        |                                |              | 25,454  |            |        |           | 4,598   |          |        |             | 2,388   |         |   |   | 172       |         |     |   | 32,612    |        
|Other                       |                                |              | 2,861   |            |        |           | 3,098   |          |        |             |        |         |   |   | 5,019     |         |     |   | 10,978    |        
|                            |                                |              |         |            |        |           |         |          |        |             |         |         |   |   |           |         |     |   |           |        
|Gross loans receivable(1)   |                                | $            | 247,461 |            |        | $         | 236,712 |          |        | $           | 460,888 |         |   | $ | 1,284,030 |         |     | $ | 2,229,091 |        
|                            |                                |              |         |            |        |           |         |          |        |             |         |         |   |   |           |         |     |   |           |        
|Less:                       |                                |              |         |            |        |           |         |          |        |             |         |         |   |   |           |         |     |   |           |        
|                            | Undisbursed funds              |              |         |            |        |           |         |          |        |             |         |         |   |   |           |         |     |   |           | (90,596 | )     
|                            | Deferred (fees) and costs, net |              |         |            |        |           |         |          |        |             |         |         |   |   |           |         |     |   |           | 11,069  |       
|                            | Allowance for credit losses    |              |         |            |        |           |         |          |        |             |         |         |   |   |           |         |     |   |           | (35,309 | )     
|                            |                                |              |         |            |        |           |         |          |        |             |         |         |   |   |           |         |     |   |           |        
|Net loans receivable        |                                |              |         |            |        |           |         |          |        |             |         |         |   |   |           |         |     | $ | 2,114,255 |        
|                            |                                |              |         |            |        |           |         |          |        |             |         |         |   |   |           |         |     |   |           |        



---



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

20



---



##### Table of Contents





| |              
| | -------------
| | Asset Quality

The Bank 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
Banks problem asset classifications are discussed below.



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

The Bank generally ceases to accrue interest on a
loan when: 1) principal or interest has been contractually
delinquent for a period of 90 days or more unless the loan
is both well secured and in the process of collection; or,
2) full collection of principal and/or interest is not
reasonably assured. In addition, classified construction loans
for which interest is being paid from interest reserve loan
funds rather than the borrowers own funds may also be
placed on nonaccrual status. 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 Bank generally classifies as substandard
(1) real estate owned (REO),
(2) nonaccrual loans, and (3) other loans that have
been adversely classified pursuant to OTS regulations and
guidelines (performing/classified). Performing loans
are classified consistent with the Banks classification
policies. See Item 7  Managements
Discussion and Analysis of Financial Condition and Results of
Operations, Critical Accounting Policies, for further
discussion of loan classifications, contained herein.

21



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##### Table of Contents



The table below sets forth information concerning
the Bank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
Banks classification policies and OTS regulations and
guidelines (performing/classified loans).

|                                                                       |                                                                                              |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |        |        | 
|---------------------------------------------------------------------- | -------------------------------------------------------------------------------------------- | --------------------------------- | --------- | ------ | ------ | ---- | --------- | ------ | ------ | ---- | --------- | ------ | ------ | - | --------- | ------ | ------ | - | --------- | ------ | ------ | 
|                                                                       |                                                                                              |                                  
|                                                                       |                                                                                              | December 31,                     
|                                                                       |                                                                                              |                                  
|                                                                       |                                                                                              | 2002                              |           | 2001   |        | 2000 |           | 1999   |        | 1998
|(Dollars in thousands)                                                 |                                                                                              |                                   |           |        |        |      |           |        |        |     
|Risk elements:                                                         |                                                                                              |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|                                                                       | Nonaccrual loans(1)                                                                          |                                   | $         | 7,675  |        |      | $         | 20,666 |        |      | $         | 31,601 |        |   | $         | 44,031 |        |   | $         | 47,688 |       
|                                                                       | Real estate owned, net                                                                       |                                   |           |       |        |      |           | 1,312  |        |      |           | 2,859  |        |   |           | 5,587  |        |   |           | 4,070  |       
|                                                                       |                                                                                              |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|                                                                       |                                                                                              |                                   | 7,675     |        |        |      | 21,978    |        |        |      | 34,460    |        |        |   | 49,618    |        |        |   | 51,758    |       
|                                                                       | Performing loans classified substandard or
    lower(2)                                      |                                   |           | 16,002 |        |      |           | 37,341 |        |      |           | 40,642 |        |   |           | 25,646 |        |   |           | 45,397 |       
|                                                                       |                                                                                              |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|                                                                       |                                                                                              | Total classified assets           |           | $      | 23,677 |      |           | $      | 59,319 |      |           | $      | 75,102 |   |           | $      | 75,264 |   |           | $      | 97,155 | 
|                                                                       |                                                                                              |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|                                                                       |                                                                                              | Total classified loans            |           | $      | 23,677 |      |           | $      | 58,007 |      |           | $      | 72,243 |   |           | $      | 69,677 |   |           | $      | 93,085 | 
|                                                                       |                                                                                              |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|Loans restructured and paying in accordance with
    modified terms(3) |                                                                                              | $                                 | 2,468     |        |        | $    | 4,506     |        |        | $    | 14,933    |        |        | $ | 15,394    |        |        | $ | 27,334    |       
|                                                                       |                                                                                              |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|Gross loans before allowance for credit losses                         |                                                                                              | $                                 | 2,149,564 |        |        | $    | 1,739,885 |        |        | $    | 1,637,517 |        |        | $ | 1,469,253 |        |        | $ | 1,343,902 |       
|                                                                       |                                                                                              |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|Loans receivable, net of specific allowance                            |                                                                                              | $                                 | 2,149,376 |        |        | $    | 1,736,310 |        |        | $    | 1,631,721 |        |        | $ | 1,468,445 |        |        | $ | 1,338,718 |       
|                                                                       |                                                                                              |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|Delinquent loans                                                       |                                                                                              |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|                                                                       | 30-89 days                                                                                   |                                   | $         | 5,357  |        |      | $         | 2,742  |        |      | $         | 12,407 |        |   | $         | 9,063  |        |   | $         | 37,308 |       
|                                                                       | 90 + days                                                                                    |                                   |           | 7,175  |        |      |           | 4,982  |        |      |           | 14,509 |        |   |           | 14,916 |        |   |           | 13,832 |       
|                                                                       |                                                                                              |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|                                                                       |                                                                                              | Total delinquent loans            |           | $      | 12,532 |      |           | $      | 7,724  |      |           | $      | 26,916 |   |           | $      | 23,979 |   |           | $      | 51,140 | 
|                                                                       |                                                                                              |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|Allowance for credit losses:                                           |                                                                                              |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|                                                                       | General                                                                                      |                                   | $         | 35,121 |        |      | $         | 27,027 |        |      | $         | 23,654 |        |   | $         | 23,477 |        |   | $         | 11,927 |       
|                                                                       | Specific(4)                                                                                  |                                   |           | 188    |        |      |           | 3,575  |        |      |           | 5,796  |        |   |           | 808    |        |   |           | 5,184  |       
|                                                                       |                                                                                              |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|                                                                       |                                                                                              | Total allowance for credit losses |           | $      | 35,309 |      |           | $      | 30,602 |      |           | $      | 29,450 |   |           | $      | 24,285 |   |           | $      | 17,111 | 
|                                                                       |                                                                                              |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|                                                                       | Total allowance for credit losses to gross loans                                             |                                   |           | 1.64   | %      |      |           | 1.76   | %      |      |           | 1.80   | %      |   |           | 1.65   | %      |   |           | 1.27   | %     
|                                                                       |                                                                                              |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|                                                                       | Total general allowance for credit losses to
    loans receivable, net of specific allowance |                                   |           | 1.63   | %      |      |           | 1.56   | %      |      |           | 1.45   | %      |   |           | 1.60   | %      |   |           | 0.89   | %     
|                                                                       |                                                                                              |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|Core capital                                                           |                                                                                              | $                                 | 183,942   |        |        | $    | 154,981   |        |        | $    | 140,387   |        |        | $ | 127,160   |        |        | $ | 108,673   |       
|                                                                       |                                                                                              |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|Risk-based capital                                                     |                                                                                              | $                                 | 206,175   |        |        | $    | 169,278   |        |        | $    | 151,914   |        |        | $ | 139,815   |        |        | $ | 119,400   |       
|                                                                       |                                                                                              |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|Ratio of classified assets to:                                         |                                                                                              |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|                                                                       | Loans receivable, net of specific allowance                                                  |                                   |           | 1.10   | %      |      |           | 3.42   | %      |      |           | 4.60   | %      |   |           | 5.13   | %      |   |           | 7.26   | %     
|                                                                       |                                                                                              |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|                                                                       | Bank core capital and general allowance for
    credit losses                                |                                   |           | 10.81  | %      |      |           | 32.59  | %      |      |           | 45.78  | %      |   |           | 49.96  | %      |   |           | 80.56  | %     
|                                                                       |                                                                                              |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|                                                                       | Core capital                                                                                 |                                   |           | 12.87  | %      |      |           | 38.28  | %      |      |           | 53.50  | %      |   |           | 59.19  | %      |   |           | 89.40  | %     
|                                                                       |                                                                                              |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       
|                                                                       | Risk-based capital                                                                           |                                   |           | 11.48  | %      |      |           | 35.04  | %      |      |           | 49.44  | %      |   |           | 53.83  | %      |   |           | 81.37  | %     
|                                                                       |                                                                                              |                                   |           |        |        |      |           |        |        |      |           |        |        |   |           |        |        |   |           |       

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---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The interest income recognized on loans that were
    on nonaccrual status at December 31, 2002, 2001, 2000, 1999
    and 1998 was $0.1 million, $0.2 million,
    $1.7 million, $2.3 million and $3.3 million,
    respectively. If these loans had been performing for the entire
    year, the income recognized would have been $0.4 million,
    $1.8 million, $3.3 million, $4.5 million and
    $4.9 million for 2002, 2001, 2000, 1999 and 1998,
    respectively. As of February 28, 2003, nonaccrual loans
    increased to $13.8 million primarily due to one
    $5.9 million commercial loan.                                       
|   
|(2) | Excludes nonaccrual loans. As of
    February 28, 2003, performing loans classified as
    substandard increased to $17.6 million primarily due to one
    $2.1 million single family residential loan.                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(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 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. This loan was sold
    in March 2002.

The Bank held no other real estate owned
properties at December 31, 2002, compared with
$1.3 million at December 31, 2001. Net loan
charge-offs were $3.4 million (0.16% of loans, net of
specific allowance) and $2.2 million (0.13% of loans, net
of specific allowance) for the years ended 2002 and 2001,
respectively. Net loan charge-offs for the fourth quarter of
2002 and 2001 were $0.6 million and $13 thousand,
respectively. Classified assets, nonaccrual loans and real
estate owned properties continue to be at the lowest levels in
over fifteen years. The Banks specific valuation allowance
decreased from $3.6 million at December 31, 2001 to
$0.2 million at December 31, 2002, as a result of
current year charge-offs, which were anticipated and
specifically reserved in the 2001 allowance.

The table below sets forth information concerning
the Banks gross classified loans, by category, as of
December 31, 2002.

|                             |                        |                 |   |            |   |           |       |                  |       |           |    |       |   |   |       |        |   |  |    |    |   |   |        |        |       | 
|---------------------------- | ---------------------- | --------------- | - | ---------- | - | --------- | ----- | ---------------- | ----- | --------- | -- | ----- | - | - | ----- | ------ | - |  | -- | -- | - | - | ------ | ------ | ----- | 
|                             |                        | Number of       |   | Nonaccrual |   | Number of |       | Other Classified |       | Number of |    |      
|                             |                        | Loans           |   | Loans      |   | Loans     |       | Loans            |       | Loans     |    | Total
|(Dollars in thousands)       |                        |                 |   |            |   |           |       |                  |       |           |    |      
|Single family residential(1) |                        |                 | 7 |            |   | $         | 2,262 |                  |       |           | 11 |       |   | $ | 8,034 |        |   |  | 18 |    |   | $ | 10,325 |       
|Income property:             |                        |                 |   |            |   |           |       |                  |       |           |    |       |   |   |       |        |   |  |    |    |   |   |        |       
|                             | Multi-family           |                 |   | 2          |   |           |       | 798              |       |           |    | 3     |   |   |       | 1,103  |   |  |    | 5  |   |   |        | 1,909  |      
|                             | Commercial(2)          |                 |   | 3          |   |           |       | 2,761            |       |           |    | 2     |   |   |       | 2,677  |   |  |    | 5  |   |   |        | 5,445  |      
|                             | Development:           |                 |   |            |   |           |       |                  |       |           |    |       |   |   |       |        |   |  |    |    |   |   |        |        |      
|                             |                        | Multi-family(3) |   |            | 1 |           |       |                  | 1,697 |           |    |       |  |   |       |        |  |  |    |    | 1 |   |        |        | 1,698 | 
|                             |                        | Commercial      |   |            |   |           |       |                  |      |           |    |       |   |   |       |        |  |  |    |    |   |   |        |        |      | 
|Land                         |                        |                 | 1 |            |   |           | 153   |                  |       |           | 3  |       |   |   | 4,188 |        |   |  | 4  |    |   |   | 4,348  |       
|Other                        |                        |                 | 2 |            |   |           | 4     |                  |       |           |   |       |   |   |      |        |   |  | 2  |    |   |   | 6      |       
|                             |                        |                 |   |            |   |           |       |                  |       |           |    |       |   |   |       |        |   |  |    |    |   |   |        |       
|                             | Gross classified loans |                 |   | 16         |   |           | $     | 7,675            |       |           |    | 19    |   |   | $     | 16,002 |   |  |    | 35 |   |   | $      | 23,731 |      
|                             |                        |                 |   |            |   |           |       |                  |       |           |    |       |   |   |       |        |   |  |    |    |   |   |        |       



---



|    |                                                                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As of December 31, 2002, included one single
    family residential loan nonaccrual with a balance of
    $1.4 million and a loan to value (LTV) of
    72.35%.                                                                                    
|   
|(2) | Included one commercial property nonaccrual loan
    with a balance of $2.2 million, representing 29.29% of
    total nonaccrual loans. As of December 31, 2002, the LTV
    for this loan was 71.37%.                                               
|   
|(3) | As of December 31, 2002, included one
    multi-family construction nonaccrual loan with a balance of
    $1.7 million and a LTV of 78.83% (based on total commitment
    of $2.7 million divided by the retail sell-out
    value of the project).

23



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| |                            
| | ---------------------------
| | 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 Statement of Financial
Accounting Standards (SFAS) No. 5,
Accounting for Contingencies, and
SFAS No. 114, as amended by SFAS No. 118,
Accounting by Creditors for Impairment of a Loan,
Staff Accounting Bulletin (SAB) 102,
Selected Loan Loss Allowance Methodology and Documentation
Issues, as well as standards established by regulatory
Interagency Policy Statements on the Allowance for Loan and
Lease Losses (ALLL). The allowance for credit losses
represents managements estimate of losses inherent in the
Banks loan portfolio as of the balance sheet date.
Management evaluates the adequacy of the allowance on a
quarterly basis by reviewing its loan portfolios to identify
these inherent losses and to assess the overall probability of
collection of these portfolios. Included in this quarterly
review is the monitoring of delinquencies, default and
historical loss experience, among other factors impacting
portfolio risk. The Banks methodology for assessing the
appropriate allowance level consists of several components,
which include the allocated general valuation allowance
(GVA), specific valuation allowances
(SVA) for identified loans and the unallocated
allowance. See Item 7  Managements
Discussion and Analysis of Financial Condition and Results of
Operations, Critical Accounting Policies  Allowance
for Credit Losses contained herein.

The Bank maintains an allowance for credit
losses, GVA, which is not tied to individual loans or
properties. GVAs are maintained for each of the Banks
principal loan portfolio components and supplemented by periodic
additions through provisions for credit losses. In measuring the
adequacy of the Banks GVA, management considers
(1) the Banks historical loss experience for each
loan portfolio component and in total, (2) the historical
migration of loans within each portfolio component and in total,
(3) observable trends in the performance of each loan
portfolio component, and (4) additional analyses to
validate the reasonableness of the Banks GVA balance,
such as the FFIEC Interagency Examiner Benchmark and
review of peer information. The GVA includes an unallocated
amount, based upon managements evaluation of various
conditions, such as general economic and business conditions
affecting the Banks key lending areas, the effects of
which are not directly measured in the determination of the
GVA 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 components.
Management currently intends to maintain an unallocated
allowance, in the range of between 3% and 5% of the total GVA,
for the inherent risk associated with imprecision in estimating
the allowance, and up to approximately 5% to account for the
economic uncertainty in Southern California until economic or
other conditions warrant a reassessment of the level of the
unallocated GVA. However, if economic conditions were to
deteriorate beyond the weaknesses currently considered by
management, it is possible that the GVA would be deemed
insufficient for the inherent losses in the loan portfolio and
further provision might be required. This could negatively
impact earnings for the relevant period. See
Item 7  Managements Discussion and
Analysis of Financial Condition and Results of Operations,
Critical Accounting Policies  Allowance for Credit
Losses, included herein.

24



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##### Table of Contents



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

|                                                               |                             |                           |       |        |       |        |   |       |       |        |   |       |       |        |   |       |       |        |   |       |       |        |  
|-------------------------------------------------------------- | --------------------------- | ------------------------- | ----- | ------ | ----- | ------ | - | ----- | ----- | ------ | - | ----- | ----- | ------ | - | ----- | ----- | ------ | - | ----- | ----- | ------ | -
|                                                               |                             |                          
|                                                               |                             | December 31,             
|                                                               |                             |                          
|                                                               |                             | 2002                      |       | 2001   |       | 2000   |   | 1999  |       | 1998  
|(Dollars in thousands)                                         |                             |                           |       |        |       |        |   |       |       |       
|Dollars:                                                       |                             |                           |       |        |       |        |   |       |       |        |   |       |       |        |   |       |       |        |   |      
|                                                               | Single family residential   |                           | $     | 10,822 |       |        | $ | 9,878 |       |        | $ | 8,075 |       |        | $ | 7,095 |       |        | $ | 7,836 |      
|                                                               | Income property:            |                           |       |        |       |        |   |       |       |        |   |       |       |        |   |       |       |        |   |       |      
|                                                               |                             | Multi-family              |       |        | 8,517 |        |   |       | 2,009 |        |   |       | 906   |        |   |       | 646   |        |   |       | 1,063 |       
|                                                               |                             | Commercial                |       |        | 7,272 |        |   |       | 4,531 |        |   |       | 4,236 |        |   |       | 6,907 |        |   |       | 4,334 |       
|                                                               |                             | Development               |       |        | 2,948 |        |   |       | 8,420 |        |   |       | 7,877 |        |   |       | 2,067 |        |   |       | 354   |       
|                                                               | Single family construction: |                           |       |        |       |        |   |       |       |        |   |       |       |        |   |       |       |        |   |       |      
|                                                               |                             | Single family residential |       |        | 1,317 |        |   |       | 2,679 |        |   |       | 4,382 |        |   |       | 3,946 |        |   |       | 789   |       
|                                                               |                             | Tract                     |       |        |      |        |   |       |      |        |   |       | 693   |        |   |       | 855   |        |   |       | 1,092 |       
|                                                               | Land                        |                           |       | 1,211  |       |        |   | 1,818 |       |        |   | 1,914 |       |        |   | 1,470 |       |        |   | 293   |      
|                                                               | Other                       |                           |       | 199    |       |        |   | 144   |       |        |   | 260   |       |        |   | 311   |       |        |   | 1,082 |      
|                                                               | Unallocated                 |                           |       | 3,023  |       |        |   | 1,123 |       |        |   | 1,107 |       |        |   | 988   |       |        |   | 268   |      
|                                                               |                             |                           |       |        |       |        |   |       |       |        |   |       |       |        |   |       |       |        |   |      
|                                                               |                             |                           | Total |        | $     | 35,309 |   |       | $     | 30,602 |   |       | $     | 29,450 |   |       | $     | 24,285 |   |       | $     | 17,111 |  
|                                                               |                             |                           |       |        |       |        |   |       |       |        |   |       |       |        |   |       |       |        |   |      
|Percentage of year end allowance:                              |                             |                           |       |        |       |        |   |       |       |        |   |       |       |        |   |       |       |        |   |      
|                                                               | Single family residential   |                           |       | 30.65  | %     |        |   | 32.28 | %     |        |   | 27.42 | %     |        |   | 29.22 | %     |        |   | 45.80 | %    
|                                                               | Income property:            |                           |       |        |       |        |   |       |       |        |   |       |       |        |   |       |       |        |   |       |      
|                                                               |                             | Multi-family              |       |        | 24.12 |        |   |       | 6.57  |        |   |       | 3.08  |        |   |       | 2.66  |        |   |       | 6.21  |       
|                                                               |                             | Commercial                |       |        | 20.60 |        |   |       | 14.80 |        |   |       | 14.38 |        |   |       | 28.44 |        |   |       | 25.33 |       
|                                                               |                             | Development               |       |        | 8.35  |        |   |       | 27.52 |        |   |       | 26.75 |        |   |       | 8.51  |        |   |       | 2.07  |       
|                                                               | Single family construction: |                           |       |        |       |        |   |       |       |        |   |       |       |        |   |       |       |        |   |       |      
|                                                               |                             | Single family residential |       |        | 3.73  |        |   |       | 8.75  |        |   |       | 14.88 |        |   |       | 16.25 |        |   |       | 4.61  |       
|                                                               |                             | Tract                     |       |        |      |        |   |       |      |        |   |       | 2.35  |        |   |       | 3.52  |        |   |       | 6.38  |       
|                                                               | Land                        |                           |       | 3.43   |       |        |   | 5.94  |       |        |   | 6.50  |       |        |   | 6.05  |       |        |   | 1.71  |      
|                                                               | Other                       |                           |       | 0.56   |       |        |   | 0.47  |       |        |   | 0.88  |       |        |   | 1.28  |       |        |   | 6.32  |      
|                                                               | Unallocated                 |                           |       | 8.56   |       |        |   | 3.67  |       |        |   | 3.76  |       |        |   | 4.07  |       |        |   | 1.57  |      
|                                                               |                             |                           |       |        |       |        |   |       |       |        |   |       |       |        |   |       |       |        |   |      
|                                                               |                             |                           | Total |        |       | 100.00 | % |       |       | 100.00 | % |       |       | 100.00 | % |       |       | 100.00 | % |       |       | 100.00 | %
|                                                               |                             |                           |       |        |       |        |   |       |       |        |   |       |       |        |   |       |       |        |   |      
|Percentage of reserves to total net loans
    (1) by category: |                             |                           |       |        |       |        |   |       |       |        |   |       |       |        |   |       |       |        |   |      
|                                                               | Single family residential   |                           |       | 1.27   | %     |        |   | 1.08  | %     |        |   | 0.91  | %     |        |   | 1.05  | %     |        |   | 1.38  | %    
|                                                               | Income property:            |                           |       |        |       |        |   |       |       |        |   |       |       |        |   |       |       |        |   |       |      
|                                                               |                             | Multi-family              |       |        | 1.24  |        |   |       | 0.79  |        |   |       | 0.36  |        |   |       | 0.29  |        |   |       | 0.43  |       
|                                                               |                             | Commercial                |       |        | 1.88  |        |   |       | 1.93  |        |   |       | 2.26  |        |   |       | 3.26  |        |   |       | 2.11  |       
|                                                               |                             | Development               |       |        | 3.00  |        |   |       | 4.92  |        |   |       | 6.05  |        |   |       | 2.08  |        |   |       | 0.77  |       
|                                                               | Single family construction: |                           |       |        |       |        |   |       |       |        |   |       |       |        |   |       |       |        |   |       |      
|                                                               |                             | Single family residential |       |        | 1.75  |        |   |       | 2.57  |        |   |       | 3.53  |        |   |       | 2.18  |        |   |       | 0.53  |       
|                                                               |                             | Tract                     |       |        |      |        |   |       |      |        |   |       | 20.01 |        |   |       | 5.12  |        |   |       | 2.65  |       
|                                                               | Land                        |                           |       | 3.71   |       |        |   | 3.73  |       |        |   | 4.21  |       |        |   | 2.93  |       |        |   | 0.53  |      
|                                                               | Other                       |                           |       | 4.20   |       |        |   | 2.18  |       |        |   | 3.06  |       |        |   | 2.24  |       |        |   | 2.93  |      
|                                                               |                             |                           | Total |        |       | 1.65   | % |       |       | 1.77   | % |       |       | 1.80   | % |       |       | 1.65   | % |       |       | 1.27   | %



---



|    |                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Percent of allowance for credit losses to net
    loan portfolio, excluding net deferred fees and costs. The
    change in the percentage of allowance to total loans by category
    is a result of different levels of classified assets within each
    category.

25



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

|                                                                            |                             |                           |           |      |        |      |           |        |     |      |           |      |      |   |           |        |      |   |           |        |        |  
|--------------------------------------------------------------------------- | --------------------------- | ------------------------- | --------- | ---- | ------ | ---- | --------- | ------ | --- | ---- | --------- | ---- | ---- | - | --------- | ------ | ---- | - | --------- | ------ | ------ | -
|                                                                            |                             |                          
|                                                                            |                             | Year Ended December 31,  
|                                                                            |                             |                          
|                                                                            |                             | 2002                      |           | 2001 |        | 2000 |           | 1999   |     | 1998
|(Dollars in thousands)                                                      |                             |                           |           |      |        |      |           |        |     |     
|Average loans outstanding                                                   |                             | $                         | 1,833,856 |      |        | $    | 1,696,785 |        |     | $    | 1,547,206 |      |      | $ | 1,411,697 |        |      | $ | 1,081,382 |       
|                                                                            |                             |                           |           |      |        |      |           |        |     |      |           |      |      |   |           |        |      |   |           |       
|Total allowance for credit losses at beginning of
    period                |                             | $                         | 30,602    |      |        | $    | 29,450    |        |     | $    | 24,285    |      |      | $ | 17,111    |        |      | $ | 13,274    |       
|Acquisition of FFIL Reserve                                                 |                             |                           | 7,189     |      |        |      |          |        |     |      |          |      |      |   |          |        |      |   |          |       
|Provision for credit losses                                                 |                             |                           | 870       |      |        |      | 3,400     |        |     |      | 6,000     |      |      |   | 12,000    |        |      |   | 7,135     |       
|Charge-offs:                                                                |                             |                           |           |      |        |      |           |        |     |      |           |      |      |   |           |        |      |   |           |       
|                                                                            | Single family residential   |                           |           | (476 | )      |      |           | (2,289 | )   |      |           | (354 | )    |   |           | (1,910 | )    |   |           | (1,178 | )     
|                                                                            | Income property:            |                           |           |      |        |      |           |        |     |      |           |      |      |   |           |        |      |   |           |        |       
|                                                                            |                             | Multi-family              |           |      |       |      |           |        | (26 | )    |           |      |     |   |           |        | (186 | ) |           |        | (1,038 | )
|                                                                            |                             | Commercial                |           |      | (665   | )    |           |        |    |      |           |      | (573 | ) |           |        | (512 | ) |           |        | (815   | )
|                                                                            |                             | Development               |           |      | (2,246 | )    |           |        |    |      |           |      |     |   |           |        |     |   |           |        |       |  
|                                                                            | Single family construction: |                           |           |      |        |      |           |        |     |      |           |      |      |   |           |        |      |   |           |        |       
|                                                                            |                             | Single family residential |           |      |       |      |           |        | (43 | )    |           |      |     |   |           |        |     |   |           |        | (267   | )
|                                                                            |                             | Tract                     |           |      |       |      |           |        |    |      |           |      | (147 | ) |           |        |     |   |           |        |       |  
|                                                                            | Land                        |                           |           |     |        |      |           |       |     |      |           |     |      |   |           | (1,140 | )    |   |           |       |       
|                                                                            | Other                       |                           |           |     |        |      |           |       |     |      |           | (10  | )    |   |           | (1,124 | )    |   |           |       |       
|Recoveries:                                                                 |                             |                           |           |      |        |      |           |        |     |      |           |      |      |   |           |        |      |   |           |       
|                                                                            | Single family residential   |                           |           |     |        |      |           |       |     |      |           |     |      |   |           |       |      |   |           |       |       
|                                                                            | Income property:            |                           |           |      |        |      |           |        |     |      |           |      |      |   |           |        |      |   |           |        |       
|                                                                            |                             | Multi-family              |           |      |       |      |           |        |    |      |           |      |     |   |           |        |     |   |           |        |       |  
|                                                                            |                             | Commercial                |           |      |       |      |           |        |    |      |           |      |     |   |           |        |     |   |           |        |       |  
|                                                                            | Single family construction: |                           |           |      |        |      |           |        |     |      |           |      |      |   |           |        |      |   |           |        |       
|                                                                            |                             | Single family residential |           |      |       |      |           |        |    |      |           |      |     |   |           |        |     |   |           |        |       |  
|                                                                            |                             | Tract                     |           |      |       |      |           |        |    |      |           |      |     |   |           |        |     |   |           |        |       |  
|                                                                            | Land                        |                           |           |     |        |      |           |       |     |      |           |     |      |   |           |       |      |   |           |       |       
|                                                                            | Other                       |                           |           | 35   |        |      |           | 110    |     |      |           | 249  |      |   |           | 46     |      |   |           |       |       
|                                                                            |                             |                           |           |      |        |      |           |        |     |      |           |      |      |   |           |        |      |   |           |       
|Net charge-offs                                                             |                             |                           | (3,352    | )    |        |      | (2,248    | )      |     |      | (835      | )    |      |   | (4,826    | )      |      |   | (3,298    | )     
|                                                                            |                             |                           |           |      |        |      |           |        |     |      |           |      |      |   |           |        |      |   |           |       
|Total allowance for credit losses at end of period                          |                             | $                         | 35,309    |      |        | $    | 30,602    |        |     | $    | 29,450    |      |      | $ | 24,285    |        |      | $ | 17,111    |       
|                                                                            |                             |                           |           |      |        |      |           |        |     |      |           |      |      |   |           |        |      |   |           |       
|Ratio of net charge-offs to average loans
    outstanding during the period |                             |                           | 0.18      | %    |        |      | 0.13      | %      |     |      | 0.05      | %    |      |   | 0.34      | %      |      |   | 0.30      | %     
|Ratio of allowance to average loans outstanding                             |                             |                           | 1.93      | %    |        |      | 1.80      | %      |     |      | 1.90      | %    |      |   | 1.72      | %      |      |   | 1.58      | %     
|Ratio of charge-off to specific allowance at
    beginning of period        |                             |                           | 93.76     | %    |        |      | 38.79     | %      |     |      | 103.34    | %    |      |   | 93.09     | %      |      |   | 85.04     | %     



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

Real estate acquired in satisfaction of loans is
transferred to REO at the lower of cost or the estimated fair
values, less the estimated costs to sell the property
(fair value). 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. The fair value of collateral includes capitalized costs.
Any subsequent declines in the fair value of the REO after the
date of transfer are recorded through a write-down of the asset.
Prior to 2000, any

26



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##### Table of Contents



subsequent declines in the fair value of the REO
after the date of transfer were recorded through the
establishment of, or additions to an allowance.


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

|                          |                      |                         |   |      |  |      |       |   |  |   |       |   | 
|------------------------- | -------------------- | ----------------------- | - | ---- |  | ---- | ----- | - |  | - | ----- | - | 
|                          |                      |                        
|                          |                      | Year Ended December 31,
|                          |                      |                        
|                          |                      | 2002                    |   | 2001 |  | 2000
|(Dollars in thousands)    |                      |                         |   |      |  |     
|Single family residential |                      | $                       |  |      |  | $    | 1,312 |   |  | $ | 2,859 |  
|                          | Allowance for losses |                         |   |     |  |      |       |  |  |   |       |  | 
|                          |                      |                         |   |      |  |      |       |   |  |   |       |  
|Real estate owned, net    |                      | $                       |  |      |  | $    | 1,312 |   |  | $ | 2,859 |  
|                          |                      |                         |   |      |  |      |       |   |  |   |       |  

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

|                                                  |                      |                         |   |      |  |      |   |      |  |      |    |     |   |   |    |     |   |   |       |        |  
|------------------------------------------------- | -------------------- | ----------------------- | - | ---- |  | ---- | - | ---- |  | ---- | -- | --- | - | - | -- | --- | - | - | ----- | ------ | -
|                                                  |                      |                        
|                                                  |                      | Year Ended December 31,
|                                                  |                      |                        
|                                                  |                      | 2002                    |   | 2001 |  | 2000 |   | 1999 |  | 1998
|(Dollars in thousands)                            |                      |                         |   |      |  |      |   |      |  |     
|Total allowance for losses at beginning of period |                      | $                       |  |      |  | $    |  |      |  | $    | 29 |     |   | $ | 45 |     |   | $ | 2,563 |       
|                                                  | Provision for losses |                         |   |     |  |      |   |     |  |      |    |    |   |   |    | 80  |   |   |       | 60     |  
|                                                  | Charge-offs          |                         |   |     |  |      |   |     |  |      |    | (29 | ) |   |    | (96 | ) |   |       | (2,578 | )
|                                                  |                      |                         |   |      |  |      |   |      |  |      |    |     |   |   |    |     |   |   |       |       
|Total allowance for losses at end of period       |                      | $                       |  |      |  | $    |  |      |  | $    |   |     |   | $ | 29 |     |   | $ | 45    |       
|                                                  |                      |                         |   |      |  |      |   |      |  |      |    |     |   |   |    |     |   |   |       |       



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

Investment securities that management has the
positive intent and ability to hold to maturity are classified
as held-to-maturity and recorded at amortized cost.
Securities not classified as held-to-maturity or trading,
including equity securities with readily determinable fair
values, are classified as available-for-sale and
recorded at fair value, with unrealized gains and losses
excluded from earnings and reported in other comprehensive
income, as part of stockholders equity. Currently, all
investment securities of the Bank are classified as
available-for-sale.

Declines in the fair value of held-to-maturity
and available-for-sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as
realized losses. Gains and losses on the sale of securities are
recorded on the trade date and are determined using the specific
identification method. Purchase premiums and discounts are
recognized in interest income using the interest method over the
estimated lives of the securities. See
Item 7  Managements Discussion and
Analysis of Financial Condition and Results of Operations,
Critical Accounting Policies  Investment
Securities, included herein.

The table below sets forth the net balance at
cost and fair value of available-for-sale investment securities,
with gross unrealized gains and losses.

|                                             |                                           |                   |   |            |         |            |   |       |       |  |   |    |    |  |   |         |         | 
|-------------------------------------------- | ----------------------------------------- | ----------------- | - | ---------- | ------- | ---------- | - | ----- | ----- |  | - | -- | -- |  | - | ------- | ------- | 
|                                             |                                           |                  
|                                             |                                           | December 31, 2002
|                                             |                                           |                  
|                                             |                                           |                   |   | Gross      |         | Gross      |   |      
|                                             |                                           | Net Balance       |   | Unrealized |         | Unrealized |   | Fair 
|                                             |                                           | at Cost           |   | Gains      |         | Losses     |   | Value
|(Dollars in thousands)                       |                                           |                   |   |            |         |            |   |      
|Investment securities
    available-for-sale |                                           |                   |   |            |         |            |   |       |       |  |   |    |    |  |   |        
|                                             | Debt securities:                          |                   |   |            |         |            |   |       |       |  |   |    |    |  |   |         |        
|                                             | Mortgage-backed securities                |                   | $ | 145,294    |         |            | $ | 1,541 |       |  | $ |   |    |  | $ | 146,835 |        
|                                             | Collateralized mortgage obligations (CMO) |                   |   | 119,663    |         |            |   | 1,154 |       |  |   | 56 |    |  |   | 120,761 |        
|                                             |                                           |                   |   |            |         |            |   |       |       |  |   |    |    |  |   |        
|                                             |                                           | Total             |   | $          | 264,957 |            |   | $     | 2,695 |  |   | $  | 56 |  |   | $       | 267,596 | 
|                                             |                                           |                   |   |            |         |            |   |       |       |  |   |    |    |  |   |        

27



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##### Table of Contents



The table below sets forth the net balance at
cost and fair value of available-for-sale debt securities by
contractual maturity at December 31, 2002.

|                                             |                                |                    |   |          |         |          |   |         |         |  |  |      |      |  
|-------------------------------------------- | ------------------------------ | ------------------ | - | -------- | ------- | -------- | - | ------- | ------- |  |  | ---- | ---- | -
|                                             |                                |                   
|                                             |                                | Available-for-Sale
|                                             |                                |                   
|                                             |                                |                    |   | Weighted
|                                             |                                | Net Balance        |   | Fair     |         | Average 
|                                             |                                | at Cost            |   | Value    |         | Yield(1)
|(Dollars in thousands)                       |                                |                    |   |          |         |         
|Investment securities
    available-for-sale |                                |                    |   |          |         |          |   |         |         |  |  |     
|Debt securities:                             |                                |                    |   |          |         |          |   |         |         |  |  |     
|                                             | Within 1 year                  |                    | $ |         |         |          | $ |        |         |  |  |     |     
|                                             | After 1 year through 5 years   |                    |   |         |         |          |   |        |         |  |  |     |     
|                                             | After 5 years through 10 years |                    |   | 57,421   |         |          |   | 58,036  |         |  |  | 4.38 | %   
|                                             | Over 10 years                  |                    |   | 207,536  |         |          |   | 209,560 |         |  |  | 4.15 | %   
|                                             |                                |                    |   |          |         |          |   |         |         |  |  |     
|                                             |                                | Total              |   | $        | 264,957 |          |   | $       | 267,596 |  |  |      | 4.20 | %
|                                             |                                |                    |   |          |         |          |   |         |         |  |  |     



---



|    |                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Weighted average yield at the end of the year is
    based on a projected yield using prepayment assumptions in
    calculating the amortized cost of the securities.

At December 31, 2002, the weighted average
effective duration and weighted average life of the Banks
investment securities portfolio were approximately 1.89 and
2.83 years, respectively. The portfolio had a weighted
average coupon of 5.32%. The weighted average book price of the
portfolio was 102.61% (net premium of $6.7 million). The
investment grade CMOs issued by Countrywide Home Loans, included
in the investment securities portfolio, exceeded 10% of
stockholders equity at December 31, 2002; the
cumulative net balance at cost and fair value of these CMOs were
$24.4 million and $24.5 million, respectively.

Proceeds from the sale of available-for-sale
investment securities during the year were $39.4 million.
The Company realized a net gain of $0.1 million on the sale
of various investment securities ($13 thousand in realized
losses).

Two securities with a net balance at cost and a
fair value of $4.9 million at December 31, 2002 were
pledged to secure a FHLB advance of $5.0 million.

Sources of Funds

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

Deposits

At December 31, 2002, the Bank operated
thirteen retail-banking locations with three primary product
lines; (1) checking and savings accounts, (2) money
market accounts, and (3) certificates of deposit. The Bank
currently has thirteen retail branches, seven of which are
located in the South Bay region. The Bank also has two branches
in Orange County, two branches in San Diego County and two
branches in the San Fernando Valley, one of which is in
Ventura County. At December 31, 2002, the Banks
retail branches by region each carried an average deposit
balance of $212.1 million, $96.2 million,
$94.8 million and $73.0 million in the Valley, Orange
County, South Bay, and San Diego regions, respectively,
which is substantially higher than most local banking companies.
The Bank does not operate a money desk or otherwise solicit
Brokered Deposits.

The Bank 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

28



---



##### Table of Contents



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,
|                           |       |                        
|                           |       |                         |         |           |  |         
|                           |       | 2002                    |         | 2001      |  | 2000    
|                           |       |                         |         |           |  |         
|                           |       |                         |         | Weighted  |  |          |      |         |   | Weighted |       |          |   |         |         | Weighted  |  |         
|                           |       | Average                 |         | Average   |  | Percent  |      | Average |   | Average  |       | Percent  |   | Average |         | Average   |  | Percent 
|                           |       | Amount                  |         | Cost      |  | of Total |      | Amount  |   | Cost     |       | of Total |   | Amount  |         | Cost      |  | of Total
|(Dollars in thousands)     |       |                         |         |           |  |          |      |         |   |          |       |          |   |         |         |           |  |         
|Noninterest checking       |       | $                       | 37,258  |           |  |          |     |         |   |          | 2.78  | %        |   | $       | 32,956  |           |  |          |     |      |   |  | 2.69  | %      |   | $ | 31,174  |           |  |  |     |      |   |  | 2.67  | %     
|Checking/ NOW              |       |                         | 66,993  |           |  |          | 1.89 | %       |   |          | 5.01  | %        |   |         | 49,014  |           |  |          | 2.48 | %    |   |  | 4.00  | %      |   |   | 39,609  |           |  |  | 2.46 | %    |   |  | 3.39  | %     
|Passbook                   |       |                         | 51,065  |           |  |          | 1.77 | %       |   |          | 3.82  | %        |   |         | 35,345  |           |  |          | 2.52 | %    |   |  | 2.89  | %      |   |   | 26,658  |           |  |  | 2.18 | %    |   |  | 2.28  | %     
|Money market               |       |                         | 378,728 |           |  |          | 2.66 | %       |   |          | 28.32 | %        |   |         | 215,243 |           |  |          | 3.94 | %    |   |  | 17.58 | %      |   |   | 180,815 |           |  |  | 4.99 | %    |   |  | 15.46 | %     
|Certificates of deposit(1) |       |                         | 803,391 |           |  |          | 3.05 | %       |   |          | 60.07 | %        |   |         | 892,016 |           |  |          | 5.54 | %    |   |  | 72.84 | %      |   |   | 891,037 |           |  |  | 5.94 | %    |   |  | 76.20 | %     
|                           |       |                         |         |           |  |          |      |         |   |          |       |          |   |         |         |           |  |          |      |      |   |  |       |        |   |   |         |           |  |  |      |      |   |  |       |       
|                           | Total |                         | $       | 1,337,435 |  |          |      | 2.83    | % |          |       | 100.00   | % |         | $       | 1,224,574 |  |          |      | 5.04 | % |  |       | 100.00 | % |   | $       | 1,169,293 |  |  |      | 5.58 | % |  |       | 100.00 | %
|                           |       |                         |         |           |  |          |      |         |   |          |       |          |   |         |         |           |  |          |      |      |   |  |       |        |   |   |         |           |  |  |      |      |   |  |       |       



---



|    |                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes $150.0 million of state deposits
    placed by the State of California with the Bank. See Notes
    to Consolidated Financial Statements 
    Note 8  Deposits for certificates of
    deposit with balances >$100,000.



| |              
| | -------------
| | FHLB Advances

A primary alternate funding source for the Bank
is a credit line with the FHLB with a maximum advance of up 40%
of the total Bank assets subject to sufficient qualifying
collateral. The FHLB system functions as a source of credit to
savings institutions that are members of the FHLB. Advances are
secured by the Banks mortgage loans, the capital stock of
the FHLB owned by the Bank and certain investment securities
owned by the Bank. Subject to the FHLBs advance policies
and requirements, these advances can be requested for any
business purpose in which the Bank is authorized to engage. In
granting advances, the FHLB considers a members
creditworthiness and other relevant factors. At
December 31, 2002, the Bank had an approved line of credit
with the FHLB for a maximum advance of up to 40% of the
Banks total assets ($996.5 million as of
December 31, 2002) based on qualifying collateral. In
February 2003, the FHLB increased this line of credit to 45% of
total Bank assets. At December 31, 2002, the Bank had
thirty-two FHLB advances outstanding totaling
$599.0 million, which had a weighted averaged interest rate
of 4.12% and a weighted average remaining maturity of
2 years and 7 months.



| |             
| | ------------
| | Senior Notes

During 2002, the Company repurchased the balance
of its 12.5% Senior Notes, the majority of which were
redeemed on December 31, 2002 at the call premium of
106.25%. The Company used proceeds of a $15.0 million
private issuance of trust preferred securities, described
herein, and excess cash at the holding company to repurchase
these notes. The repurchases resulted in an extraordinary item,
net of tax, of $1.1 million, or $0.13 per diluted
share, during the fourth quarter, and $1.2 million, or
$0.15 per diluted share, during the year and will result in
approximately $2.1 million reduction in interest expense in
2003.



| |                   
| | ------------------
| | Capital Securities

In 2001 and 2002, the Company organized four
statutory business trusts and wholly owned subsidiaries of the
Company (the Capital Trusts), which issued an
aggregate of $51.0 million of fixed and floating rate
Capital Securities. 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 the Capital Trusts
(collectively, the Common Securities and together
with the Capital Securities the Trust Securities).
The Capital Trusts exist for the sole purpose of issuing the
Trust Securities and investing the proceeds thereof in fixed
rate and floating rate, junior subordinated deferrable interest
debentures issued by the Company and engaging in certain other
limited activities. Interest on the Capital Securities is
payable semi-annually.

29



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##### Table of Contents



The table below sets forth information concerning
the Companys Capital Securities as of December 31,
2002.

|                       |      |            |  |          |                        |      |  |         |          |      |  |          |         |      |  |              |        |  |  |  |       |   |  |  |       |   |  |  |              |   |  |  |          | 
|---------------------- | ---- | ---------- |  | -------- | ---------------------- | ---- |  | ------- | -------- | ---- |  | -------- | ------- | ---- |  | ------------ | ------ |  |  |  | ----- | - |  |  | ----- | - |  |  | ------------ | - |  |  | -------- | 
|                       |      |            |  |          |                        |      |  |         |          |      |  |          |         |     
|(Dollars in thousands) |      |            |  |          |                        |      |  |         |          |      |  |          |         |     
|                       |      | Date of    |  | Maturity |                        |      |  | Initial |          |      |  |          |         |     
|Ownership              |      | Subsidiary |  | Issuance |                        | Date |  | Amount  |          | Rate |  | Rate Cap |         | Rate |  | Call Date(1)
|                       |      |            |  |          |                        |      |  |         |          |      |  |          |         |      |  |             
|                       | 100% |            |  |          | HFC Capital Trust I    |      |  |         | 3/28/01  |      |  |          | 6/8/31  |      |  | $            | 9,000  |  |  |  | 10.18 | % |  |  | N/A   |   |  |  | Fixed        |   |  |  | 10 Years | 
|                       | 100% |            |  |          | HFC Capital Trust II   |      |  |         | 11/28/01 |      |  |          | 12/8/31 |      |  | $            | 5,000  |  |  |  | 5.17  | % |  |  | 11.00 | % |  |  | LIBOR + 3.75 | % |  |  | 5 Years  | 
|                       | 100% |            |  |          | HFC Capital Trust  III |      |  |         | 4/10/02  |      |  |          | 4/10/32 |      |  | $            | 22,000 |  |  |  | 5.32  | % |  |  | 11.00 | % |  |  | LIBOR + 3.70 | % |  |  | 5 Years  | 
|                       | 100% |            |  |          | HFC Capital Trust IV   |      |  |         | 11/1/02  |      |  |          | 11/1/32 |      |  | $            | 15,000 |  |  |  | 4.97  | % |  |  | 12.00 | % |  |  | LIBOR + 3.35 | % |  |  | 5 Years  | 



---



|    |                                                                            
|--- | ---------------------------------------------------------------------------
|(1) | Exercise of the call option on any of the Capital
    Securities is at par.



| |                                                                   
| | ------------------------------------------------------------------
| | Business Combinations, Goodwill and
    Acquired Intangible Assets

On August 23, 2002, the Company acquired all
of the assets and liabilities of First Fidelity. The acquisition
of First Fidelity was accounted for under the purchase method of
accounting, and accordingly, all assets and liabilities were
adjusted to and recorded at their estimated fair values as of
the acquisition date. Goodwill and other intangible assets
represent the excess of purchase price over the fair value of
net assets acquired by the Company. In accordance with
SFAS No. 141, the Company recorded goodwill for a
purchase business combination to the extent that the purchase
price of the acquisition exceeded the net identifiable assets
and intangible assets of the acquired company. See Notes
to Consolidated Financial Statements 
Note 7  Business Combinations, Goodwill and
Acquired Intangible Assets.

As a result of the adoption of
SFAS No. 142, Goodwill and Other Intangible
Assets, which eliminates amortization of goodwill, the
Company is required to evaluate goodwill annually, or more
frequently if impairment indicators arise. Since the
Companys acquisition of First Fidelity occurred on
August 23, 2002, intangible assets associated with this
acquisition, which has been allocated to the Companys only
operating segment (the Bank), will be evaluated in 2003 and
impairment, if any, will be reflected in the 2003 Financial
Statements. The Company identified no impairment indicators
since the acquisition. The Companys intangible assets,
other than goodwill, are amortized over their estimated useful
lives.

The following tables summarize the fair values of
assets and liabilities and the related premiums, discounts and
goodwill associated with the acquisition:

|                                          |                                           |                     |         |                     |         |              |         |   |         |   |        |     |       | 
|----------------------------------------- | ----------------------------------------- | ------------------- | ------- | ------------------- | ------- | ------------ | ------- | - | ------- | - | ------ | --- | ----- | 
|                                          |                                           |                     |         |                     |         | Premiums/   
|                                          |                                           | Book Values of      |         | Fair Values of      |         | Discounts at
|                                          |                                           | Assets Acquired and |         | Assets Acquired and |         | Date of     
|                                          |                                           | Liabilities Assumed |         | Liabilities Assumed |         | Acquisition 
|(Dollars in thousands)                    |                                           |                     |         |                     |         |             
|Loans receivable, net                     |                                           | $                   | 527,598 |                     |         | $            | 530,122 |   |         | $ | 2,524  |    
|                                          | Discounts/deferred fees on acquired loans |                     |         | (927                | )       |              |         |  |         |   |        | 927 |      
|Intangible assets subject to amortization |                                           |                     |        |                     |         |              |        |   |         |   | 1,524  |    
|Investments                               |                                           |                     | 64,808  |                     |         |              | 64,844  |   |         |   | 36     |    
|Fixed assets                              |                                           |                     | 543     |                     |         |              | 242     |   |         |   | (301   | )  
|FHLB stock                                |                                           |                     | 8,595   |                     |         |              | 8,595   |   |         |   |       |    
|Other assets                              |                                           |                     | 76,428  |                     |         |              | 77,031  |   |         |   | 603    |    
|Deferred tax on valuations                |                                           |                     |        |                     |         |              |        |   |         |   | (1,978 | )  
|                                          |                                           |                     |         |                     |         |              |         |   |         |   |        |    
|                                          |                                           | Total assets        |         |                     | 677,045 |              |         |   | 680,834 |   |        |     | 3,335 | 
|                                          |                                           |                     |         |                     |         |              |         |   |         |   |        |    
|Deposits                                  |                                           |                     | 449,893 |                     |         |              | 453,790 |   |         |   | 3,897  |    
|FHLB advances                             |                                           |                     | 171,902 |                     |         |              | 173,633 |   |         |   | 1,731  |    
|Other liabilities                         |                                           |                     | 6,386   |                     |         |              | 6,386   |   |         |   |       |    
|Deferred tax on valuations                |                                           |                     |        |                     |         |              |        |   |         |   | (2,364 | )  
|                                          |                                           |                     |         |                     |         |              |         |   |         |   |        |    
|                                          |                                           | Total liabilities   |         |                     | 628,181 |              |         |   | 633,809 |   |        |     | 3,264 | 
|                                          |                                           |                     |         |                     |         |              |         |   |         |   |        |    
|Net asset value                           |                                           | $                   | 48,864  |                     |         |              |         |   |         | $ | 71     |    
|                                          |                                           |                     |         |                     |         |              |         |   |         |   |        |    

30



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##### Table of Contents



|                                          |              |                |         |        | 
|----------------------------------------- | ------------ | -------------- | ------- | ------ | 
|                                          |              | Purchase Price
|                                          |              | and Goodwill  
|                                          |              |               
|Purchase Price and Goodwill
    Analysis: |              |                |         |       
|Total consideration                       |              |                | 69,847  |       
|                                          | Direct costs |                |         | 2,058  | 
|                                          |              |                |         |       
|Total purchase price                      |              |                | 71,905  |       
|Net assets acquired                       |              |                | (48,864 | )     
|Net asset valuation                       |              |                | (71     | )     
|                                          |              |                |         |       
|                                          | Goodwill     |                | $       | 22,970 | 
|                                          |              |                |         |       

Premiums and discounts on loans are amortized on
a loan-by-loan basis, using the effective interest method over
the estimated lives of the loans. Discounts on deposits and FHLB
advances are amortized over the respective estimated lives using
the effective interest method. Amortization of premiums and
discounts are reflected in interest income or interest expense
depending on the classification of the related asset or
liability.

The following table summarizes the Companys
intangible assets as of December 31, 2002:

|                                   |                         |                |     |                          |  |                     |    |     |  |  |         |  | 
|---------------------------------- | ----------------------- | -------------- | --- | ------------------------ |  | ------------------- | -- | --- |  |  | ------- |  | 
|                                   |                         |                |     | Accumulated Amortization |  |                    
|                                   |                         |                |     | for the Year Ended       |  |                    
|                                   |                         | Gross Carrying |     | December 31,             |  | Weighted Average   
|                                   |                         | Amount(1)      |     | 2002                     |  | Amortization Period
|(Dollars in thousands)             |                         |                |     |                          |  |                    
|Intangible Assets:                 |                         |                |     |                          |  |                     |    |     |  |  |         | 
|Core deposit intangible  checking |                         | $              | 876 |                          |  | $                   | 60 |     |  |  | 5 years | 
|Core deposit intangible  savings  |                         |                | 648 |                          |  |                     | 76 |     |  |  | 5 years | 
|                                   |                         |                |     |                          |  |                     |    |     |  |  |         | 
|                                   | Total intangible assets |                | $   | 1,524                    |  |                     | $  | 136 |  |  |         |  | 
|                                   |                         |                |     |                          |  |                     |    |     |  |  |         | 



---



|    |                                                         
|--- | --------------------------------------------------------
|(1) | Reflects original amount at the time of
    acquisition.

As of December 31, 2002, the Companys
only intangible assets that are currently being amortized are
core deposit intangibles, with $136 thousand in
amortization expense charged to operating expense for the twelve
months ended December 31, 2002.

The following table summarizes the
premium/discount for fair value adjustments in connection with
the acquisition of First Fidelity:

|                          |  |                   |       |              |  |                |                 |  |  |  |          | 
|------------------------- |  | ----------------- | ----- | ------------ |  | -------------- | --------------- |  |  |  | -------- | 
|                          |  | Balance at        |       | Method of    |  | Estimated     
|                          |  | December 31, 2002 |       | Amortization |  | Remaining Life
|(Dollars in thousands)    |  |                   |       |              |  |               
|Premium on loans(1)       |  | $                 | 1,769 |              |  |                | Interest Method |  |  |  | 20 years | 
|Discount on deposits      |  | $                 | 2,742 |              |  |                | Interest Method |  |  |  | 5 years  | 
|Discount on FHLB advances |  | $                 | 1,190 |              |  |                | Interest Method |  |  |  | 8 years  | 



---



|    |                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Approximately 18% of the premium on loans has an
    estimated remaining life of 16-20 years. However,
    approximately 82% of the total premium has a total weighted
    average remaining life of 9 years.

The following table summarizes estimated future
amortization expense on core deposit intangibles:

|                   |  |                |     | 
|------------------ |  | -------------- | --- | 
|                   |  | Future        
|For the Years      |  | Amortization  
|Ended December 31, |  | Expense       
|                   |  |               
|                   |  | (In thousands)
|2003               |  | $              | 412 | 
|2004               |  |                | 355 | 
|2005               |  |                | 216 | 
|2006               |  |                | 156 | 
|2007               |  |                | 72  | 

31



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##### Table of Contents








|        |           
|------- | ----------
|Item 2. | Properties

As of December 31, 2002, the Company had
fifteen leased and two wholly owned properties. The leased
properties included its corporate headquarters, thirteen 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, 2002. The table
below reflects the principal terms and net book values of
leasehold improvements for leased properties, and the net book
values of the owned properties (i.e. building and land). None of
the leases contain any unusual terms and are all net
or triple net leases.

|                           |                                           |            |          |         |  |         |             |        |  |          |         |   |         |  |        |        |         |   |         |         |         | 
|-------------------------- | ----------------------------------------- | ---------- | -------- | ------- |  | ------- | ----------- | ------ |  | -------- | ------- | - | ------- |  | ------ | ------ | ------- | - | ------- | ------- | ------- | 
|                           |                                           | Expiration |          | Renewal |  | Monthly |             | Square |  | Net Book
|                           |                                           | of term    |          | Options |  | Rental  |             | Feet   |  | Value   
|                           |                                           |            |          |         |  |         |             |        |  |         
|Leased:                    |                                           |            |          |         |  |         |             |        |  |          |         |   |         |  |        |        |         |   |         |        
|El Segundo Corporate       |                                           |            | 11/30/05 |         |  |         | One 5-year  |        |  | $        | 105,348 |   |         |  | 61,190 |        |         | $ | 337,140 |        
|Torrance Branch            |                                           |            | 08/31/05 |         |  |         | N/A         |        |  |          | 8,858   |   |         |  | 4,300  |        |         |   | 127,325 |        
|Westlake Branch            |                                           |            | 06/30/10 |         |  |         | Two 5-year  |        |  |          | 15,566  |   |         |  | 7,700  |        |         |   | 71,941  |        
|Manhattan Beach Branch     |                                           |            | 10/30/10 |         |  |         | Four 5-year |        |  |          | 4,590   |   |         |  | 4,590  |        |         |   | 17,405  |        
|Warehouse                  |                                           |            | 06/30/04 |         |  |         | Two 3-year  |        |  |          | 4,200   |   |         |  | 10,000 |        |         |   | 37,597  |        
|Tarzana Branch             |                                           |            | 01/31/05 |         |  |         | Five 5-year |        |  |          | 3,729   |   |         |  | 3,352  |        |         |   | 118,384 |        
|Redondo Beach Branch       |                                           |            | 04/30/04 |         |  |         | Two 5-year  |        |  |          | 4,128   |   |         |  | 1,403  |        |         |   | 42,272  |        
|Hermosa Beach Branch       |                                           |            | 01/15/06 |         |  |         | Four 5-year |        |  |          | 2,413   |   |         |  | 588    |        |         |   | 45,453  |        
|Gardena Branch             |                                           |            | 12/31/06 |         |  |         | Two 5-year  |        |  |          | 3,375   |   |         |  | 1,500  |        |         |   | 77,511  |        
|Tustin Loan Center         |                                           |            | 06/14/04 |         |  |         | One 5-year  |        |  |          | 20,888  |   |         |  | 14,814 |        |         |   | 17,491  |        
|Irvine (North Park) Branch |                                           |            | 11/01/12 |         |  |         | N/A         |        |  |          | 7,035   |   |         |  | 2,483  |        |         |   |        |        
|Irvine (Oak Creek) Branch  |                                           |            | 01/09/13 |         |  |         | N/A         |        |  |          | 8,484   |   |         |  | 2,424  |        |         |   |        |        
|Orange Branch              |                                           |            | 10/30/03 |         |  |         | N/A         |        |  |          | 4,020   |   |         |  | 1,536  |        |         |   |        |        
|Del Mar Branch             |                                           |            | 05/01/07 |         |  |         | Two 3-year  |        |  |          | 5,753   |   |         |  | 1,770  |        |         |   |        |        
|San Diego Branch           |                                           |            | 04/30/04 |         |  |         | N/A         |        |  |          | 3,334   |   |         |  | 1,446  |        |         |   |        |        
|                           |                                           |            |          |         |  |         |             |        |  |          |         |   |         |  |        |        |         |   |         |        
|                           |                                           | Total      |          |         |  |         |             |        |  |          |         | $ | 201,721 |  |        |        | 119,096 |   |         | $       | 892,519 | 
|                           |                                           |            |          |         |  |         |             |        |  |          |         |   |         |  |        |        |         |   |         |        
|Owned:                     |                                           |            |          |         |  |         |             |        |  |          |         |   |         |  |        |        |         |   |         |        
|                           | Hawthorne Branch                          |            |          |         |  |         |             |        |  |          |         |   |         |  |        | 10,000 |         |   | $       | 112,291 |        
|                           | Westchester Branch                        |            |          |         |  |         |             |        |  |          |         |   |         |  |        | 8,800  |         |   |         | 277,159 |        
|                           | Manhattan Beach Branch (building only)(1) |            |          |         |  |         |             |        |  |          |         |   |         |  |        | 4,590  |         |   |         | 17,405  |        
|                           | Tarzana Branch (building only)(1)         |            |          |         |  |         |             |        |  |          |         |   |         |  |        | 3,352  |         |   |         | 118,384 |        
|                           |                                           |            |          |         |  |         |             |        |  |          |         |   |         |  |        |        |         |   |         |        
|                           |                                           | Total      |          |         |  |         |             |        |  |          |         |   |         |  |        |        | 26,742  |   |         | $       | 525,239 | 
|                           |                                           |            |          |         |  |         |             |        |  |          |         |   |         |  |        |        |         |   |         |        



---



|    |                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------
|(1) | 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 $1.0 million at
December 31, 2002.

At December 31, 2002, the net book values of
the Companys office property, and furniture, fixtures and
equipment, excluding data processing equipment, were
$4.1 million. See Notes to Consolidated Financial
Statements  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.

32



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##### Table of Contents








|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

Litigation

The Bank is a defendant in a construction defect
case entitled Stone Water Terrace HOA v. Hawthorne
Savings and Loan Association. In this action, Plaintiff
alleges, under several theories of recovery, that the Bank is
responsible for construction defects in a 43-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. The Bank denies the
allegations in the complaint and has cross-complained against
all of the subcontractors for indemnity. Discovery has
commenced, and Plaintiffs are claiming damages of approximately
$3.6 million. In pretrial motions, the Court has held that
the Bank cannot be held liable to Plaintiffs in connection with
defects found in 23 units which were completed and sold
before the Bank foreclosed on the project. 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 be material. 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.

33



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##### Table of Contents








|        |                                                        
|------- | -------------------------------------------------------
|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 2002.




Item 4A.     Executive
Officers

The following table sets forth, as of
February 28, 2003, 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   |  |     | 41 |                                                |  | 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.
|David Rosenthal      |  |     | 59 |                                                |  | Executive Vice President and Chief Financial
    Officer of Hawthorne Savings, F.S.B., since September 2002.
    Chief Financial Officer of Casden Properties Inc., from 1999 to
    July 2002. Senior Vice President of IMC Mortgage from 1998 to
    1999. President and Chief Operating Officer of First National
    Mortgage Exchange, Inc., from 1995 to 1998. Chief Executive
    Officer of Rosenthal Consulting Group from 1989 to 1995.
    Executive Vice President and Chief Financial Officer of Columbia
    Savings & Loan from 1983 through 1989. Audit Partner
    with Deloitte & Touche from 1977 through 1983.                                                                                                                                                                        
|Robert P. Quinn      |  |     | 52 |                                                |  | Executive Vice President and Chief Lending
    Officer of Hawthorne Savings, F.S.B. since November 2002. First
    Senior Vice President of United California Bank/ Sanwa Bank from
    1996 to 2002. Vice President of Chase Manhattan Corporation from
    1973 through 1995.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|David L. Hardin      |  |     | 49 |                                                |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Charles B. Stoneburg |  |     | 60 |                                                |  | Executive Vice President and Chief Administrative
    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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

34



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|                   |  |     |    |                                                |  |                                                                                                                                                                                                                                                                                                                                                                         
|------------------ |  | --- | -- | ---------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name               |  | Age |    | Position with the Company and Prior Experience
|                   |  |     |    |                                               
|Jacqueline Calhoun |  |     | 33 |                                                |  | 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.
|Eileen Lyon        |  |     | 45 |                                                |  | 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.                                                                                                                         

35



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##### 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, 2002 |  |      |       |     |  |   |       | 
|First quarter                |  | $    | 29.25 |     |  | $ | 19.01 | 
|Second quarter               |  |      | 32.50 |     |  |   | 28.75 | 
|Third quarter                |  |      | 33.23 |     |  |   | 24.70 | 
|Fourth quarter               |  |      | 29.56 |     |  |   | 25.69 | 
|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 | 

Stockholders

As of March 21, 2003, there were
approximately 445 holders of record.

Dividends

It is the present policy of the Company to retain
earnings to provide funds for use in its business; however, this
policy is evaluated on an on-going basis. The Company has not
paid cash dividends on the Common Stock since 1993.

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.

36



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|        |                        
|------- | -----------------------
|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,
|                                   |                                                           |                                      
|(Dollars in thousands,             |                                                           | 2002                                  |   | 2001      |      | 2000 |   | 1999      |      | 1998
|except per share data)             |                                                           |                                       |   |           |      |      |   |           |      |     
|Consolidated statements of income: |                                                           |                                       |   |           |      |      |   |           |      |      |   |           |   |  |   |           |   |  |   |          
|                                   | Interest revenues                                         |                                       | $ | 137,194   |      |      | $ | 147,686   |      |      | $ | 148,988   |   |  | $ | 132,747   |   |  | $ | 106,992   |  
|                                   | Interest costs                                            |                                       |   | (64,087   | )    |      |   | (85,670   | )    |      |   | (88,682   | ) |  |   | (73,626   | ) |  |   | (61,874   | )
|                                   |                                                           |                                       |   |           |      |      |   |           |      |      |   |           |   |  |   |           |   |  |   |          
|                                   | Net interest income                                       |                                       |   | 73,107    |      |      |   | 62,016    |      |      |   | 60,306    |   |  |   | 59,121    |   |  |   | 45,118    |  
|                                   | Provision for credit losses                               |                                       |   | (870      | )    |      |   | (3,400    | )    |      |   | (6,000    | ) |  |   | (12,000   | ) |  |   | (7,135    | )
|                                   |                                                           |                                       |   |           |      |      |   |           |      |      |   |           |   |  |   |           |   |  |   |          
|                                   | Net interest income after provision for credit
    losses |                                       |   | 72,237    |      |      |   | 58,616    |      |      |   | 54,306    |   |  |   | 47,121    |   |  |   | 37,983    |  
|                                   | Noninterest revenues                                      |                                       |   | 6,387     |      |      |   | 5,630     |      |      |   | 8,094     |   |  |   | 7,820     |   |  |   | 4,653     |  
|                                   | Income/ (loss) from real estate operations, net           |                                       |   | 71        |      |      |   | 205       |      |      |   | (924      | ) |  |   | 324       |   |  |   | 1,909     |  
|                                   | General and administrative expenses                       |                                       |   | (38,534   | )    |      |   | (34,537   | )    |      |   | (36,524   | ) |  |   | (37,035   | ) |  |   | (28,833   | )
|                                   | Income before income taxes and extraordinary item         |                                       |   | 40,161    |      |      |   | 29,914    |      |      |   | 24,952    |   |  |   | 18,230    |   |  |   | 15,712    |  
|                                   | Income tax provision                                      |                                       |   | (16,259   | )    |      |   | (12,612   | )    |      |   | (10,668   | ) |  |   | (8,030    | ) |  |   | (4,674    | )
|                                   |                                                           |                                       |   |           |      |      |   |           |      |      |   |           |   |  |   |           |   |  |   |          
|                                   | Income before extraordinary item                          |                                       |   | 23,902    |      |      |   | 17,302    |      |      |   | 14,284    |   |  |   | 10,200    |   |  |   | 11,038    |  
|                                   | Extraordinary item (net of taxes)                         |                                       |   | (1,203    | )(1) |      |   | (469      | )(1) |      |   |          |   |  |   |          |   |  |   |          |  
|                                   |                                                           |                                       |   |           |      |      |   |           |      |      |   |           |   |  |   |           |   |  |   |          
|                                   | Net income                                                |                                       | $ | 22,699    |      |      | $ | 16,833    |      |      | $ | 14,284    |   |  | $ | 10,200    |   |  | $ | 11,038    |  
|                                   |                                                           |                                       |   |           |      |      |   |           |      |      |   |           |   |  |   |           |   |  |   |          
|Per share amounts:                 |                                                           |                                       |   |           |      |      |   |           |      |      |   |           |   |  |   |           |   |  |   |          
|                                   | Basic earnings per share before extraordinary item        |                                       | $ | 3.75      |      |      | $ | 3.27      |      |      | $ | 2.69      |   |  | $ | 1.93      |   |  | $ | 2.64      |  
|                                   | Extraordinary item (net of taxes)                         |                                       |   | (0.19     | )    |      |   | (0.09     | )    |      |   |          |   |  |   |          |   |  |   |          |  
|                                   |                                                           |                                       |   |           |      |      |   |           |      |      |   |           |   |  |   |           |   |  |   |          
|                                   | Basic earnings per share before extraordinary item        |                                       | $ | 3.56      |      |      | $ | 3.18      |      |      | $ | 2.69      |   |  | $ | 1.93      |   |  | $ | 2.64      |  
|                                   |                                                           |                                       |   |           |      |      |   |           |      |      |   |           |   |  |   |           |   |  |   |          
|                                   | Diluted earnings per share after extraordinary
    item   |                                       | $ | 3.03      |      |      | $ | 2.29      |      |      | $ | 1.94      |   |  | $ | 1.33      |   |  | $ | 1.65      |  
|                                   | Extraordinary item (net of taxes)                         |                                       |   | (0.15     | )    |      |   | (0.06     | )    |      |   |          |   |  |   |          |   |  |   |          |  
|                                   |                                                           |                                       |   |           |      |      |   |           |      |      |   |           |   |  |   |           |   |  |   |          
|                                   | Diluted earnings per share after extraordinary
    item   |                                       | $ | 2.88      |      |      | $ | 2.23      |      |      | $ | 1.94      |   |  | $ | 1.33      |   |  | $ | 1.65      |  
|                                   |                                                           |                                       |   |           |      |      |   |           |      |      |   |           |   |  |   |           |   |  |   |          
|                                   | Tangible diluted book value per share                     |                                       |   | 16.40     | (2)  |      |   | 16.00     |      |      |   | 13.91     |   |  |   | 12.10     |   |  |   | 10.43     |  
|Balance sheet data at period end:  |                                                           |                                       |   |           |      |      |   |           |      |      |   |           |   |  |   |           |   |  |   |          
|                                   | Total assets                                              |                                       |   | 2,494,970 |      |      |   | 1,856,197 |      |      |   | 1,753,395 |   |  |   | 1,581,153 |   |  |   | 1,412,434 |  
|                                   | Cash and cash equivalents                                 |                                       |   | 21,849    |      |      |   | 98,583    |      |      |   | 99,919    |   |  |   | 86,722    |   |  |   | 45,449    |  
|                                   | Investment securities                                     |                                       |   | 267,596   |      |      |   |          |      |      |   |          |   |  |   |          |   |  |   |          |  
|                                   | Loans receivable, net                                     |                                       |   | 2,114,255 |      |      |   | 1,709,283 |      |      |   | 1,608,067 |   |  |   | 1,444,968 |   |  |   | 1,326,791 |  
|                                   | Real estate owned, net                                    |                                       |   |          |      |      |   | 1,312     |      |      |   | 2,859     |   |  |   | 5,587     |   |  |   | 4,070     |  
|                                   | Deposits                                                  |                                       |   | 1,662,810 |      |      |   | 1,199,645 |      |      |   | 1,214,856 |   |  |   | 1,086,635 |   |  |   | 1,019,450 |  
|                                   | Senior notes due 2004                                     |                                       |   |          |      |      |   | 25,778    |      |      |   | 39,358    |   |  |   | 40,000    |   |  |   | 40,000    |  
|                                   | Capital securities                                        |                                       |   | 51,000    |      |      |   | 14,000    |      |      |   |          |   |  |   |          |   |  |   |          |  

37



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|                                   |                                                    |                                       |       |         |   |      |        |         |   |      |        |         |   |   |        |         |   |   |        |         |  
|---------------------------------- | -------------------------------------------------- | ------------------------------------- | ----- | ------- | - | ---- | ------ | ------- | - | ---- | ------ | ------- | - | - | ------ | ------- | - | - | ------ | ------- | -
|                                   |                                                    |                                      
|                                   |                                                    | At or for the Year Ended December 31,
|                                   |                                                    |                                      
|(Dollars in thousands,             |                                                    | 2002                                  |       | 2001    |   | 2000 |        | 1999    |   | 1998
|except per share data)             |                                                    |                                       |       |         |   |      |        |         |   |     
|                                   | FHLB advances                                      |                                       |       | 600,190 |   |      |        | 484,000 |   |      |        | 384,000 |   |   |        | 349,000 |   |   |        | 264,000 |  
|                                   | Stockholders equity                               |                                       |       | 163,066 |   |      |        | 120,449 |   |      |        | 104,161 |   |   |        | 92,304  |   |   |        | 81,424  |  
|                                   | Allowance for credit losses                        |                                       |       | 35,309  |   |      |        | 30,602  |   |      |        | 29,450  |   |   |        | 24,285  |   |   |        | 17,111  |  
|Asset quality at period end:       |                                                    |                                       |       |         |   |      |        |         |   |      |        |         |   |   |        |         |   |   |        |        
|                                   | Nonaccrual loans                                   |                                       | $     | 7,675   |   |      | $      | 20,666  |   |      | $      | 31,601  |   |   | $      | 44,031  |   |   | $      | 47,688  |  
|                                   | Real estate owned, net                             |                                       |       |        |   |      |        | 1,312   |   |      |        | 2,859   |   |   |        | 5,587   |   |   |        | 4,070   |  
|                                   |                                                    |                                       |       |         |   |      |        |         |   |      |        |         |   |   |        |         |   |   |        |        
|                                   |                                                    | $                                     | 7,675 |         |   | $    | 21,978 |         |   | $    | 34,460 |         |   | $ | 49,618 |         |   | $ | 51,758 |        
|                                   |                                                    |                                       |       |         |   |      |        |         |   |      |        |         |   |   |        |         |   |   |        |        
|Net charge-offs                    |                                                    | $                                     | 3,352 |         |   | $    | 2,248  |         |   | $    | 835    |         |   | $ | 4,826  |         |   | $ | 3,298  |        
|Yields and costs (for the period): |                                                    |                                       |       |         |   |      |        |         |   |      |        |         |   |   |        |         |   |   |        |        
|                                   | Interest-earnings assets                           |                                       |       | 6.69    | % |      |        | 8.20    | % |      |        | 8.94    | % |   |        | 8.68    | % |   |        | 9.06    | %
|                                   | Interest-bearing liabilities                       |                                       |       | 3.41    | % |      |        | 5.21    | % |      |        | 5.81    | % |   |        | 5.21    | % |   |        | 5.60    | %
|                                   | Interest rate spread(3)                            |                                       |       | 3.28    | % |      |        | 2.99    | % |      |        | 3.13    | % |   |        | 3.47    | % |   |        | 3.46    | %
|                                   | Net interest margin(4)                             |                                       |       | 3.57    | % |      |        | 3.45    | % |      |        | 3.62    | % |   |        | 3.87    | % |   |        | 3.82    | %
|Performance ratios (5):            |                                                    |                                       |       |         |   |      |        |         |   |      |        |         |   |   |        |         |   |   |        |        
|                                   | Return on average assets                           |                                       |       | 1.09    | % |      |        | 0.93    | % |      |        | 0.85    | % |   |        | 0.66    | % |   |        | 0.93    | %
|                                   | Return on average common stockholders equity      |                                       |       | 16.90   | % |      |        | 15.13   | % |      |        | 14.58   | % |   |        | 11.66   | % |   |        | 18.22   | %
|                                   | Average stockholders equity to average
    assets |                                       |       | 6.48    | % |      |        | 6.17    | % |      |        | 5.85    | % |   |        | 5.68    | % |   |        | 5.09    | %
|                                   | Efficiency ratio(6)                                |                                       |       | 48.07   | % |      |        | 50.89   | % |      |        | 50.19   | % |   |        | 48.35   | % |   |        | 57.88   | %
|Bank capital ratios at period end: |                                                    |                                       |       |         |   |      |        |         |   |      |        |         |   |   |        |         |   |   |        |        
|                                   | Tangible                                           |                                       |       | 7.46    | % |      |        | 8.36    | % |      |        | 8.01    | % |   |        | 8.05    | % |   |        | 7.65    | %
|                                   | Core                                               |                                       |       | 7.46    | % |      |        | 8.36    | % |      |        | 8.01    | % |   |        | 8.05    | % |   |        | 7.65    | %
|                                   | Tier 1                                             |                                       |       | 10.42   | % |      |        | 11.63   | % |      |        | 11.30   | % |   |        | 11.37   | % |   |        | 10.10   | %
|                                   | Risk-based                                         |                                       |       | 11.68   | % |      |        | 12.70   | % |      |        | 12.23   | % |   |        | 12.50   | % |   |        | 11.10   | %
|Asset quality data at period end:  |                                                    |                                       |       |         |   |      |        |         |   |      |        |         |   |   |        |         |   |   |        |        
|                                   | Total nonaccrual loans to total assets             |                                       |       | 0.31    | % |      |        | 1.11    | % |      |        | 1.80    | % |   |        | 2.78    | % |   |        | 3.38    | %
|                                   | Nonaccrual loans to total gross loans              |                                       |       | 0.36    | % |      |        | 1.19    | % |      |        | 1.93    | % |   |        | 3.00    | % |   |        | 3.55    | %
|                                   | Allowance for credit losses to gross loans         |                                       |       | 1.64    | % |      |        | 1.76    | % |      |        | 1.80    | % |   |        | 1.65    | % |   |        | 1.27    | %
|                                   | Allowance for credit losses to nonaccrual loans    |                                       |       | 460.05  | % |      |        | 148.08  | % |      |        | 93.19   | % |   |        | 55.15   | % |   |        | 35.88   | %
|                                   | Net charge-offs to average loans                   |                                       |       | 0.18    | % |      |        | 0.13    | % |      |        | 0.05    | % |   |        | 0.34    | % |   |        | 0.30    | %



---



|    |                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Related to the accelerated write-off of prepaid
    issuance costs and premium due to the repurchase and redemption
    of Senior Notes.                                                  
|   
|(2) | Excludes goodwill, intangible assets, net of tax,
    and unrealized gain on available-for-sale securities, net of tax.                                                                   
|   
|(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
    (excluding other/legal settlements) divided by net interest
    income before provision for credit losses and noninterest
    revenues.

38



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

Overview

The following discussion provides information
about the critical accounting policies, 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 information under
Item 1  Business,
Item 6  Selected Financial Data, the
Companys Consolidated Financial Statements and the
accompanying notes presented herein. See Cautionary
Statement Regarding Forward Looking Statements.

Critical Accounting Policies

The Companys accounting policies are
integral to understanding the results reported. Additional
accounting policies are described in detail in
Note 1  Summary of Significant Accounting
Policies, to the Consolidated Financial Statements,
included herein. The Companys most complex and critical
accounting policies require managements judgment to
ascertain the valuation of assets, liabilities, commitments and
contingencies. We have established detailed policies and control
procedures that are intended to ensure valuation methods are
well controlled and applied consistently from period to period.
In addition, the policies and procedures are intended to ensure
that the process for changing methodologies occurs in an
appropriate manner. The following is a brief description of the
Companys current accounting polices involving significant
management valuation judgments.



| |                            
| | ---------------------------
| | 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, SAB 102, Selected Loan
Loss Allowance Methodology and Documentation Issues, as
well as standards established by regulatory Interagency Policy
Statements on the ALLL. The allowance for credit losses
represents managements estimate of losses inherent in the
Banks loan portfolio as of the balance sheet date.
Management evaluates the adequacy of the allowance on a
quarterly basis by reviewing its loan portfolio to identify
these inherent losses and to assess the overall probability of
collection of the loans in the portfolio. Included in this
quarterly review is the monitoring of delinquencies, default and
historical loss experience, among other factors impacting
portfolio risk. The Banks methodology for assessing the
appropriate allowance level consists of several components,
which include the allocated and unallocated GVA and SVA for
identified loans.

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). The primary factors used in
assigning risk factors (loan grades) include: capacity and
willingness of borrower/guarantor to service debt considering
current financial data; cash flow of the underlying real estate
collateral; the borrowers ability to service existing
debts; alternate sources 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.

Currently, the portfolio is segmented by
collateral type, further stratified by loan grade (Pass
grades 1, 2 and 3, Special Mention and Substandard). A
brief description of these classifications follows:



| |   |                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The three pass loan grades represent a level of
    credit quality, which ranges from high quality assets with no
    well defined deficiency or weakness, to some noted weakness with
    average risk and nominal loss potential.

39



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Special mention assets have potential weaknesses
    that require close monitoring by management, but do not
    currently possess characteristics that would expose the Bank to
    a sufficient degree of risk to warrant an adverse classification.                                                                                                                                                            
|
| |  | Substandard assets, grade 5, have a
    well-defined weakness, which are characterized by the potential
    loss to the Bank if the deficiencies are not corrected.
    Occasionally a loan in this category might require an SVA and is
    evaluated on a case-by-case basis.                                                                                                                                   
|
| |  | Substandard assets, grade 6, are assets that
    display weaknesses described above under grade 5, with the
    added characteristic that the weaknesses make full collection of
    the debt questionable. These loans may be placed on nonaccrual
    status. Some of these assets may be considered impaired under
    SFAS No. 114 and an analysis is performed to determine
    if there is a need for a SVA.

Management establishes SVAs for credit losses on
individual loans when it has determined that recovery of the
Banks gross investment is not probable and when the amount
of loss can be reasonably determined. 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 (TDR) 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). The Bank currently has a SVA of $0.2 million for one
loan.

The GVA includes an unallocated amount. The
unallocated allowance is based upon managements evaluation
of various conditions, such as general economic and business
conditions affecting the Banks key lending areas, the
effects of which are not directly measured in the determination
of the GVA 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 components. In
evaluating the inherent risk associated with imprecision in
estimating the allowance, management has determined it to be
prudent to maintain an unallocated allowance, in the range of
between 3% and 5% of the total GVA. In addition, Management
currently intends to maintain an unallocated allowance of up to
approximately 5% to account for the economic uncertainty in
Southern California until economic or other conditions warrant a
reassessment of the level of the unallocated GVA.

Management believes that the provision for credit
losses was at an adequate level during 2002 and that the
allowance for credit losses of $35.3 million at
December 31, 2002, is adequate to absorb the losses that,
in the opinion and judgment of management, are known or inherent
in the Banks loan portfolio.



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

The Bank generally ceases to accrue interest on a
loan when: 1) principal or interest has been contractually
delinquent for a period of 90 days or more, unless the loan
is both well secured and in the process of collection; or,
2) full collection of principal and/or interest is not
reasonably assured. In addition, classified construction loans
for which interest is being paid from interest reserve loan
funds, rather than the borrowers own funds, may also be
placed on nonaccrual status. 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,
REO), are transferred to REO and carried at the
lower of cost or estimated fair value less the estimated costs
to sell the property (fair value). 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

40



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##### Table of Contents



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 estimated 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. In accordance
with SFAS No. 66, Accounting for Sales of Real
Estate, if the Bank originates a loan to facilitate the
sale of the REO property, 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 from real estate
operations, net in the consolidated statements of income.




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

The investment policy of the Bank seeks to
provide and maintain liquidity, produce favorable returns on
investments without incurring unnecessary interest rate or
credit risk, while complementing the Banks lending
activities. The Banks policies generally limit investments
to government and federal agency backed securities and other
non-government guaranteed securities, including investment grade
debt obligations.

The Banks investment securities portfolio
is subject to interest rate risk. Fluctuations in interest rates
may cause actual prepayments to vary from the estimated
prepayments over the life of the security. This may result in
adjustments to the amortization of premiums or accretion of
discounts related to these instruments, consequently changing
the net yield on such securities. Reinvestment risk is also
associated with the cash flows from such securities. The
unrealized gain/loss on such securities may also be adversely
impacted by changes in interest rates.

Under SFAS No. 115, investment
securities that management has the positive intent and ability
to hold to maturity are classified as
held-to-maturity and recorded at amortized cost.
Securities not classified as held-to-maturity or trading, with
readily determinable fair values, are classified as
available-for-sale and recorded at fair value.
Currently, all investment securities of the Bank are classified
as available-for-sale. The unrealized gains and losses for these
securities are excluded from earnings and reported in other
comprehensive income, as part of stockholders equity. The
Company is obligated to assess, at each reporting date, whether
there isother than temporary impairment to its
investment securities. Declines in the fair value of
held-to-maturity and available-for-sale securities below their
cost that are deemed to be other than temporary are reflected in
earnings as realized losses. Gains and losses on the sale of
securities are recorded on the trade date. The Company had no
impaired investment securities during 2002.

Purchase premiums and discounts are recognized in
interest income using the interest method over the estimated
lives of the securities.



| |                  
| | -----------------
| | Intangible Assets

As a result of the adoption of
SFAS No. 142, Goodwill and Other Intangible
Assets, which eliminates amortization of goodwill, the
Company is required to evaluate goodwill annually, or more
frequently if impairment indicators arise. Since the
Companys acquisition of First Fidelity occurred on
August 23, 2002, intangible assets associated with this
acquisition, which has been allocated to the Companys only
operating segment (the Bank), will be evaluated in 2003 and
impairment, if any, will be reflected in the 2003 Financial
Statements. See Notes to Consolidated Financial
Statements  Note 1  Summary of
Significant Accounting Policies and Notes to
Consolidated Financial Statements 
Note 7  Business Combinations, Goodwill and
Acquired Intangible Assets.



| |             
| | ------------
| | Income Taxes

Management estimates tax provision based on the
amount it expects to owe various tax authorities. Taxes are
discussed in more detail in Notes to Consolidated
Financial Statements  Note 1  Summary
of

41



---



##### Table of Contents



Accounting Policies and Notes to
Consolidated Financial Statements 
Note 10  Income Taxes, of the Consolidated
Financial Statements.


Results of Operations



| |                        
| | -----------------------
| | 2002 Compared with 2001



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

Net income includes the financial impact since
August 23, 2002, of the Companys acquisition of First
Fidelity, which is described in Notes to Consolidated
Financial Statements  Note 7 
Business Combinations, Goodwill and Acquired Intangible
Assets.

Net income for 2002 was $22.7 million, or
$2.88 per diluted share after extraordinary item, an
increase of 34.85% over net earnings of $16.8 million, or
$2.23 per diluted share, for 2001. Net income for 2002
resulted in a return on average assets (ROA) of
1.09%, compared with a ROA of 0.93% for 2001. Return on average
equity (ROE) was 16.90% for 2002, compared with a
ROE of 15.13% for 2001.

During 2002, the Company repurchased the balance
of its 12.5% Senior Notes, the majority of which were
redeemed on December 31, 2002 at the call premium of
106.25%. The repurchases resulted in an extraordinary item, net
of tax, of $1.2 million, or $0.15 per diluted share
during the year. The Company used a combination of cash and
$15.0 million of trust preferred securities to fund the
repurchases.

Total general and administrative expenses
(G&A) were $38.5 million, for the year
ended December 31, 2002, compared with $34.5 million
for 2001. Although G&A (excluding Other/legal settlements)
for the year ended 2002 reflected a 10.99% increase, compared
with G&A (excluding Other/legal settlements) for the same
period in 2001, G&A (excluding Other/legal settlements) to
average assets decreased from 1.88% to 1.82%. The increase in
G&A was primarily attributable to the acquisition of First
Fidelity.

42



---



##### 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.

|                                          |                                                           |                                  |                                            |           |           |            |        |         |        |           |      |            |       |         |       |           |           |            |        |         |        |         |      |      |       |      |       |           |           |           |        |         |        |         |      |      |       |      | 
|----------------------------------------- | --------------------------------------------------------- | -------------------------------- | ------------------------------------------ | --------- | --------- | ---------- | ------ | ------- | ------ | --------- | ---- | ---------- | ----- | ------- | ----- | --------- | --------- | ---------- | ------ | ------- | ------ | ------- | ---- | ---- | ----- | ---- | ----- | --------- | --------- | --------- | ------ | ------- | ------ | ------- | ---- | ---- | ----- | ---- | 
|                                          |                                                           |                                 
|                                          |                                                           | Twelve Months Ended December 31,
|                                          |                                                           |                                 
|                                          |                                                           |                                  |                                            |           |           |           
|                                          |                                                           | 2002                             |                                            | 2001      |           | 2000      
|                                          |                                                           |                                  |                                            |           |           |           
|                                          |                                                           | Average                          |                                            | Revenues/ |           | Average    |        | Average |        | Revenues/ |      | Average    |       | Average |       | Revenues/ |           | Average   
|                                          |                                                           | Balance                          |                                            | Costs     |           | Yield/Cost |        | Balance |        | Costs     |      | Yield/Cost |       | Balance |       | Costs     |           | Yield/Cost
|(Dollars in thousands)                    |                                                           |                                  |                                            |           |           |            |        |         |        |           |      |            |       |         |       |           |           |           
|Assets:                                   |                                                           |                                  |                                            |           |           |            |        |         |        |           |      |            |       |         |       |           |           |            |        |         |        |         |      |      |       |      |       |           |           |           |        |         |        |         |      |     
|Interest-earning assets:                  |                                                           |                                  |                                            |           |           |            |        |         |        |           |      |            |       |         |       |           |           |            |        |         |        |         |      |      |       |      |       |           |           |           |        |         |        |         |      |     
|                                          | Loans receivable(1)(2)                                    |                                  | $                                          | 1,833,856 |           |            | $      | 130,628 |        |           |      | 7.12       | %     |         | $     | 1,696,785 |           |            | $      | 143,249 |        |         |      | 8.44 | %     |      | $     | 1,547,206 |           |           | $      | 141,279 |        |         |      | 9.13 | %    
|                                          | Cash, Fed funds and other                                 |                                  |                                            | 109,178   |           |            |        | 1,818   |        |           |      | 1.67       |       |         |       | 81,446    |           |            |        | 3,231   |        |         |      | 3.97 |       |      |       | 98,071    |           |           |        | 6,233   |        |         |      | 6.36 |      
|                                          | Investment securities                                     |                                  |                                            | 77,988    |           |            |        | 3,155   |        |           |      | 4.05       |       |         |       |          |           |            |        |        |        |         |      |     |       |      |       |          |           |           |        |        |        |         |      |     |      
|                                          | Investment in capital stock of Federal Home
    Loan Bank |                                  |                                            | 28,281    |           |            |        | 1,593   |        |           |      | 5.63       |       |         |       | 21,754    |           |            |        | 1,206   |        |         |      | 5.54 |       |      |       | 20,566    |           |           |        | 1,476   |        |         |      | 7.18 |      
|                                          |                                                           |                                  |                                            |           |           |            |        |         |        |           |      |            |       |         |       |           |           |            |        |         |        |         |      |      |       |      |       |           |           |           |        |         |        |         |      |     
|                                          |                                                           |                                  | Total interest-earning assets              |           |           | 2,049,303  |        |         |        | 137,194   |      |            |       | 6.69    |       |           |           | 1,799,985  |        |         |        | 147,686 |      |      |       | 8.20 |       |           |           | 1,665,843 |        |         |        | 148,988 |      |      |       | 8.94 | 
|                                          |                                                           |                                  |                                            |           |           |            |        |         |        |           |      |            |       |         |       |           |           |            |        |         |        |         |      |      |       |      |       |           |           |           |        |         |        |         |      |     
|Noninterest-earning assets                |                                                           |                                  | 23,888                                     |           |           |            |        |         |        |           |      |            |       |         | 2,845 |           |           |            |        |         |        |         |      |      |       |      | 9,410 |           |           |           |        |         |        |         |      |     
|                                          |                                                           |                                  |                                            |           |           |            |        |         |        |           |      |            |       |         |       |           |           |            |        |         |        |         |      |      |       |      |       |           |           |           |        |         |        |         |      |     
|                                          |                                                           |                                  | Total assets                               |           | $         | 2,073,191  |        |         |        |           |      |            |       |         |       |           | $         | 1,802,830  |        |         |        |         |      |      |       |      |       |           | $         | 1,675,253 |        |         |        |         |      |      |       |      | 
|                                          |                                                           |                                  |                                            |           |           |            |        |         |        |           |      |            |       |         |       |           |           |            |        |         |        |         |      |      |       |      |       |           |           |           |        |         |        |         |      |     
|                                         
|Liabilities and Stockholders
    Equity: |                                                           |                                  |                                            |           |           |            |        |         |        |           |      |            |       |         |       |           |           |            |        |         |        |         |      |      |       |      |       |           |           |           |        |         |        |         |      |     
|                                          | Interest-bearing liabilities:                             |                                  |                                            |           |           |            |        |         |        |           |      |            |       |         |       |           |           |            |        |         |        |         |      |      |       |      |       |           |           |           |        |         |        |         |      |      |      
|                                          |                                                           | Deposits(3)                      |                                            | $         | 1,300,177 |            |        | $       | 36,755 |           |      |            | 2.83  | %       |       | $         | 1,191,618 |            |        | $       | 60,022 |         |      |      | 5.04  | %    |       | $         | 1,138,119 |           |        | $       | 63,513 |         |      |      | 5.58  | %   
|                                          |                                                           | FHLB advances                    |                                            |           | 511,614   |            |        |         | 21,931 |           |      |            | 4.23  |         |       |           | 407,836   |            |        |         | 20,956 |         |      |      | 5.07  |      |       |           | 346,983   |           |        |         | 20,180 |         |      |      | 5.82  |     
|                                          |                                                           | Senior notes                     |                                            |           | 24,819    |            |        |         | 3,120  |           |      |            | 12.50 |         |       |           | 31,714    |            |        |         | 3,970  |         |      |      | 12.52 |      |       |           | 39,912    |           |        |         | 4,989  |         |      |      | 12.50 |     
|                                          |                                                           | Capital securities               |                                            |           | 32,540    |            |        |         | 2,281  |           |      |            | 7.01  |         |       |           | 7,345     |            |        |         | 722    |         |      |      | 9.83  |      |       |           |          |           |        |         |       |         |      |      |      |     
|                                          |                                                           |                                  |                                            |           |           |            |        |         |        |           |      |            |       |         |       |           |           |            |        |         |        |         |      |      |       |      |       |           |           |           |        |         |        |         |      |     
|                                          |                                                           |                                  | Total interest-bearing liabilities         |           |           | 1,869,150  |        |         |        | 64,087    |      |            |       | 3.41    |       |           |           | 1,638,513  |        |         |        | 85,670  |      |      |       | 5.21 |       |           |           | 1,525,014 |        |         |        | 88,682  |      |      |       | 5.81 | 
|                                          |                                                           |                                  |                                            |           |           |            |        |         |        |           |      |            |       |         |       |           |           |            |        |         |        |         |      |      |       |      |       |           |           |           |        |         |        |         |      |     
|                                          | Noninterest-bearing checking                              |                                  |                                            | 37,258    |           |            |        |         |        |           |      |            |       |         |       | 32,956    |           |            |        |         |        |         |      |      |       |      |       | 31,174    |           |           |        |         |        |         |      |      |      
|                                          | Noninterest-bearing liabilities                           |                                  |                                            | 32,477    |           |            |        |         |        |           |      |            |       |         |       | 20,098    |           |            |        |         |        |         |      |      |       |      |       | 21,124    |           |           |        |         |        |         |      |      |      
|                                          | Stockholders equity                                      |                                  |                                            | 134,306   |           |            |        |         |        |           |      |            |       |         |       | 111,263   |           |            |        |         |        |         |      |      |       |      |       | 97,941    |           |           |        |         |        |         |      |      |      
|                                          |                                                           |                                  |                                            |           |           |            |        |         |        |           |      |            |       |         |       |           |           |            |        |         |        |         |      |      |       |      |       |           |           |           |        |         |        |         |      |     
|                                          |                                                           |                                  | Total liabilities and stockholders equity |           | $         | 2,073,191  |        |         |        |           |      |            |       |         |       |           | $         | 1,802,830  |        |         |        |         |      |      |       |      |       |           | $         | 1,675,253 |        |         |        |         |      |      |       |      | 
|                                          |                                                           |                                  |                                            |           |           |            |        |         |        |           |      |            |       |         |       |           |           |            |        |         |        |         |      |      |       |      |       |           |           |           |        |         |        |         |      |     
|Net interest income                       |                                                           |                                  |                                            |           |           | $          | 73,107 |         |        |           |      |            |       |         |       |           |           | $          | 62,016 |         |        |         |      |      |       |      |       |           |           | $         | 60,306 |         |        |         |      |     
|                                          |                                                           |                                  |                                            |           |           |            |        |         |        |           |      |            |       |         |       |           |           |            |        |         |        |         |      |      |       |      |       |           |           |           |        |         |        |         |      |     
|Interest rate spread                      |                                                           |                                  |                                            |           |           |            |        |         |        |           | 3.28 | %          |       |         |       |           |           |            |        |         |        |         | 2.99 | %    |       |      |       |           |           |           |        |         |        |         | 3.13 | %   
|                                          |                                                           |                                  |                                            |           |           |            |        |         |        |           |      |            |       |         |       |           |           |            |        |         |        |         |      |      |       |      |       |           |           |           |        |         |        |         |      |     
|Net interest margin                       |                                                           |                                  |                                            |           |           |            |        |         |        |           | 3.57 | %          |       |         |       |           |           |            |        |         |        |         | 3.45 | %    |       |      |       |           |           |           |        |         |        |         | 3.62 | %   
|                                          |                                                           |                                  |                                            |           |           |            |        |         |        |           |      |            |       |         |       |           |           |            |        |         |        |         |      |      |       |      |       |           |           |           |        |         |        |         |      |     



---



|    |                                                                                                                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes the interest on nonaccrual loans only to
    the extent that it was paid and recognized as interest income.                                                                                                                                                      
|   
|(2) | Includes expense incurred on net deferred loan
    costs of $0.5 million for the year ended December 31,
    2002. Includes income earned on net deferred loan fees of
    $2.4 million and $2.6 million for the years ended
    December 31, 2001 and 2000, respectively.
|   
|(3) | See page 29 for deposit information by type.                                                                                                                                                                                                                              

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 the
repricing of the Companys liabilities which include
deposits and FHLB advances, (3) the speed at which loans
prepay and the impact of internal interest rate floors, and
(4) the magnitude of the Companys noninterest-earning
assets, including nonaccrual loans and REO.

43



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##### Table of Contents



The Companys net interest income before
provision for credit losses increased 17.88% to
$73.1 million, for the year ended December 31, 2002,
compared with $62.0 million during the same period in 2001.
The Companys year-over-year increase in net interest
income was due to: 1) a more stable interest rate
environment in 2002, as the Federal Reserve lowered rates once
in 2002, compared with eleven times during 2001;
2) inclusion of First Fidelity net assets as of
August 23, 2002; 3) the average cost of
interest-bearing liabilities decreased faster than the decrease
in the yield earned on average earning-assets; 4) the
majority of adjustable rate loans reached their contractual
floors; 5) the initiation of treasury activities which
resulted in incremental income from investment securities; and
6) the collection of $1.0 million in interest on real
estate loans that were brought current in the first quarter of
2002.

The Company is a variable rate lender and
although the static gap report shows that the balance sheet is
asset sensitive, during 2002, the repricing behavior more
closely approximates a liability sensitive balance sheet, as the
majority of its ARM loans reached their contractual floors. As
of December 31, 2002, 91.28% of the loans in the
Companys loan portfolio were adjustable rate, of which
approximately 62.75%, or $1.22 billion, have reached their
internal interest rate floors and thus have taken on fixed rate
characteristics. The substantial majority of such loans are
priced at a margin over various market sensitive indices,
including MTA (38.83% of the portfolio), LIBOR (28.88% of the
portfolio), Prime (13.33% of the portfolio), COFI (10.65% of the
portfolio) and CMT (7.37% of the portfolio). It is expected that
when/or if interest rates rise to levels above the floors in the
loan portfolio, the Company will once again behave as an asset
sensitive institution. As borrowers refinanced loans, the
Company continued to experience prepayments of
$668.0 million with a weighted average interest rate of
7.61%, for the year ended December 31, 2002. The negative
impact of prepayments was partially mitigated by new loan
production of $755.8 million with a weighted average rate
of 6.00%, for the year ended December 31, 2002. The yield
on interest-earning assets was 6.69% for the year ended
December 31, 2002, compared with 8.20% for 2001. Based upon
the continued projected decline in the effective yield of the
lagging indices, the Company expects that the yield on its loan
portfolio will decline in the future as the decreases in current
market interest rates are fully incorporated.

At December 31, 2002, 63.19% of the
Companys interest-bearing deposits were comprised of
certificate accounts, with an original weighted average term of
14.5 months, compared with 71.89% with an original weighted
average term of 10.5 months at December 31, 2001. The
remaining, weighted average term to maturity for the
Companys certificate accounts approximated 7.7 months
at December 31, 2002, compared with 10 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.

As of December 31, 2002, 80.97% of the
Companys borrowings from the FHLB were fixed rate, with
remaining terms ranging from 1 day to 8 years,
compared with 74.17% with remaining terms ranging from 1 to
10 years at December 31, 2001 (though such remaining
terms are subject to early call provisions). The remaining
19.03% and 25.83% of the borrowings at December 31, 2002
and December 31, 2001, respectively, carried adjustable
interest rates and mature in February 2003, with 88% and 80%,
respectively, of the adjustable borrowings tied to the Prime
Rate.

Assuming a flat interest rate environment,
previously announced guidance that the net interest margin will
be in the range of 3.35% to 3.45% for 2003 remains unchanged.
However, if rates were to increase, the net interest margin will
be compressed until loan rates exceed floors.

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),

44



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##### Table of Contents



(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, 2002 and 2001 |   | Years Ended December 31, 2001 and 2000
|                         |                                                           | 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)                                       |                                        | $ | 11,572                                 |        |         | $ | (22,384 | )       |            |   | (1,809 | )      |         | $ | (12,621 | )       |   | $ | 13,658 |        |  |   | (10,658 | )       |   | $ | (1,030 | )    |   | $ | 1,970  |       
|                         | Cash, Fed funds and other                                 |                                        |   | 1,100                                  |        |         |   | (1,875  | )       |            |   | (638   | )      |         |   | (1,413  | )       |   |   | (1,057 | )      |  |   | (2,342  | )       |   |   | 397    |      |   |   | (3,002 | )     
|                         | Investment securities                                     |                                        |   |                                       |        |         |   |        |         |            |   | 3,155  |        |         |   | 3,155   |         |   |   |       |        |  |   |        |         |   |   |       |      |   |   |       |       
|                         | Investment in capital stock of Federal Home
    Loan Bank |                                        |   | 362                                    |        |         |   | 19      |         |            |   | 6      |        |         |   | 387     |         |   |   | 85     |        |  |   | (336    | )       |   |   | (19    | )    |   |   | (270   | )     
|                         |                                                           |                                        |   |                                        |        |         |   |         |         |            |   |        |        |         |   |         |         |   |   |        |        |  |   |         |         |   |   |        |      |   |   |       
|                         |                                                           | Total interest-earning assets          |   |                                        | 13,034 |         |   |         | (24,240 | )          |   |        | 714    |         |   |         | (10,492 | ) |   |        | 12,686 |  |   |         | (13,336 | ) |   |        | (652 | ) |   |        | (1,302 | )
|                         |                                                           |                                        |   |                                        |        |         |   |         |         |            |   |        |        |         |   |         |         |   |   |        |        |  |   |         |         |   |   |        |      |   |   |       
|                         | Interest-bearing liabilities:                             |                                        |   |                                        |        |         |   |         |         |            |   |        |        |         |   |         |         |   |   |        |        |  |   |         |         |   |   |        |      |   |   |        |       
|                         | Deposits                                                  |                                        |   | 5,468                                  |        |         |   | (26,336 | )       |            |   | (2,399 | )      |         |   | (23,267 | )       |   |   | 2,986  |        |  |   | (6,186  | )       |   |   | (291   | )    |   |   | (3,491 | )     
|                         | FHLB advances                                             |                                        |   | 5,333                                  |        |         |   | (3,474  | )       |            |   | (884   | )      |         |   | 975     |         |   |   | 3,539  |        |  |   | (2,351  | )       |   |   | (412   | )    |   |   | 776    |       
|                         | Senior notes                                              |                                        |   | (863                                   | )      |         |   | 17      |         |            |   | (4     | )      |         |   | (850    | )       |   |   | (1,025 | )      |  |   | 7       |         |   |   | (1     | )    |   |   | (1,019 | )     
|                         | Capital securities                                        |                                        |   | 2,476                                  |        |         |   | (207    | )       |            |   | (710   | )      |         |   | 1,559   |         |   |   |       |        |  |   |        |         |   |   | 722    |      |   |   | 722    |       
|                         |                                                           |                                        |   |                                        |        |         |   |         |         |            |   |        |        |         |   |         |         |   |   |        |        |  |   |         |         |   |   |        |      |   |   |       
|                         |                                                           | Total interest-bearing liabilities     |   |                                        | 12,414 |         |   |         | (30,000 | )          |   |        | (3,997 | )       |   |         | (21,583 | ) |   |        | 5,500  |  |   |         | (8,530  | ) |   |        | 18   |   |   |        | (3,012 | )
|                         |                                                           |                                        |   |                                        |        |         |   |         |         |            |   |        |        |         |   |         |         |   |   |        |        |  |   |         |         |   |   |        |      |   |   |       
|                         | Change in net interest income                             |                                        | $ | 620                                    |        |         | $ | 5,760   |         |            | $ | 4,711  |        |         | $ | 11,091  |         |   | $ | 7,186  |        |  | $ | (4,806  | )       |   | $ | (670   | )    |   | $ | 1,710  |       
|                         |                                                           |                                        |   |                                        |        |         |   |         |         |            |   |        |        |         |   |         |         |   |   |        |        |  |   |         |         |   |   |        |      |   |   |       



---



|    |                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------
|(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 changes in the balances of interest-earnings
assets and interest-bearing liabilities during 2002 were
primarily due to the acquisition of First Fidelity on
August 23, 2003.

The Companys interest revenues decreased by
$10.5 million, or 7.10%, during the year ended
December 31, 2002, compared with the same period in 2001.
The decrease in 2002 compared to 2001 was primarily attributable
to the 132 basis point decline in the yield on average loans
receivable, which averaged 7.12% during 2002, compared with
8.44% in 2001, partially offset by an increase of 8.08% in the
average balance of loans outstanding and the collection of
$1.0 million in interest on loans that were brought current
during the first quarter of 2002. Average total loans, net of
deferred fees, grew to $1.8 billion in 2002, compared with
$1.7 billion in 2001. Also contributing to the decrease was
a 230 basis point decrease in the yield on cash and cash
equivalents, which averaged 1.67% during 2002, compared with
3.97% in 2001. Average cash and cash equivalents increased to
$109.2 million in 2002, compared with $81.4 million in
2001, primarily due to deployment of the excess liquidity into
higher yielding investment securities. The Company continued to
experience prepayments of $668.0 million with a weighted
average interest rate of 7.61%, as borrowers refinanced loans,
while new loan production of $755.8 million reflected a
weighted average rate of 6.00%, for the year ended
December 31, 2002. The net decrease in revenues was
partially offset by an increase of $3.2 million earned on
investment securities.

Interest costs decreased by $21.6 million,
or 25.19%, during the year ended December 31, 2002,
compared with the same period in 2001. The decrease in interest
expense in 2002 compared to 2001 was primarily attributable to a
180 basis point decrease in the average cost of funds, to 3.41%
for the year ended December 31, 2002, from 5.21% for the
same period of 2001. The reduction in the cost of funds is the
result of the combination of the continued downward pressure on
interest rates (rates on new certificates of deposit were
generally lower than the maturing certificates of deposit) and
the shift in the deposit mix during 2002. The increase in
average interest-bearing liabilities for the year ended
December 31, 2002, compared with 2001 was primarily due to
increases of $108.6 million and $103.8 million, in the
average balance of average interest-

45



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##### Table of Contents



bearing deposits and FHLB advances, respectively.
Average interest-bearing deposits were $1.30 billion with
an average cost of funds of 2.83% during the year ended
December 31, 2002, compared with $1.19 billion and a
5.04% average cost of funds during the same period in 2001. The
average balance of certificates of deposit (CDs) was
$803.4 million with an average cost of funds of 3.05%,
compared with $892.0 million and a 5.54% average cost of
funds during the years ended December 31, 2002 and 2001,
respectively. The average balance of money market accounts was
$378.7 million with an average cost of funds of 2.66%
during the year ended December 31, 2002, compared with
$215.2 million and a 3.94% average cost of funds during the
same period in 2001. As a percentage of total average deposits,
transaction accounts have increased to 39.93% for the year ended
December 31, 2002, compared with 27.16% of total average
deposits during the same period in 2001. The change in the
deposit mix and FHLB advances, as well as the decrease in the
average cost of funds had a positive impact on the
Companys total interest costs during 2002.


These changes in interest revenues and interest
costs produced an increase of $11.1 million, or 17.88%, in
the Companys net interest income before provision for
credit losses for the year ended December 31, 2002,
compared with the same period in 2001. Expressed as a percentage
of interest-earning assets, the Companys net interest
margin increased to 3.57% during the year ended
December 31, 2002, compared with the net interest margin of
3.45% produced during the same period in 2001. The increase in
the net interest margin in 2002 was primarily due to the
interest rate floors in the loan portfolio, which resulted in
the cost of funds repricing faster than the yield on the loan
portfolio. However, the Companys net interest income was
impacted by the 475 basis point and 50 basis point drop in
interest rates during 2001 and 2002, respectively, and continues
to be adversely impacted by lower yields on new loan
productions, continued runoff of existing loans, and repricing
of the respective indices. In a rising interest rate environment
these adjustable rate loans, that have taken on fixed rate loan
characteristics, will result in potential net interest margin
compression. These loans will not reprice until rates have
increased enough to bring the fully indexed rate above the
internal floor rate, while interest-bearing deposits will
reprice more quickly.



| |                            
| | ---------------------------
| | Provision for Credit Losses

Provision for credit losses were
$0.9 million and $3.4 million for 2002 and 2001,
respectively. The decrease in the provision for credit losses in
2002 was due to overall improvement in asset quality primarily
resulting from successful efforts of implementing revised
underwriting standards and continued strength of the Southern
California real estate market. Nonaccrual loans totaled
$7.7 million at December 31, 2002 (or 0.31% of total
assets), compared with nonaccrual loans of $20.7 million
(or 1.11% of total assets) at December 31, 2001. Other
classified loans were $16.0 million at December 31,
2002, compared with $37.3 million at December 31,
2001. Additionally, total classified assets to Bank core capital
and general allowance for credit losses was 10.81% in 2002,
compared with 32.59% in 2001. Delinquent loans totaled
$12.5 million at December 31, 2002, compared with
$7.7 million at December 31, 2001. As a result of the
improved asset quality, management reduced the level of
provision for credit losses in 2002. The Banks specific
valuation allowance decreased from $3.6 million at
December 31, 2001 to $0.2 million at December 31,
2002, as a result of current year charge-offs, which were
anticipated and specifically reserved in the 2001 allowance. At
December 31, 2002, the ratio of allowance for credit losses
to loans receivable, net of specific allowance, was 1.64%,
compared with 1.76% at December 31, 2001.

Although the Bank 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 estimated 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 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations, Critical Accounting
Policies  Allowance for Credit Losses and
Item 1  Business, Allowance for Credit
losses for further discussion of the Banks allowance
for credit losses.

46



---



##### Table of Contents





| |                     
| | --------------------
| | Noninterest Revenues

Noninterest revenues were $6.4 million for
the year ended December 31, 2002, an increase of
$0.8 million, or 13.45%, from $5.6 million earned in
2001. Loan related and other fees constituted 65.43% of total
noninterest revenues and were comprised primarily of prepayment
fees resulting from the high level of refinancings. Fee income
on deposits increased 12.78% for the year ended
December 31, 2002, compared with the same period in 2001,
resulting from the growth in core transaction deposits.

Loan related fees were $4.2 million for
2002, compared with $4.3 million in 2001 and 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 Banks loan) and (3) in
connection with certain loans which contain exit or release fees
payable to the Bank upon the maturity or repayment of the
Banks loan. Noninterest revenues also include deposit fee
income for service fees, nonsufficient fund fees and other
miscellaneous check and service charges, which increased to
$1.5 million for 2002, an increase of 12.78% from
$1.4 million earned in 2001.



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

The following table sets forth the costs and
revenues attributable to the Banks REO properties for the
periods indicated.

|                                               |                                     |                          |     |      |   |      |     |     |   |   |      |      |  
|---------------------------------------------- | ----------------------------------- | ------------------------ | --- | ---- | - | ---- | --- | --- | - | - | ---- | ---- | -
|                                               |                                     |                         
|                                               |                                     | Years Ended December 31,
|                                               |                                     |                         
|                                               |                                     | 2002                     |     | 2001 |   | 2000
|(Dollars in thousands)                         |                                     |                          |     |      |   |     
|Expenses associated with REO:                  |                                     |                          |     |      |   |      |     |     |   |   |      |     
|                                               | Repairs, maintenance and renovation |                          | $   | (21  | ) |      | $   | (22 | ) |   | $    | (294 | )
|                                               | Insurance and property taxes        |                          |     |     |   |      |     | (10 | ) |   |      | (18  | )
|                                               |                                     |                          |     |      |   |      |     |     |   |   |      |     
|                                               |                                     |                          | (21 | )    |   |      | (32 | )   |   |   | (312 | )   
|Net income/(loss) from sales of REO            |                                     |                          | 87  |      |   |      | 106 |     |   |   | (166 | )   
|Property operations, net                       |                                     |                          | 5   |      |   |      | 131 |     |   |   | 30   |     
|Charge-off for losses on REO                   |                                     |                          |    |      |   |      |    |     |   |   | (476 | )   
|                                               |                                     |                          |     |      |   |      |     |     |   |   |      |     
|Income/(loss) from real estate operations, net |                                     | $                        | 71  |      |   | $    | 205 |     |   | $ | (924 | )   
|                                               |                                     |                          |     |      |   |      |     |     |   |   |      |     

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. During the year ended December 31, 2002, the Bank
sold one property generating net cash proceeds of
$1.4 million and net income of $0.1 million, compared
with sales of five properties generating net cash proceeds of
$3.0 million and net income of $0.1 million during
2001.

47



---



##### Table of Contents





| |                     
| | --------------------
| | 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,
|                                  |       |                         
|                                  |       |                          |        |              
|                                  |       | 2002 and 2001            |        | 2001 and 2000
|                                  |       |                          |        |              
|                                  |       | 2002                     |        | 2001          |  | Change |        | 2001   |  | 2000 |       | Change
|(Dollars in thousands)            |       |                          |        |               |  |        |        |        |  |      |       |       
|Employee                          |       | $                        | 22,389 |               |  | $      | 18,320 |        |  | $    | 4,069 |        |  | $ | 18,320 |        |  | $ | 17,391 |        |  | $ | 929    |       
|Operating                         |       |                          | 7,259  |               |  |        | 6,409  |        |  |      | 850   |        |  |   | 6,409  |        |  |   | 6,092  |        |  |   | 317    |       
|Occupancy                         |       |                          | 4,109  |               |  |        | 4,015  |        |  |      | 94    |        |  |   | 4,015  |        |  |   | 3,758  |        |  |   | 257    |       
|Professional                      |       |                          | 2,132  |               |  |        | 2,857  |        |  |      | (725  | )      |  |   | 2,857  |        |  |   | 4,255  |        |  |   | (1,398 | )     
|Technology                        |       |                          | 1,734  |               |  |        | 1,897  |        |  |      | (163  | )      |  |   | 1,897  |        |  |   | 1,939  |        |  |   | (42    | )     
|SAIF premiums and OTS assessments |       |                          | 588    |               |  |        | 929    |        |  |      | (341  | )      |  |   | 929    |        |  |   | 893    |        |  |   | 36     |       
|Other/legal settlements           |       |                          | 323    |               |  |        | 110    |        |  |      | 213   |        |  |   | 110    |        |  |   | 2,196  |        |  |   | (2,086 | )     
|                                  |       |                          |        |               |  |        |        |        |  |      |       |        |  |   |        |        |  |   |        |        |  |   |        |       
|                                  | Total |                          | $      | 38,534        |  |        | $      | 34,537 |  |      | $     | 3,997  |  |   | $      | 34,537 |  |   | $      | 36,524 |  |   | $      | (1,987 | )
|                                  |       |                          |        |               |  |        |        |        |  |      |       |        |  |   |        |        |  |   |        |        |  |   |        |       

Although G&A (excluding Other/legal
settlements) for the year ended 2002 reflected a 10.99%
increase, compared with G&A for the same period in 2001,
G&A to average assets decreased from 1.88% to 1.82%. The
increase in G&A was primarily attributable to the
acquisition of First Fidelity. Employee related costs increased
primarily due to increased headcount due to the inclusion of
First Fidelity employees. Operating costs increased primarily
due to additional supplies for the First Fidelity offices and
increased third party service fees due to the acquisition.
Professional fees decreased primarily due to insurance company
reimbursements totaling $0.7 million for legal fees and
increased third party service fees related to litigation and
fewer outstanding legal issues.

The Bank 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 Banks
financial condition, its capital ratios and the rating it
receives in connection with annual regulatory examinations by
the OTS. SAIF premiums and OTS assessments were
$0.6 million and $0.9 million for the year ended
December 31, 2002 and 2001, respectively.

During 2002, other non-operating expenses totaled
$0.3 million, primarily consisting of $0.7 million in
one-time merger related and conversion expenses as a result of
the acquisition of First Fidelity, partially offset by a credit
in legal settlement expenses of $0.4 million.



| |             
| | ------------
| | Income Taxes

The effective tax rate was 40.48% for the year
ended 2002, compared with 42.16% for 2001. The lower effective
tax rate in 2002 was primarily the result of a $0.6 million
nonrecurring tax benefit in the third quarter of 2002 resulting
from a change in state tax law related to the treatment of bad
debts, which impacted all California financial institutions with
assets in excess of $500.0 million. The Company expects to
record provision for income taxes at an effective tax rate of
between 40% and 42% during 2003.



| |                   
| | ------------------
| | Extraordinary Item

During 2002, the Company repurchased the balance
of its 12.5% Senior Notes, the majority of which were
redeemed on December 31, 2002 at the call premium of
106.25%. Payment of the premium and recognition of the prepaid
offering costs associated with the Senior Notes resulted in an
extraordinary loss of $1.2 million, net of related income
taxes of $0.9 million, or $0.15 per diluted share. See
Notes to the Consolidated Financial Statements 
Note 18  Extraordinary Item.

48



---



##### Table of Contents





| |                        
| | -----------------------
| | 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 had 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 was tied to
adjustable rate indices, such as MTA, LIBOR, Prime, COFI and
CMT. Out of these adjustable rate loans, approximately 61.73%,
or $1.0 billion, had reached their internal interest rate
floors. Therefore, these loans had taken on fixed rate
characteristics, while the majority of the Companys
deposits had 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 $34.5 million for the year ended
December 31, 2001, compared with $36.5 million of
G&A incurred during the same period in 2000. Included in
G&A for 2000 was $2.2 million, primarily in connection
with ongoing litigation and/or satisfaction of judgments against
the Company.

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

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 interest-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 had continued into
2002, prepayment speeds continue to increase. 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. The 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.

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. Contributing to the increase in year over year interest
revenues on loans was a $10.9 million, or 34.60%, decrease
in nonaccrual loans.

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 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
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.

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. 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 showed 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 was primarily due to
experiencing the benefit of the repricing of the certificates of
deposits, which had a six month average life. As of
December 31, 2001, $1.0 billion, or 61.73%, of the
Companys adjustable rate loan portfolio had reached
contractual floors. These loans had taken on fixed rate
repricing characteristics until sufficient upward interest rate
movements will bring the fully indexed rate above their floors.

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| |                            
| | ---------------------------
| | 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, debt service coverage ratio, etc.),
revision of approval authorities which began in January 2000 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, 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.



| |                     
| | --------------------
| | 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. 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 Owned

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

Total general and administrative expenses were
$34.5 million for the year ended December 31, 2001,
compared with $36.5 million of G&A incurred during the
same period in 2000. The decrease in general and administrative
expenses was primarily attributed to the decrease of
$2.1 million in other/legal settlement expenses, as
described below, and $1.4 million in professional fees. The
reduction in professional fees was primarily due to fewer
outstanding legal issues in 2001 and insurance company
reimbursements for legal fees incurred in 2000. The increased
employee costs was primarily due to $0.7 million in
compensation related expenses as a result of a new formalized
employee merit program implemented in 2001. The efficiency ratio
for the year ended December 31, 2001, was 50.89% compared
with 50.19% for the year ended December 31, 2000.

During 2001, other/legal settlements 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 was 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 Association matter, and $0.1 million
in connection with the early termination of the lease for office
space in Irvine.

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| |             
| | ------------
| | 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.

Stockholders Equity and Regulatory
Capital

The Companys capital consists of common
stockholders equity, which amounted to
$163.1 million, or 6.53%, of the Companys total
assets at December 31, 2002. See Consolidated
Statements of Stockholders Equity, Notes to
Consolidated Financial Statements 
Note 12  Capital and Debt Offerings, and
Capital Resources and Liquidity below.

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. As of December 31,
2002, the Banks core and risk-based capital was
$183.9 million and $206.2 million, respectively.
According to regulatory definitions, Banks whose Tier 1 and
total capital ratios meet or exceed 6% and 10%, respectively,
are deemed well capitalized. As of December 31,
2002, the Bank was categorized as well capitalized
under the regulatory framework for PCA Rules, with core and
risk-based capital ratios of 7.46% and 11.68%, respectively. See
Notes to Consolidated Financial Statements 
Note 13  Regulatory Matters.

Capital Resources and Liquidity

Hawthorne Financial Corporation maintained cash
and cash equivalents of $1.8 million at December 31,
2002. 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 dividend to
the Holding Company in an amount necessary to pay the 2002
interest payments on the Senior Notes and the Capital
Securities, as well as to fund the acquisition of First
Fidelity. 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 holding
companys long-term debt and the acquisition of treasury
shares for the foreseeable future.

The Banks primary funding sources are
deposits, principal payments on loans, FHLB advances and cash
flows from operations. Other possible sources of liquidity
available to the Company include the sale of loans and
investment securities, commercial bank lines of credit, and
direct access, under certain conditions, to borrowings from the
Federal Reserve System. The cash needs of the Bank are
principally for the payment of interest on, and withdrawals of,
deposit accounts, the funding of loans, investments and
operating costs and expenses. OTS regulations no longer require
a savings association to maintain a specified average daily
balance of liquid assets. The Bank maintains an adequate level
of liquid assets to ensure safe and sound daily operations.

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A primary alternate funding source for the Bank
is a credit line with the FHLB with a maximum advance of up 40%
of the total Bank assets subject to sufficient qualifying
collateral. In February 2003, the FHLB increased this line of
credit to 45% of total Bank assets. The FHLB system functions as
a source of credit to savings institutions that are members of
the FHLB. Advances are secured primarily by the Banks
mortgage loans and the capital stock of the FHLB owned by the
Bank. Subject to the FHLBs advance policies and
requirements, these advances can be requested for any business
purpose in which the Bank is authorized to engage. At
December 31, 2002, the Company had thirty-two FHLB advances
outstanding totaling $599.0 million which had a weighted
averaged interest rate of 4.12% and a weighted average remaining
maturity of 2 years and 7 months. See Notes to
the Consolidated Financial Statements 
Note 9  FHLB Advances.

On August 23, 2002, the Company issued
1,266,540 shares of Hawthorne Financial Corporation stock
and $37.8 million in cash for the 1,815,115 shares of
First Fidelity Bancorp, Inc. stock and 88,000 options
outstanding. See Notes to Consolidated Financial
Statements  Consolidated Statements of
Stockholders Equity, and Notes to Consolidated
Financial Statements  Note 12 
Capital and Debt Offerings.

During the year ended December 31, 2002, the
Company repurchased the balance of its 12.5% Senior Notes,
the majority of which were redeemed on December 31, 2002 at
the call premium of 106.25%. The repurchases resulted in an
extraordinary item, net of tax, of $1.2 million or
$0.15 per diluted share. The Company used the proceeds of
$15.0 million private issuance of Trust Preferred
Securities and excess cash held at the holding company to fund
the repurchases.

As of December 31, 2002, cumulative
repurchases of treasury shares, under the Companys
repurchase program, were 1,182,983 shares at an average
price of $20.88. There were 1,188,383 treasury shares at
December 31, 2002.

Issuance of each trust preferred debt obligation
(capital securities) is through statutory business trusts and
wholly owned subsidiaries of the Company. See
Item 1  Business, Capital Securities
on page 29.

The table below sets forth information concerning
the Companys capital securities as of December 31,
2002.

|                       |  |            |                        |          |  |      |          |         |  |      |         |          |  |      |        |              |  |  |        |  |  |  |       |   |  |  |               |  |  |  |          | 
|---------------------- |  | ---------- | ---------------------- | -------- |  | ---- | -------- | ------- |  | ---- | ------- | -------- |  | ---- | ------ | ------------ |  |  | ------ |  |  |  | ----- | - |  |  | ------------- |  |  |  | -------- | 
|                       |  |            |                        |          |  |      |          |         |  |      |         |          |  |     
|(Dollars in thousands) |  | Date of    |                        | Maturity |  |      |          | Initial |  |      |         |          |  |     
|Ownership              |  | Subsidiary |                        | Issuance |  | Date |          | Amount  |  | Rate |         | Rate Cap |  | Rate |        | Call Date(1)
|                       |  |            |                        |          |  |      |          |         |  |      |         |          |  |      |        |             
|100%                   |  |            | HFC Capital Trust I    |          |  |      | 3/28/01  |         |  |      | 6/8/31  |          |  | $    | 9,000  |              |  |  | 10.18% |  |  |  | N/A   |   |  |  | Fixed         |  |  |  | 10 Years | 
|100%                   |  |            | HFC Capital Trust II   |          |  |      | 11/28/01 |         |  |      | 12/8/31 |          |  | $    | 5,000  |              |  |  | 5.17%  |  |  |  | 11.00 | % |  |  | LIBOR + 3.75% |  |  |  | 5 Years  | 
|100%                   |  |            | HFC Capital Trust  III |          |  |      | 4/10/02  |         |  |      | 4/10/32 |          |  | $    | 22,000 |              |  |  | 5.32%  |  |  |  | 11.00 | % |  |  | LIBOR + 3.70% |  |  |  | 5 Years  | 
|100%                   |  |            | HFC Capital Trust IV   |          |  |      | 11/1/02  |         |  |      | 11/1/32 |          |  | $    | 15,000 |              |  |  | 4.97%  |  |  |  | 12.00 | % |  |  | LIBOR + 3.35% |  |  |  | 5 Years  | 



---



|    |                                                                            
|--- | ---------------------------------------------------------------------------
|(1) | Exercise of the call option on any of the capital
    securities is at par.

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, 2002, the Company had commitments to fund the
undisbursed portion of existing construction and land loans of
$76.2 million and income property and estate loans of
$5.1 million. The commitments to fund the undisbursed
portion of existing lines of credit, excluding construction and
land lines of credit, totaled $9.3 million.

In addition, as of December 31, 2002, the
Company had commitments to fund $70.5 million in loans
approved by the bank.

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

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leases is not material to the Company as
disclosed herein. See Notes to Consolidated Financial
Statements  Note 14  Commitments and
Contingencies.


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 generally made by the Bank to the participant without
recourse, representation, or warranty, either expressed or
implied, other than usual and customary representations and
warranties regarding ownership by the Bank.

Other Contractual
Obligations The Company
does not have material financial guarantees or other contractual
commitments that are reasonably likely to adversely affect
liquidity. As of December 31, 2002, the Federal Home
Loan Bank issued six letters of credit (LC) for
a total of $193.5 million. The purpose of the LCs is to
fulfill the collateral requirements for five deposits totaling
$150.0 million 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 mature over the next six months. The
maturities coincide with the maturities of the States
deposits. There are no issuance fees associated with these LCs;
however, a maintenance fee of 15 basis points per annum is paid
monthly by the Company. See Notes to Consolidated
Financial Statements  Note 15 
Off-Balance Sheet Activity.

Related Party
Transactions The Company
has related party transactions in the ordinary course of
business. 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 Notes to
Consolidated Financial Statements 
Note 17   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) 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
expensed on deposits and borrowings. The volumes and yields on
loans, investments, deposits and borrowings are affected by
market interest rates. As of December 31, 2002, 91.28% of
the Companys loan portfolio was tied to adjustable rate
indices, such as MTA, LIBOR, Prime, COFI and CMT. As of
December 31, 2002, $1.2 billion, or 62.75%, 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 Banks investment securities portfolio
is subject to interest rate risk. Fluctuations in interest rates
may cause actual prepayments to vary from the estimated
prepayments over the life of the security. This may result in
adjustments to the amortization of premiums or accretion of
discounts related to these instruments, consequently changing
the net yield on such securities. Reinvestment risk is also
associated with the cash flows from such securities. The
unrealized gain/loss on such securities may also be adversely
impacted by changes in interest rates.

At December 31, 2002, 63.19% of the
Companys interest-bearing deposits were comprised of
certificate accounts, with an original weighted average term of
14.5 months. The remaining, weighted average term to

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maturity for the Companys certificate
accounts approximated 7.7 months at December 31, 2002.
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.


As of December 31, 2002, 80.97% of the
Companys borrowings from the FHLB are fixed rate, with
remaining terms ranging from 1 day to 8 years (though
such remaining terms are subject to early call provisions). The
remaining 19.03% of the borrowings carry an adjustable interest
rate, with 88% of the adjustable borrowings tied to the Prime
Rate, maturing in February 2003. The Company intends to roll
these borrowings into shorter term and overnight maturities in
the near term and expects to extend these liabilities sometime
during 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 repricing of the adjustable
rate loans and the 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 mitigated by the $1.2 billion in loans that have
reached contractual floors that will not immediately reprice
upwards in a rising interest rate environment. In fact, although
the bank is technically asset sensitive, due to the floors, the
repricing behavior more closely approximates a liability
sensitive balance sheet. 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,
specifically the one year 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 levels 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.

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
sheet 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 of the floors on loans, and
because a portion of the Companys interest sensitive
assets and liabilities are tied to indices that may lag changes
in market interest rates by three months or more, the static gap
analysis is not the most effective tool to measure the
Companys sensitivity to interest rates.

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Although the cumulative static gap position
indicates an asset-sensitive position, the Companys net
interest income will be impacted by the significant amount of
adjustable rate loans that have reached floor interest rates in
excess of current market rates. In a rising rate environment,
the Companys liabilities within a cumulative static gap
period will reprice upward to market rates while the loan
portfolio may not reprice up because of the floors, causing a
reduction in net interest income. Conversely, in a declining
rate environment, the Companys liabilities will continue
to reprice downward, while its loan portfolio remains at its
floor rates, thereby creating an increase in net interest income.

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 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, 2002, rate
shocks were performed for 100, 200 and 300 basis points up,
and 100 basis points down.

The Company utilizes internal interest rate
floors and caps on individual loans to mitigate the risk of
interest margin compression. 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 continued into 2002, prepayment speeds
continued to increase. If this trend continues in 2003, it could
negatively impact growth in interest earning assets and the
overall yield, 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 rate
increases could exceed the maximum rates allowed on such loans
while the Companys cost of funds continues to rise. As a
result, the interest income derived from these loans would
remain at the cap, resulting in an overall compression on net
interest income.

The following table sets forth information
concerning repricing opportunities for the Companys
interest-earning assets and interest-bearing liabilities as of
December 31, 2002. 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

56



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period in which they mature. Such assets and
liabilities, including those loans that have reached their
internal interest rate floors, are classified by the earlier of
their maturity or repricing date.


|                                               |                               |                             |           |            |         |               |         |            |         |            |          |        |         |   |          |         |         |   |         |         |   |   |           |           |           | 
|---------------------------------------------- | ----------------------------- | --------------------------- | --------- | ---------- | ------- | ------------- | ------- | ---------- | ------- | ---------- | -------- | ------ | ------- | - | -------- | ------- | ------- | - | ------- | ------- | - | - | --------- | --------- | --------- | 
|                                               |                               |                            
|                                               |                               | December 31, 2002          
|                                               |                               |                            
|                                               |                               |                             |           | Over Three |         |               |         | Over       |         |           
|                                               |                               |                             |           | through    |         | Over Six      |         | One Year   |         |           
|                                               |                               | Three Months                |           | Six        |         | through       |         | through    |         | Over       |          |       
|                                               |                               | Or Less                     |           | Months     |         | Twelve Months |         | Five Years |         | Five Years |          | Total 
|(Dollars in thousands)                         |                               |                             |           |            |         |               |         |            |         |            |          |       
|Interest-earning assets:                       |                               |                             |           |            |         |               |         |            |         |            |          |        |         |   |          |         |         |   |         |         |   |   |           |          
|                                               | Cash and cash equivalents(1)  |                             | $         | 1,721      |         |               | $       |           |         |            | $        |       |         |   | $        |        |         |   | $       |        |   |   | $         | 1,721     |          
|                                               | Investments and FHLB Stock(2) |                             |           | 60,587     |         |               |         |           |         |            |          |       |         |   |          | 232,336 |         |   |         |        |   |   |           | 292,923   |          
|                                               | Loans(3)                      |                             |           | 1,185,370  |         |               |         | 727,744    |         |            |          | 53,248 |         |   |          | 35,882  |         |   |         | 136,250 |   |   |           | 2,138,495 |          
|                                               |                               |                             |           |            |         |               |         |            |         |            |          |        |         |   |          |         |         |   |         |         |   |   |           |          
|Total interest-earning assets                  |                               | $                           | 1,247,678 |            |         | $             | 727,744 |            |         | $          | 53,248   |        |         | $ | 268,218  |         |         | $ | 136,250 |         |   | $ | 2,433,138 |          
|                                               |                               |                             |           |            |         |               |         |            |         |            |          |        |         |   |          |         |         |   |         |         |   |   |           |          
|Interest-bearing liabilities                   |                               |                             |           |            |         |               |         |            |         |            |          |        |         |   |          |         |         |   |         |         |   |   |           |          
|                                               | Deposits:                     |                             |           |            |         |               |         |            |         |            |          |        |         |   |          |         |         |   |         |         |   |   |           |           |          
|                                               |                               | Non-certificates of deposit |           | $          | 597,528 |               |         | $          |        |            |          | $      |        |   |          | $       |        |   |         | $       |  |   |           | $         | 597,528   | 
|                                               |                               | Certificates of deposit(4)  |           |            | 365,739 |               |         |            | 227,863 |            |          |        | 224,185 |   |          |         | 204,935 |   |         |         |  |   |           |           | 1,022,722 | 
|                                               | FHLB advances(5)              |                             |           | 119,000    |         |               |         | 58,000     |         |            |          | 15,000 |         |   |          | 202,000 |         |   |         | 205,000 |   |   |           | 599,000   |          
|                                               | Capital securities            |                             |           |           |         |               |         | 42,000     |         |            |          |       |         |   |          |        |         |   |         | 9,000   |   |   |           | 51,000    |          
|                                               |                               |                             |           |            |         |               |         |            |         |            |          |        |         |   |          |         |         |   |         |         |   |   |           |          
|Total interest-bearing liabilities             |                               | $                           | 1,082,267 |            |         | $             | 327,863 |            |         | $          | 239,185  |        |         | $ | 406,935  |         |         | $ | 214,000 |         |   | $ | 2,270,250 |          
|                                               |                               |                             |           |            |         |               |         |            |         |            |          |        |         |   |          |         |         |   |         |         |   |   |           |          
|Interest rate sensitivity gap                  |                               | $                           | 165,411   |            |         | $             | 399,881 |            |         | $          | (185,937 | )      |         | $ | (138,717 | )       |         | $ | (77,750 | )       |   | $ | 162,888   |          
|Cumulative interest rate sensitivity gap       |                               | $                           | 165,411   |            |         | $             | 565,292 |            |         | $          | 379,355  |        |         | $ | 240,638  |         |         | $ | 162,888 |         |   | $ | 162,888   |          
|As percentage of total interest-earning assets |                               |                             | 6.80      | %          |         |               | 23.23   | %          |         |            | 15.59    | %      |         |   | 9.89     | %       |         |   | 6.69    | %       |   |   | 6.69      | %        



---



|    |                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------
|(1) | Excludes noninterest-earning cash balances.                                                                                      
|   
|(2) | Excludes investments mark-to-market
    adjustment and (discounts)/premiums.                                                    
|   
|(3) | Balances include $7.7 million of nonaccrual
    loans, and exclude deferred (fees) and costs and allowance
    for credit losses.
|   
|(4) | Excludes discounts on certificates of deposit
    acquired in connection with the acquisition of First Fidelity.                 
|   
|(5) | Excludes discounts on FHLB advances acquired in
    connection with the acquisition of First Fidelity.                           






|         |                                                               
|-------- | --------------------------------------------------------------
|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 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

57



---



##### Table of Contents



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, 2002, based on the
Companys internally generated model, it was estimated that
the Companys NPV ratio was 9.87% in the event of a
200 basis point increase in rates, an increase of 0.61%
from basecase of 9.81%. If rates were to decrease by
100 basis points, the Companys NPV ratio was
estimated at 9.83%, an increase of 0.20% from basecase.

Presented below, as of December 31, 2002, 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 |         |              
|                       |      |                     |         |              
|(Dollars in thousands) |      |                     |         | $ Change from |  |       |        | Change from
|Change in Rates        |      | $ Amount            |         | Basecase      |  | Ratio |        | Basecase   
|                       |      |                     |         |               |  |       |        |            
|+300 bp                |      |                     | 251,198 |               |  |       | (50    | )           |  |  | 10.01 | %    |   |  | 20 bp | 
|+200 bp                |      |                     | 248,693 |               |  |       | (2,555 | )           |  |  | 9.87  | %    |   |  | 6 bp  | 
|+100 bp                |      |                     | 249,516 |               |  |       | (1,732 | )           |  |  | 9.82  | %    |   |  | 1 bp  | 
|                       | 0 bp |                     |         | 251,248       |  |       |        |             |  |  |       | 9.81 | % |  |       |  | 
|-100 bp                |      |                     | 253,984 |               |  |       | 2,736  |             |  |  | 9.83  | %    |   |  | 2 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 several shortcomings of the typical static 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. In
addition, NPV takes into account the caps and floors on loans.
In the table shown above, this is reflected in the uses of value
in the up 100 bp and 200 bp scenarios and the gain in
value in the down 100 bp scenario. The adjustable rate
loans that have reached their floors gain value as rates drop
and lose value as rates rise until each loans floor is
exceeded. This table demonstrates an anticipated decrease in
value until rates have increased 300 bp or more, as
liabilities reprise upward and earning asset yields remain
stagnant.

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. This
is the result of the Company using local market data compared to
national data when establishing market value. The OTS
model does not take into account floors on loans. However, 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-42 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.

58



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

None.




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. 99.4 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. 99.4 to this Annual Report on
Form 10-K.






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

The following table summarizes information as of
December 31, 2002 relating to equity compensation plans of
the Company pursuant to which grants of options, restricted
stock, or other rights to acquire shares may be granted from
time to time. As of December 31, 2002, the Company had no
equity compensation plans that were not approved by security
holders.

|                                                           |  |                         |         |                   |  |                                |       |  |  |  |         | 
|---------------------------------------------------------- |  | ----------------------- | ------- | ----------------- |  | ------------------------------ | ----- |  |  |  | ------- | 
|                                                           |  |                         |         |                   |  | Number of Securities          
|                                                           |  |                         |         |                   |  | Remaining Available for Future
|                                                           |  | Number of Securities    |         | Weighted-Average  |  | Issuance under Equity         
|                                                           |  | to be Issued upon       |         | Exercise Price of |  | Compensation Plans (excluding 
|                                                           |  | Exercise of Outstanding |         | Outstanding       |  | securities reflected in the   
|Plan Category                                              |  | Options                 |         | Options           |  | first column)                 
|                                                           |  |                         |         |                   |  |                               
|Equity compensation plans approved by security
    holders |  |                         | 763,900 |                   |  | $                              | 18.06 |  |  |  | 104,367 | 

Information concerning security ownership of
certain beneficial owners and management is incorporated by
reference from the sections entitled Security Ownership of
Principal Stockholders and Management and Election
of Directors of the Companys Proxy Statement, which
is filed as Exhibit No. 99.4 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. 99.4 to this Annual Report on
Form 10-K.




PART IV






|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

Evaluation of Disclosure Controls and
Procedures

Under SEC rules, the Company is required to
maintain disclosure controls and procedures designed to ensure
that information required to be disclosed by the Company in the
reports that it files or submits under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and
forms. Within the 90-day period prior to the filing date of this
report, the Company carried out an evaluation of the
effectiveness of the design and operation of its disclosure
controls and procedures. The Companys management,
including the Companys Chief Executive Officer and Chief

59



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Financial Officer, supervised and participated in
the evaluation. Based on this evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that the
Companys disclosure controls and procedures were effective
as of the evaluation date.


Changes in Internal Control

There were no significant changes in the
Companys internal controls or in other factors that could
significantly affect these controls subsequent to the date of
their evaluation.






|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | 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, 2002 and 2001                     
|                                  | Consolidated Statements of Income for the years
    ended December 31, 2002, 2001 and 2000              
|                                  | Consolidated Statements of Stockholders
    Equity for the years ended December 31, 2002, 2001 and 2000
|                                  | Consolidated Statements of Cash Flows for the
    years ended December 31, 2002, 2001 and 2000          
|                                  | Notes to Consolidated Financial Statements for
    the years ended December 31, 2002, 2001 and 2000     



| |                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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



| |                                                                                                   
| | --------------------------------------------------------------------------------------------------
| | During the fourth quarter of 2002, registrant
    filed the following Current Reports on Form 8-K:

|           |  |      |       |         |  |  |            | 
|---------- |  | ---- | ----- | ------- |  |  | ---------- | 
|           |  |      |       | Item   
|Date Filed |  | Form |       | Numbers
|           |  |      |       |        
|10/16/02   |  |      | 8-K   |         |  |  | 2, 5, 7, 9 | 
|11/05/02   |  |      | 8-K   |         |  |  | 5          | 
|11/05/02   |  |      | 8-K/A |         |  |  | 7          | 
|11/14/02   |  |      | 8-K   |         |  |  | 9          | 
|12/03/02   |  |      | 8-K   |         |  |  | 7, 9       | 

(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                      |  | Form of Warrants to purchase an aggregate of
    2,512,188 shares of Common Stock (2)                               
|        | 4 | .3                      |  | Registration Rights Agreement among the Company
    and certain investors (2)                                       
|        | 4 | .4                      |  | Unit Purchase Agreement among the Company and the
    investors named therein (2)                                   

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|        |   |                         |  |                                                                                                                                                                                                                |                                                                                                                                                                                                        |    
|------- | - | ----------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---
|Exhibit |   |                        
|Number  |   | Description of Document
|        |   |                        
|        | 4 | .5                      |  | Indenture dated as of March  28, 2001 between Hawthorne Financial Corporation and Wilmington Trust Company, as Trustee (2)                                                                                    
|        | 4 | .6                      |  | Certificate of Trust of HFC Capital Trust I (2)                                                                                                                                                               
|        | 4 | .7                      |  |                                                                                                                                                                                                                | 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 | .8                      |  | Capital Securities Certificate of HFC Capital Trust I (2)                                                                                                                                                     
|        | 4 | .9                      |  | Common Securities Certificate of HFC Capital Trust I (2)                                                                                                                                                      
|        | 4 | .10                     |  | Capital Securities Guarantee Agreement between Hawthorne Financial Corporation and Wilmington Trust Company, dated as of March 28, 2001 (2)                                                                   
|        | 4 | .11                     |  | Common Securities Guarantee Agreement between Hawthorne Financial Corporation and Wilmington Trust Company, dated as of March 28, 2001 (2)                                                                    
|        | 4 | .12                     |  | 10.18% Junior Subordinated Deferrable Interest Debentures due June 8, 2031 (2)                                                                                                                                
|        | 4 | .13                     |  | Indenture dated as of November  28, 2001 between Hawthorne Financial Corporation and Wilmington Trust Company, as Trustee (3)                                                                                 
|        | 4 | .14                     |  | Certificate of Trust of HFC Capital Trust II (3)                                                                                                                                                              
|        | 4 | .15                     |  | 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 (3)
|        | 4 | .16                     |  | Capital Securities Certificate of HFC Capital Trust II (3)                                                                                                                                                    
|        | 4 | .17                     |  | Common Securities Certificate of HFC Capital Trust II (3)                                                                                                                                                     
|        | 4 | .18                     |  | Capital Securities Guarantee Agreement between Hawthorne Financial Corporation and Wilmington Trust Company, dated as of November 28, 2001 (3)                                                                
|        | 4 | .19                     |  | Floating Rate Junior Subordinated Debt Securities due December 8, 2031 (3)                                                                                                                                    
|        | 4 | .20                     |  | HFC Capital Trust II Placement Agent Agreement (3)                                                                                                                                                            
|        | 4 | .21                     |  | Declaration of Trust of HFC Capital Trust III                                                                                                                                                                 
|        | 4 | .22                     |  | Amended and Restated Declaration of Trust of HFC Capital Trust  III, among Hawthorne Financial Corporation, Wilmington Trust Company and the Administrative Trustees named therein dated as of April 10, 2002 
|        | 4 | .23                     |  | Capital Securities Certificate of HFC Capital Trust III                                                                                                                                                       
|        | 4 | .24                     |  | Common Securities Certificate of HFC Capital Trust III                                                                                                                                                        
|        | 4 | .25                     |  | Capital Securities Guarantee Agreement between Hawthorne Financial Corporation and Wilmington Trust Company, dated as of April 10, 2002                                                                       
|        | 4 | .26                     |  | Floating Rate Junior Subordinated Debt Security due 2032                                                                                                                                                      
|        | 4 | .27                     |  | Indenture dated as of April 10, 2002, between Hawthorne Financial Corporation and Wilmington Trust Company, as Trustee                                                                                        
|        | 4 | .28                     |  | Certificate of Trust of HFC Capital Trust IV                                                                                                                                                                  
|        | 4 | .29                     |  | Amended and Restated Trust Agreement of HFC Capital Trust  IV, among Hawthorne Financial Corporation, The Bank of New York and the Administrative Trustees named therein dated as of November 1, 2002         
|        | 4 | .30                     |  | Preferred Security Certificate of HFC Capital Trust IV                                                                                                                                                        
|        | 4 | .31                     |  | Common Security Certificate of HFC Capital Trust IV                                                                                                                                                           
|        | 4 | .32                     |  | Guarantee Agreement between Hawthorne Financial Corporation and The Bank of New York, dated as of November 1, 2002                                                                                            
|        | 4 | .33                     |  | Floating Rate Junior Subordinated Note due 2032                                                                                                                                                               
|        | 4 | .34                     |  | Junior Subordinated Indenture dated as of November 1, 2002 between Hawthorne Financial Corporation and The Bank of New York, as Trustee                                                                       

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|        |    |                         |  |                                                                                                                                                                                                                                                                                                               
|------- | -- | ----------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |                        
|Number  |    | Description of Document
|        |    |                        
|        | 10 | .1                      |  | Hawthorne Financial Corporation 2001 Stock
    Incentive Plan (3)*                                                                                                                                                                                                                                            
|        | 10 | .2                      |  | Change in Control Agreements between Company and
    Simone Lagomarsino (4)*                                                                                                                                                                                                                                  
|        | 10 | .3                      |  | Form of Change in Control Employment Agreement
    for Executive Officers (4)*                                                                                                                                                                                                                                
|        | 10 | .4                      |  | Deferred Compensation Plan (2)*                                                                                                                                                                                                                                                                               
|        | 10 | .5                      |  | Agreement and Plan of Reorganization dated as of
    March 20, 2002 and amended and restated as of
    April 24, 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. (5)
|        | 10 | .6                      |  | Employment Agreement for Robert P. Quinn                                                                                                                                                                                                                                                                      
|        | 11 | .1                      |  | Statement on computation of per share
    earnings (6)                                                                                                                                                                                                                                                        
|        | 21 | .1                      |  | Subsidiaries of the Registrant                                                                                                                                                                                                                                                                                
|        | 23 | .1                      |  | Consent of Deloitte & Touche LLP                                                                                                                                                                                                                                                                              
|        | 99 | .1                      |  | Certification of Chief Executive Officer pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                        
|        | 99 | .2                      |  | Certification of Chief Financial Officer pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                        
|        | 99 | .3                      |  | Hawthorne Financial Corporation Code of Conduct                                                                                                                                                                                                                                                               
|        | 99 | .4                      |  | Proxy Statement for Annual Meeting of
    Shareholders (7)                                                                                                                                                                                                                                                    



---



| |   |                                                           
| | - | ----------------------------------------------------------
| | * | 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, 2001                                
|
| | (4) | Incorporated by reference from the Companys
    Quarterly Report on Form 10-Q for the quarter ended
    June 30, 2000.                             
|
| | (5) | Incorporated by reference from the Companys
    Registration Statement on Form S-4 (No. 333-89776)
    filed on June 4, 2002.                      
|
| | (6) | See Note 1 to the Notes to Consolidated
    Financial Statements included in Item 8 and listed in
    Item 15(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, 2002.                                                           

62



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##### 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 28, 2003

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                                  |  | Title                                                                                                 |  | Date          
|                                           |  |                                                                                                       |  |               
|                                          
|/s/ SIMONE LAGOMARSINOSimone Lagomarsino   |  | Director, President, and Chief Executive
    Officer
    (Principal Executive Officer)                |  | March 28, 2003
|                                          
|/s/ DAVID ROSENTHALDavid Rosenthal         |  | Executive Vice President and Chief Financial
    Officer (Principal Financial and Accounting Officer) |  | March 28, 2003
|                                          
|/s/ TIMOTHY R. CHRISMANTimothy R. Chrisman |  | Chairman of the Board                                                                                 |  | March 28, 2003
|                                          
|/s/ GARY W. BRUMMETTGary W. Brummett       |  | Director                                                                                              |  | March 28, 2003
|                                          
|/s/ CARLTON JENKINSCarlton Jenkins         |  | Director                                                                                              |  | March 28, 2003
|                                          
|/s/ ANTHONY W. LIBERATIAnthony W. Liberati |  | Director                                                                                              |  | March 28, 2003
|                                          
|/s/ HARRY F. RADCLIFFEHarry F. Radcliffe   |  | Director                                                                                              |  | March 28, 2003
|                                          
|/s/ HOWARD E. RITTHoward E. Ritt           |  | Director                                                                                              |  | March 28, 2003

63



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##### Table of Contents






CERTIFICATION

I, Simone Lagomarsino, certify that:

1. I have reviewed this annual report on
Form 10-K of Hawthorne Financial Corporation;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                        
|
| | c) presented in this annual report the
    Companys conclusions about the effectiveness of the
    disclosure controls and procedures based on its evaluation as of
    the Evaluation Date;                                                                                                                  

5. The registrants other certifying
officers and I have disclosed, based on the Companys
most recent evaluation, to the registrants auditors and
the audit committee of registrants board of directors (or
persons performing the equivalent functions):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officers and I have indicated in this annual report whether
there were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of the Companys most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.



| |     |                       
| | --- | ----------------------
| | By: | /s/ SIMONE LAGOMARSINO

| |                                          
| | -----------------------------------------
| |                                          
| | Simone Lagomarsino                       
| | President and Chief Executive
    Officer

Date: March 28, 2003

64



---



##### Table of Contents






CERTIFICATION

I, David Rosenthal, certify that:

1. I have reviewed this annual report on
Form 10-K of Hawthorne Financial Corporation;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                        
|
| | c) presented in this annual report the
    Companys conclusions about the effectiveness of the
    disclosure controls and procedures based on its evaluation as of
    the Evaluation Date;                                                                                                                  

5. The registrants other certifying
officers and I have disclosed, based on the Companys
most recent evaluation, to the registrants auditors and
the audit committee of registrants board of directors (or
persons performing the equivalent functions):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officers and I have indicated in this annual report whether
there were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of the Companys most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.



| |     |                    
| | --- | -------------------
| | By: | /s/ DAVID ROSENTHAL

| |                                                         
| | --------------------------------------------------------
| |                                                         
| | David Rosenthal                                         
| | Executive Vice President and Chief Financial
    Officer

Date: March 28, 2003

65



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##### 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-8 | 

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, 2002 and 2001, and the related consolidated
statements of income, stockholders equity, and cash flows
for each of the three years in the period ended
December 31, 2002. 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, 2002 and 2001, and the
results of its operations and its cash flows for the years then
ended in conformity with accounting principles generally
accepted in the United States of America.

/s/ DELOITTE & TOUCHE LLP

LOS ANGELES, CALIFORNIA

FEBRUARY 12, 2003


A-2



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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES




CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION

|                                          |                                                                                                                                   |                                                                                 |                     |                                            |         |        |           |           |         |        |           | 
|----------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | ------------------- | ------------------------------------------ | ------- | ------ | --------- | --------- | ------- | ------ | --------- | 
|                                          |                                                                                                                                   | December 31,                                                                    |                     | December 31,                              
|                                          |                                                                                                                                   | 2002                                                                            |                     | 2001                                      
|(Dollars in thousands)                    |                                                                                                                                   |                                                                                 |                     |                                           
|Assets:                                   |                                                                                                                                   |                                                                                 |                     |                                            |         |        |           |          
|                                          | Cash and cash equivalents                                                                                                         |                                                                                 | $                   | 21,849                                     |         |        | $         | 98,583    |        
|                                          | Investment securities available-for-sale, at fair
    value                                                                       |                                                                                 |                     | 267,596                                    |         |        |           |          |        
|                                          | Loans receivable (net of allowance for credit
    losses of $35,309 in 2002 and $30,602 in 2001)                                  |                                                                                 |                     | 2,114,255                                  |         |        |           | 1,709,283 |        
|                                          | Real estate owned                                                                                                                 |                                                                                 |                     |                                           |         |        |           | 1,312     |        
|                                          | Accrued interest receivable                                                                                                       |                                                                                 |                     | 11,512                                     |         |        |           | 9,677     |        
|                                          | Investment in capital stock of Federal Home
    Loan Bank, at cost                                                                |                                                                                 |                     | 34,705                                     |         |        |           | 24,464    |        
|                                          | Office property and equipment at cost, net                                                                                        |                                                                                 |                     | 5,106                                      |         |        |           | 4,237     |        
|                                          | Deferred tax asset, net                                                                                                           |                                                                                 |                     | 10,068                                     |         |        |           | 4,363     |        
|                                          | Goodwill                                                                                                                          |                                                                                 |                     | 22,970                                     |         |        |           |          |        
|                                          | Intangible assets                                                                                                                 |                                                                                 |                     | 1,388                                      |         |        |           |          |        
|                                          | Other assets                                                                                                                      |                                                                                 |                     | 5,521                                      |         |        |           | 4,278     |        
|                                          |                                                                                                                                   |                                                                                 |                     |                                            |         |        |           |          
|                                          |                                                                                                                                   |                                                                                 |                     | Total assets                               |         | $      | 2,494,970 |           |         | $      | 1,856,197 | 
|                                          |                                                                                                                                   |                                                                                 |                     |                                            |         |        |           |          
|                                         
|Liabilities and Stockholders
    Equity: |                                                                                                                                   |                                                                                 |                     |                                            |         |        |           |          
|                                          | Liabilities:                                                                                                                      |                                                                                 |                     |                                            |         |        |           |           |        
|                                          |                                                                                                                                   | Deposits:                                                                       |                     |                                            |         |        |           |           |         |       
|                                          |                                                                                                                                   |                                                                                 | Noninterest-bearing |                                            | $       | 39,818 |           |           | $       | 35,634 |          
|                                          |                                                                                                                                   |                                                                                 | Interest-bearing:   |                                            |         |        |           |           |         |        |          
|                                          |                                                                                                                                   |                                                                                 |                     | Transaction accounts                       |         |        | 597,528   |           |         |        | 338,829   | 
|                                          |                                                                                                                                   |                                                                                 |                     | Certificates of deposit                    |         |        | 1,025,464 |           |         |        | 825,182   | 
|                                          |                                                                                                                                   |                                                                                 |                     |                                            |         |        |           |          
|                                          |                                                                                                                                   |                                                                                 |                     | Total deposits                             |         |        | 1,662,810 |           |         |        | 1,199,645 | 
|                                          |                                                                                                                                   | FHLB advances                                                                   |                     |                                            | 600,190 |        |           |           | 484,000 |       
|                                          |                                                                                                                                   | Senior notes                                                                    |                     |                                            |        |        |           |           | 25,778  |       
|                                          |                                                                                                                                   | Capital securities                                                              |                     |                                            | 51,000  |        |           |           | 14,000  |       
|                                          |                                                                                                                                   | Accounts payable and other liabilities                                          |                     |                                            | 17,904  |        |           |           | 12,325  |       
|                                          |                                                                                                                                   |                                                                                 |                     |                                            |         |        |           |          
|                                          |                                                                                                                                   |                                                                                 |                     | Total liabilities                          |         |        | 2,331,904 |           |         |        | 1,735,748 | 
|                                          |                                                                                                                                   |                                                                                 |                     |                                            |         |        |           |          
|Commitments and Contingencies (Note 14)   |                                                                                                                                   |                                                                                 |                    |                                            |         |        |          |          
|Stockholders Equity:                     |                                                                                                                                   |                                                                                 |                     |                                            |         |        |           |          
|                                          | Common stock  $0.01 par value;
    authorized 20,000,000 shares; issued, 8,576,048 shares
    (2002) and 5,920,266 shares (2001) |                                                                                 |                     | 86                                         |         |        |           | 59        |        
|                                          | Capital in excess of par value  common
    stock                                                                                 |                                                                                 |                     | 81,087                                     |         |        |           | 44,524    |        
|                                          | Retained earnings                                                                                                                 |                                                                                 |                     | 105,134                                    |         |        |           | 82,435    |        
|                                          | Accumulated other comprehensive income                                                                                            |                                                                                 |                     | 1,504                                      |         |        |           |          |        
|                                          | Less:                                                                                                                             |                                                                                 |                     |                                            |         |        |           |           |        
|                                          |                                                                                                                                   | Treasury stock, at cost 
    1,188,383 shares (2002) and 560,719 shares (2001) |                     |                                            | (24,745 | )      |           |           | (6,569  | )     
|                                          |                                                                                                                                   |                                                                                 |                     |                                            |         |        |           |          
|                                          |                                                                                                                                   |                                                                                 |                     | Total stockholders equity                 |         |        | 163,066   |           |         |        | 120,449   | 
|                                          |                                                                                                                                   |                                                                                 |                     |                                            |         |        |           |          
|                                          |                                                                                                                                   |                                                                                 |                     | Total liabilities and stockholders equity |         | $      | 2,494,970 |           |         | $      | 1,856,197 | 
|                                          |                                                                                                                                   |                                                                                 |                     |                                            |         |        |           |          

See accompanying notes to Consolidated Financial
Statements

A-3



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES




CONSOLIDATED STATEMENTS OF INCOME

|                                                                |                                      |                                                              |                                                           |         |        |         |        |         |        |         |        |         |        |         | 
|--------------------------------------------------------------- | ------------------------------------ | ------------------------------------------------------------ | --------------------------------------------------------- | ------- | ------ | ------- | ------ | ------- | ------ | ------- | ------ | ------- | ------ | ------- | 
|                                                                |                                      |                                                             
|                                                                |                                      | Year Ended December 31,                                     
|                                                                |                                      |                                                             
|                                                                |                                      | 2002                                                         |                                                           | 2001    |        | 2000   
|(In thousands, except per share data)                           |                                      |                                                              |                                                           |         |        |        
|Interest revenues:                                              |                                      |                                                              |                                                           |         |        |         |        |         |        |         |        |        
|                                                                | Loans                                |                                                              | $                                                         | 130,628 |        |         | $      | 143,249 |        |         | $      | 141,279 |       
|                                                                | Investments and other securities     |                                                              |                                                           | 3,155   |        |         |        |        |        |         |        |        |       
|                                                                | Fed funds and other                  |                                                              |                                                           | 3,411   |        |         |        | 4,437   |        |         |        | 7,709   |       
|                                                                |                                      |                                                              |                                                           |         |        |         |        |         |        |         |        |        
|                                                                |                                      |                                                              | Total interest revenues                                   |         |        | 137,194 |        |         |        | 147,686 |        |         |        | 148,988 | 
|                                                                |                                      |                                                              |                                                           |         |        |         |        |         |        |         |        |        
|Interest costs:                                                 |                                      |                                                              |                                                           |         |        |         |        |         |        |         |        |        
|                                                                | Deposits                             |                                                              |                                                           | 36,755  |        |         |        | 60,022  |        |         |        | 63,513  |       
|                                                                | FHLB advances                        |                                                              |                                                           | 21,931  |        |         |        | 20,956  |        |         |        | 20,180  |       
|                                                                | Senior notes                         |                                                              |                                                           | 3,120   |        |         |        | 3,970   |        |         |        | 4,989   |       
|                                                                | Capital securities                   |                                                              |                                                           | 2,281   |        |         |        | 722     |        |         |        |        |       
|                                                                |                                      |                                                              |                                                           |         |        |         |        |         |        |         |        |        
|                                                                |                                      |                                                              | Total interest costs                                      |         |        | 64,087  |        |         |        | 85,670  |        |         |        | 88,682  | 
|                                                                |                                      |                                                              |                                                           |         |        |         |        |         |        |         |        |        
|Net interest income                                             |                                      |                                                              | 73,107                                                    |         |        |         | 62,016 |         |        |         | 60,306 |        
|Provision for credit losses                                     |                                      |                                                              | 870                                                       |         |        |         | 3,400  |         |        |         | 6,000  |        
|                                                                |                                      |                                                              |                                                           |         |        |         |        |         |        |         |        |        
|                                                                |                                      |                                                              | Net interest income after provision for credit
    losses |         |        | 72,237  |        |         |        | 58,616  |        |         |        | 54,306  | 
|Noninterest revenues:                                           |                                      |                                                              |                                                           |         |        |         |        |         |        |         |        |        
|                                                                |                                      | Loan related and other                                       |                                                           |         | 4,715  |         |        |         | 4,268  |         |        |         | 7,072  |        
|                                                                |                                      | Deposit fees                                                 |                                                           |         | 1,536  |         |        |         | 1,362  |         |        |         | 1,022  |        
|                                                                |                                      | Gain on sale of available-for-sale investment
    securities |                                                           |         | 136    |         |        |         |       |         |        |         |       |        
|                                                                |                                      |                                                              |                                                           |         |        |         |        |         |        |         |        |        
|                                                                |                                      |                                                              | Total noninterest revenues                                |         |        | 6,387   |        |         |        | 5,630   |        |         |        | 8,094   | 
|Income/(loss) from real estate operations, net                  |                                      |                                                              | 71                                                        |         |        |         | 205    |         |        |         | (924   | )      
|Noninterest expenses:                                           |                                      |                                                              |                                                           |         |        |         |        |         |        |         |        |        
|                                                                | General and administrative expenses: |                                                              |                                                           |         |        |         |        |         |        |         |        |         |       
|                                                                |                                      | Employee                                                     |                                                           |         | 22,389 |         |        |         | 18,320 |         |        |         | 17,391 |        
|                                                                |                                      | Operating                                                    |                                                           |         | 7,259  |         |        |         | 6,409  |         |        |         | 6,092  |        
|                                                                |                                      | Occupancy                                                    |                                                           |         | 4,109  |         |        |         | 4,015  |         |        |         | 3,758  |        
|                                                                |                                      | Professional                                                 |                                                           |         | 2,132  |         |        |         | 2,857  |         |        |         | 4,255  |        
|                                                                |                                      | Technology                                                   |                                                           |         | 1,734  |         |        |         | 1,897  |         |        |         | 1,939  |        
|                                                                |                                      | SAIF premiums and OTS assessments                            |                                                           |         | 588    |         |        |         | 929    |         |        |         | 893    |        
|                                                                |                                      | Other/legal settlements                                      |                                                           |         | 323    |         |        |         | 110    |         |        |         | 2,196  |        
|                                                                |                                      |                                                              |                                                           |         |        |         |        |         |        |         |        |        
|                                                                |                                      |                                                              | Total general and administrative expenses                 |         |        | 38,534  |        |         |        | 34,537  |        |         |        | 36,524  | 
|                                                                |                                      |                                                              |                                                           |         |        |         |        |         |        |         |        |        
|Income before income taxes and extraordinary item               |                                      |                                                              | 40,161                                                    |         |        |         | 29,914 |         |        |         | 24,952 |        
|Income tax provision                                            |                                      |                                                              | 16,259                                                    |         |        |         | 12,612 |         |        |         | 10,668 |        
|                                                                |                                      |                                                              |                                                           |         |        |         |        |         |        |         |        |        
|Income before extraordinary item                                |                                      |                                                              | 23,902                                                    |         |        |         | 17,302 |         |        |         | 14,284 |        
|Extraordinary item, related to early
    extinguishment of debt |                                      |                                                              | (1,203                                                    | )       |        |         | (469   | )       |        |         |       |        
|                                                                |                                      |                                                              |                                                           |         |        |         |        |         |        |         |        |        
|Net income                                                      |                                      | $                                                            | 22,699                                                    |         |        | $       | 16,833 |         |        | $       | 14,284 |        
|                                                                |                                      |                                                              |                                                           |         |        |         |        |         |        |         |        |        
|Basic earnings per share before extraordinary item              |                                      | $                                                            | 3.75                                                      |         |        | $       | 3.27   |         |        | $       | 2.69   |        
|                                                                |                                      |                                                              |                                                           |         |        |         |        |         |        |         |        |        
|Basic earnings per share after extraordinary item               |                                      | $                                                            | 3.56                                                      |         |        | $       | 3.18   |         |        | $       | 2.69   |        
|                                                                |                                      |                                                              |                                                           |         |        |         |        |         |        |         |        |        
|Diluted earnings per share before extraordinary
    item        |                                      | $                                                            | 3.03                                                      |         |        | $       | 2.29   |         |        | $       | 1.94   |        
|                                                                |                                      |                                                              |                                                           |         |        |         |        |         |        |         |        |        
|Diluted earnings per share after extraordinary
    item         |                                      | $                                                            | 2.88                                                      |         |        | $       | 2.23   |         |        | $       | 1.94   |        
|                                                                |                                      |                                                              |                                                           |         |        |         |        |         |        |         |        |        
|Weighted average basic shares outstanding                       |                                      |                                                              | 6,382                                                     |         |        |         | 5,291  |         |        |         | 5,300  |        
|                                                                |                                      |                                                              |                                                           |         |        |         |        |         |        |         |        |        
|Weighted average diluted shares outstanding                     |                                      |                                                              | 7,891                                                     |         |        |         | 7,565  |         |        |         | 7,371  |        
|                                                                |                                      |                                                              |                                                           |         |        |         |        |         |        |         |        |        

See accompanying notes to Consolidated Financial
Statements

A-4



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES




CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                                                                                                              |  |        |       |        |  |            |    |          |  |               |        |          |  |               |         |               |  |   |       |     |  |   |         |   |  |   |         |   |  |   |        | 
|------------------------------------------------------------------------------------------------------------- |  | ------ | ----- | ------ |  | ---------- | -- | -------- |  | ------------- | ------ | -------- |  | ------------- | ------- | ------------- |  | - | ----- | --- |  | - | ------- | - |  | - | ------- | - |  | - | ------ | 
|                                                                                                              |  |        |       |        |  | Capital in |    |          |  |               |        |          |  |               |         |              
|                                                                                                              |  |        |       |        |  | Excess of  |    |          |  | Accumulated   |        |          |  |               |         |              
|                                                                                                              |  | Number |       |        |  | Par        |    |          |  | Other         |        |          |  |               |         |              
|                                                                                                              |  | of     |       |        |  | Value-     |    |          |  | Comprehensive |        |          |  | Total         |         |              
|                                                                                                              |  | Common |       | Common |  | Common     |    | Retained |  | Income/(Loss) |        | Treasury |  | Stockholders |         | Comprehensive
|                                                                                                              |  | Shares |       | Stock  |  | Stock      |    | Earnings |  | Plan          |        | Stock    |  | Equity        |         | Income       
|(Dollars in thousands)                                                                                        |  |        |       |        |  |            |    |          |  |               |        |          |  |               |         |              
|Balance at January 1, 2000                                                                                    |  | $      | 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 |   |  |   |        | 
|Exercised stock options                                                                                       |  |        | 106   |        |  |            | 2  |          |  |               | 1,121  |          |  |               |        |               |  |   |      |     |  |   |        |   |  |   | 1,123   |   |  |   |        | 
|Exercised warrants                                                                                            |  |        | 1,284 |        |  |            | 13 |          |  |               | 2,720  |          |  |               |        |               |  |   |      |     |  |   |        |   |  |   | 2,733   |   |  |   |        | 
|Tax benefit for stock options exercised                                                                       |  |        |      |        |  |            |   |          |  |               | 729    |          |  |               |        |               |  |   |      |     |  |   |        |   |  |   | 729     |   |  |   |        | 
|Treasury stock                                                                                                |  |        | (628  | )      |  |            |   |          |  |               |       |          |  |               |        |               |  |   |      |     |  |   | (18,176 | ) |  |   | (18,176 | ) |  |   |        | 
|Stock issued for acquisition of First Fidelity(1)                                                             |  |        | 1,266 |        |  |            | 12 |          |  |               | 31,993 |          |  |               |        |               |  |   |      |     |  |   |        |   |  |   | 32,005  |   |  |   |        | 
|Net income                                                                                                    |  |        |       |        |  |            |   |          |  |               |       |          |  |               | 22,699  |               |  |   |      |     |  |   |        |   |  |   | 22,699  |   |  | $ | 22,699 | 
|Other comprehensive income Unrealized gain (loss)
    on investment securities available-for-sale, net of tax |  |        |      |        |  |            |   |          |  |               |       |          |  |               |        |               |  |   | 1,504 | (2) |  |   |        |   |  |   | 1,504   |   |  |   | 1,504  | 
|                                                                                                              |  |        |       |        |  |            |    |          |  |               |        |          |  |               |         |               |  |   |       |     |  |   |         |   |  |   |         |   |  |   |        | 
|Comprehensive income                                                                                          |  |        |      |        |  |            |   |          |  |               |       |          |  |               |        |               |  |   |      |     |  |   |        |   |  |   |        |   |  | $ | 24,203 | 
|                                                                                                              |  |        |       |        |  |            |    |          |  |               |        |          |  |               |         |               |  |   |       |     |  |   |         |   |  |   |         |   |  |   |        | 
|Balance at December 31, 2002                                                                                  |  |        | 7,388 |        |  | $          | 86 |          |  | $             | 81,087 |          |  | $             | 105,134 |               |  | $ | 1,504 |     |  | $ | (24,745 | ) |  | $ | 163,066 |   |  |   |        | 
|                                                                                                              |  |        |       |        |  |            |    |          |  |               |        |          |  |               |         |               |  |   |       |     |  |   |         |   |  |   |         |   |  |   |        | 



---

(1) Stock issued at $25.27.

|    |  |                                                                             |  |                   |        |  
|--- |  | --------------------------------------------------------------------------- |  | ----------------- | ------ | -
|    |  |                                                                             |  | December 31, 2002
|(2) |  |                                                                             |  |                  
|    |  | Unrealized net holding gain on available-for-sale
    investment securities |  | $                 | 2,639  |  
|    |  | Reclassification adjustment for losses/(gains)
    realized in income       |  |                   |       |  
|    |  |                                                                             |  |                   |        |  
|    |  | Net unrealized gain                                                         |  |                   | 2,639  |  
|    |  | Tax effect                                                                  |  |                   | (1,135 | )
|    |  |                                                                             |  |                   |        |  
|    |  | Unrealized holding gain on available-for-sale
    securities, net of tax    |  | $                 | 1,504  |  
|    |  |                                                                             |  |                   |        |  

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,      
|                                      |                                                                                   |                               
|                                      |                                                                                   | 2002                           |                                                         | 2001                                      |          | 2000  
|(Dollars in thousands)                |                                                                                   |                                |                                                         |                                           |          |       
|Cash Flows from Operating Activities: |                                                                                   |                                |                                                         |                                           |          |        |          |        |          |        |          |       
|                                      | Net income                                                                        |                                | $                                                       | 22,699                                    |          |        | $        | 16,833 |          |        | $        | 14,284 |         
|                                      | Adjustments to reconcile net income to cash
    provided by operating activities: |                                |                                                         |                                           |          |        |          |        |          |        |          |        |         
|                                      |                                                                                   |                                | Deferred income tax benefit                             |                                           |          | (2,249 | )        |        |          | (1,496 | )        |        |          | (664   | )       
|                                      |                                                                                   |                                | Provision for credit losses on loans                    |                                           |          | 870    |          |        |          | 3,400  |          |        |          | 6,000  |         
|                                      |                                                                                   |                                | Chargeoff/provision for losses on real estate
    owned |                                           |          |       |          |        |          |       |          |        |          | 476    |         
|                                      |                                                                                   |                                | Net gain on sale of investments                         |                                           |          | (136   | )        |        |          |       |          |        |          |       |         
|                                      |                                                                                   |                                | Net (gain)/loss from sale of loans                      |                                           |          | (24    | )        |        |          | 110    |          |        |          |       |         
|                                      |                                                                                   |                                | Net (gain)/loss from sale of real estate owned          |                                           |          | (87    | )        |        |          | (106   | )        |        |          | 166    |         
|                                      |                                                                                   |                                | Net loss on extinguishment of debt                      |                                           |          | 1,203  |          |        |          |       |          |        |          |       |         
|                                      |                                                                                   |                                | Loan fee and discount amortization (accretion)          |                                           |          | 1,377  |          |        |          | (2,341 | )        |        |          | (2,822 | )       
|                                      |                                                                                   |                                | Depreciation and amortization                           |                                           |          | 3,519  |          |        |          | 2,750  |          |        |          | 2,778  |         
|                                      |                                                                                   |                                | FHLB dividends                                          |                                           |          | (1,646 | )        |        |          | (1,206 | )        |        |          | (1,476 | )       
|                                      |                                                                                   |                                | Decrease/(increase) in accrued interest receivable      |                                           |          | 648    |          |        |          | 1,363  |          |        |          | (1,790 | )       
|                                      |                                                                                   |                                | Decrease in other assets                                |                                           |          | 51,447 |          |        |          | 798    |          |        |          | 1,143  |         
|                                      |                                                                                   |                                | (Decrease)/increase in other liabilities                |                                           |          | (808   | )        |        |          | 1,305  |          |        |          | (1,788 | )       
|                                      |                                                                                   |                                |                                                         |                                           |          |        |          |        |          |        |          |       
|                                      |                                                                                   |                                |                                                         | Net cash provided by operating activities |          |        | 76,813   |        |          |        | 21,410   |        |          |        | 16,307   |  
|                                      |                                                                                   |                                |                                                         |                                           |          |        |          |        |          |        |          |       
|Cash Flows from Investing Activities: |                                                                                   |                                |                                                         |                                           |          |        |          |        |          |        |          |       
|                                      | Loans:                                                                            |                                |                                                         |                                           |          |        |          |        |          |        |          |        |         
|                                      |                                                                                   | New loans funded               |                                                         |                                           | (688,283 | )      |          |        | (666,368 | )      |          |        | (753,066 | )     
|                                      |                                                                                   | Payoffs and principal payments |                                                         |                                           | 878,725  |        |          |        | 592,617  |        |          |        | 576,206  |       
|                                      |                                                                                   | Sales proceeds                 |                                                         |                                           | 10,891   |        |          |        | 27,765   |        |          |        | 14,961   |       
|                                      |                                                                                   | Purchases                      |                                                         |                                           | (78,947  | )      |          |        | (55,458  | )      |          |        | (8,568   | )     
|                                      |                                                                                   | Other, net                     |                                                         |                                           | (877     | )      |          |        | (3,018   | )      |          |        | 466      |       
|                                      | Activity in available-for-sale investment
    securities:                         |                                |                                                         |                                           |          |        |          |        |          |        |          |        |         
|                                      |                                                                                   | Purchases                      |                                                         |                                           | (258,749 | )      |          |        |         |        |          |        |         |       
|                                      |                                                                                   | Sales proceeds                 |                                                         |                                           | 39,373   |        |          |        |         |        |          |        |         |       
|                                      |                                                                                   | Principal payments             |                                                         |                                           | 18,215   |        |          |        |         |        |          |        |         |       
|                                      | Purchases of FHLB stock                                                           |                                |                                                         |                                          |          |        |          | (2,528 | )        |        |          | (630   | )       
|                                      | Redemption of FHLB stock                                                          |                                |                                                         |                                          |          |        |          |       |          |        |          | 3,612  |         
|                                      | Real estate owned:                                                                |                                |                                                         |                                           |          |        |          |        |          |        |          |        |         
|                                      |                                                                                   | Sales proceeds                 |                                                         |                                           | 1,399    |        |          |        | 2,969    |        |          |        | 5,105    |       
|                                      |                                                                                   | Capitalized costs              |                                                         |                                           |         |        |          |        | (4       | )      |          |        | (62      | )     
|                                      | Office property and equipment:                                                    |                                |                                                         |                                           |          |        |          |        |          |        |          |        |         
|                                      |                                                                                   | Sales proceeds                 |                                                         |                                           |         |        |          |        |         |        |          |        | 51       |       
|                                      |                                                                                   | Additions                      |                                                         |                                           | (2,126   | )      |          |        | (1,414   | )      |          |        | (1,337   | )     
|                                      | Acquisition of First Fidelity, net of cash
    acquired                           |                                |                                                         | (24,836                                   | )        |        |          |       |          |        |          |       |         
|                                      |                                                                                   |                                |                                                         |                                           |          |        |          |        |          |        |          |       
|                                      |                                                                                   |                                |                                                         | Net cash used in investing activities     |          | $      | (105,215 | )      |          | $      | (105,439 | )      |          | $      | (163,262 | )
|                                      |                                                                                   |                                |                                                         |                                           |          |        |          |        |          |        |          |       

A-6



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES




CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                         |                                                                                                                                                                                         |                                         |                                                         |         |          |         |        |         |        |        |        |         |        |         | 
|-------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------- | ------------------------------------------------------- | ------- | -------- | ------- | ------ | ------- | ------ | ------ | ------ | ------- | ------ | ------- | 
|                                                         |                                                                                                                                                                                         |                                        
|                                                         |                                                                                                                                                                                         | Years Ended December 31,               
|                                                         |                                                                                                                                                                                         |                                        
|                                                         |                                                                                                                                                                                         | 2002                                    |                                                         | 2001    |          | 2000   
|(Dollars in thousands)                                   |                                                                                                                                                                                         |                                         |                                                         |         |          |        
|Cash Flows from Financing Activities:                    |                                                                                                                                                                                         |                                         |                                                         |         |          |         |        |         |        |        |        |        
|                                                         | Deposit activity, net                                                                                                                                                                   |                                         |                                                         | 13,272  |          |         |        | (15,211 | )      |        |        | 128,221 |       
|                                                         | Net (decrease)/increase in FHLB advances                                                                                                                                                |                                         |                                                         | (56,903 | )        |         |        | 100,000 |        |        |        | 35,000  |       
|                                                         | Net proceeds from exercise of stock options and
    warrants                                                                                                                            |                                         |                                                         | 3,856   |          |         |        | 461     |        |        |        | 1,117   |       
|                                                         | Reduction in Senior Notes                                                                                                                                                               |                                         |                                                         | (27,381 | )        |         |        | (13,580 | )      |        |        | (642    | )     
|                                                         | Proceeds from Capital Securities                                                                                                                                                        |                                         |                                                         | 37,000  |          |         |        | 14,000  |        |        |        |        |       
|                                                         | Purchases of Treasury Stock                                                                                                                                                             |                                         |                                                         | (18,176 | )        |         |        | (2,977  | )      |        |        | (3,544  | )     
|                                                         |                                                                                                                                                                                         |                                         |                                                         |         |          |         |        |         |        |        |        |        
|                                                         |                                                                                                                                                                                         |                                         | Net cash (used in)/provided by financing
    activities |         |          | (48,332 | )      |         |        | 82,693 |        |         |        | 160,152 | 
|                                                         |                                                                                                                                                                                         |                                         |                                                         |         |          |         |        |         |        |        |        |        
|Net (decrease)/increase in cash and cash
    equivalents |                                                                                                                                                                                         |                                         | (76,734                                                 | )       |          |         | (1,336 | )       |        |        | 13,197 |        
|Cash and cash equivalents, beginning of period           |                                                                                                                                                                                         |                                         | 98,583                                                  |         |          |         | 99,919 |         |        |        | 86,722 |        
|                                                         |                                                                                                                                                                                         |                                         |                                                         |         |          |         |        |         |        |        |        |        
|Cash and cash equivalents, end of period                 |                                                                                                                                                                                         | $                                       | 21,849                                                  |         |          | $       | 98,583 |         |        | $      | 99,919 |        
|                                                         |                                                                                                                                                                                         |                                         |                                                         |         |          |         |        |         |        |        |        |        
|Supplemental Cash Flow Information:                      |                                                                                                                                                                                         |                                         |                                                         |         |          |         |        |         |        |        |        |        
|                                                         | Cash paid during the period for:                                                                                                                                                        |                                         |                                                         |         |          |         |        |         |        |        |        |         |       
|                                                         |                                                                                                                                                                                         | Interest                                |                                                         | $       | 63,089   |         |        | $       | 85,241 |        |        | $       | 87,204 |        
|                                                         |                                                                                                                                                                                         | Income taxes, net                       |                                                         |         | 14,900   |         |        |         | 10,500 |        |        |         | 11,050 |        
|                                                         | Non-cash investing and financing activities:                                                                                                                                            |                                         |                                                         |         |          |         |        |         |        |        |        |         |       
|                                                         |                                                                                                                                                                                         | Tax benefit for exercised stock options |                                                         |         | 729      |         |        |         | 1,971  |        |        |         |       |        
|                                                         | The Company purchased all of the assets of First
    Fidelity on August 23, 2002. In conjunction with the
    acquisition, assets acquired and liabilities assumed were as
    follows: |                                         |                                                         |         |          |         |        |         |        |        |        |         |       
|                                                         |                                                                                                                                                                                         | Total purchase price                    |                                                         | $       | 71,905   |         |        |         |        |        |        |         |        |        
|                                                         |                                                                                                                                                                                         | Assets acquired                         |                                                         |         | (677,045 | )       |        |         |        |        |        |         |        |        
|                                                         |                                                                                                                                                                                         | Liabilities assumed                     |                                                         |         | 628,181  |         |        |         |        |        |        |         |        |        
|                                                         |                                                                                                                                                                                         | Net asset valuation                     |                                                         |         | (71      | )       |        |         |        |        |        |         |        |        
|                                                         |                                                                                                                                                                                         |                                         |                                                         |         |          |         |        |         |        |        |        |        
|                                                         |                                                                                                                                                                                         | Goodwill                                |                                                         | $       | 22,970   |         |        |         |        |        |        |         |        |        
|                                                         | Stock issued in connection with the acquisition                                                                                                                                         |                                         | $                                                       | 32,005  |          |         |        |         |        |        |        |         |       

A-7



---



##### 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. and its wholly owned
subsidiary, HS Financial Services Corporation,
(Bank) and HFC Capital Trust I, HFC Capital
Trust II, HFC Capital Trust III and HFC Capital
Trust IV, which are collectively referred to herein as the
Company. All significant intercompany transactions
and balances have been eliminated in consolidation. Certain
reclassifications have been made to the prior years
consolidated financial statements to conform to the current
years presentation.



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

The Company, through its only operating segment
(the Bank), 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 primarily
residential and income property real estate loans. The
Companys principal sources of revenue are interest earned
on mortgage loans and investment securities, as well as fees
generated from various deposit account services and
miscellaneous loan processing activities. The Companys
principal expenses are interest paid on deposit accounts and
borrowings and other 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. Other estimates include fair value
of investment securities, impairment of intangibles, if
required, and contingent liabilities related litigation, as
needed, and stock options.



| |                          
| | -------------------------
| | 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.



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

Investment securities that management has the
positive intent and ability to hold to maturity are classified
as held-to-maturity and recorded at amortized cost.
Securities not classified as held-to-maturity or trading, with
readily determinable fair values, are classified as
available-for-sale and recorded at fair value, with
unrealized gains and losses excluded from earnings and reported
in other comprehensive income, as part of stockholders
equity.

The Company is permitted to invest in a variety
of investment securities, including U.S. Government and
agency backed securities, mortgage-backed securities and
investment grade securities. The investment policy of the Bank
seeks to provide and maintain liquidity, produce favorable
returns on investments without

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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

incurring unnecessary interest rate or credit
risk, while complementing the Banks lending activities.
The Company monitors its investment activities to ensure that
they are consistent with the Companys established
guidelines and objectives. Purchase premiums and discounts are
recognized in interest income using the interest method over the
estimated lives of the securities. All investment securities of
the Bank are classified as available-for-sale.
Declines in the fair value of available-for-sale securities
below cost that are deemed to be other than temporary are
reflected in earnings as realized losses. Gains and losses on
the sale of securities are recorded on the trade date and are
determined using the specific identification method.



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

Loans are carried at the principal amount
outstanding, net of deferred loan fees/ costs and premiums/
discounts. 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
allowable direct costs associated with originating loans, and
recognizes these net deferred fees/costs 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/ 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. The Company generally ceases to accrue interest on
a loan when: 1) principal or interest has been
contractually delinquent for a period of 90 days or more
unless the loan is both well secured and in the process of
collection; or, 2) full collection of principal and/or
interest is not reasonably assured. In addition, classified
construction loans for which interest is being paid from
interest reserve loan funds rather than the borrowers own
funds may also be placed on nonaccrual status. 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 and a corresponding increase
to the allowance for credit losses. See further discussion below
in the Allowance for Credit Losses section.

As of December 31, 2002, the Bank classified
its loans as held-for-investment, as the Banks intent and
ability was to hold these loans in their portfolio until
maturity.



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

Management evaluates the allowance for credit
losses in accordance with GAAP, within the guidance established
by Statement of Financial Accounting Standards
(SFAS) No. 5, Accounting for
Contingencies, and SFAS No. 114, as amended by
SFAS No. 118, Accounting by Creditors for
Impairment of a Loan, Staff Accounting Bulletin
(SAB) 102, Selected Loan Loss Allowance
Methodology and Documentation Issues, as well as standards
established by regulatory Interagency Policy Statements on the
Allowance for Loan and Lease Losses (ALLL). The
allowance for credit losses represents managements
estimate of losses inherent in the Companys loan portfolio
as of the balance sheet date. Management evaluates the adequacy
of the allowance on a quarterly basis by reviewing its loan
portfolios to identify these inherent losses and to assess the
overall probability of collection of these portfolios. Included
in this quarterly

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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

review is the monitoring of delinquencies,
default and historical loss experience, among other factors
impacting portfolio risk. The Companys methodology for
assessing the appropriate allowance level consists of several
components, which include the allocated general valuation
allowance (GVA), specific valuation allowances
(SVA) for identified loans and the unallocated
allowance.

Management establishes SVAs for credit losses on
individual loans when it has determined that recovery of the
Banks gross investment is not probable and when the amount
of loss can be reasonably determined. 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).

The Company maintains an allowance for credit
losses, GVA, which is not tied to individual loans or
properties. GVAs are maintained for each of the Companys
principal loan portfolio components 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 component and in total, (2) the historical
migration of loans within each portfolio component and in total,
(3) observable trends in the performance of each loan
portfolio component, and (4) additional analyses to
validate the reasonableness of the Banks GVA balance, such
as the FFIEC Interagency Examiner Benchmark and
review of peer information. The GVA includes an unallocated
amount, based upon managements evaluation of various
conditions, such as general economic and business conditions
affecting our key lending areas, the effects of which are not
directly measured in the determination of the GVA 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 components. Management currently
intends to maintain an unallocated allowance, in the range of
between 3% and 5% of the total GVA, for the inherent risk
associated with imprecision in estimating the allowance, and up
to approximately 5% to account for the economic uncertainty in
Southern California until economic or other conditions warrant a
reassessment of the level of the unallocated GVA. However, if
economic conditions were to deteriorate beyond the weaknesses
currently considered by management, it is possible that the GVA
would be deemed insufficient for the inherent losses in the loan
portfolio and further provision might be required. This could
negatively impact earnings for the relevant period.



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

Properties acquired through foreclosure, or deed
in lieu of foreclosure (real estate owned,
REO), are transferred to REO and carried at the
lower of cost or estimated fair value less the estimated costs
to sell the property (fair value). 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
estimated 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. In accordance
with SFAS No. 66, Accounting for Sales of Real
Estate, if the Bank originates a loan to facilitate,
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

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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

estate owned properties are reflected in
Income from real estate operations, net in the
consolidated statements of income.



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

The Companys 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                            



| |                                                                   
| | ------------------------------------------------------------------
| | Business Combinations, Goodwill and
    Acquired Intangible Assets

On August 23, 2002, the Company acquired all
of the assets and liabilities of First Fidelity Bancorp, Inc.
(First Fidelity). This acquisition was accounted for
under the purchase method of accounting, and accordingly, all
assets and liabilities were adjusted to and recorded at their
estimated fair values as of the acquisition date. Goodwill and
other intangible assets represent the excess of purchase price
over the fair value of net assets acquired by the Company. In
accordance with SFAS No. 141, the Company recorded
goodwill to the extent that the purchase price of the
acquisition exceeded the acquired net identifiable assets and
intangible assets.

As a result of the adoption of
SFAS No. 142, Goodwill and Other Intangible
Assets, which eliminates amortization of goodwill, the
Company is required to evaluate goodwill annually, or more
frequently if impairment indicators arise. Since the
Companys acquisition of First Fidelity occurred on
August 23, 2002, intangible assets associated with this
acquisition, which have been allocated to the Companys
only operating segment (the Bank), will be evaluated in 2003 and
impairment, if any, will be reflected in the 2003 financial
statements. The Company identified no impairment indicators
since the acquisition. The Companys intangible assets
(consisting of core deposit intangible assets), other than
goodwill, are amortized over their estimated useful lives.
Amortization of premiums and discounts are reflected in interest
income or interest expense depending on the classification of
the related asset or liability.



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

During the twelve months ended December 31,
2002, the Company repurchased the balance of its
12.5% Senior Notes, the majority of which were redeemed on
December 31, 2002 at the call premium of 106.25%. The
repurchases resulted in an extraordinary item, net of tax, of
$1.1 million, or $0.13 per diluted share during the
fourth quarter, and $1.2 million, or $0.15 per diluted
share during the year. See Note 12 
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. In accordance with SFAS No. 109
Accounting for Income Taxes, if it is more

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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

likely than not that any portion of a deferred
tax asset will not be realized, a valuation allowance is
recorded. The deferred tax asset is evaluated annually, or on a
more frequent basis as necessary. Management believes that it is
more likely than not that this portion of the deferred tax asset
will be realized. As portions of the deferred tax asset are
realized, the related benefits are recorded as deferred tax
benefit in our consolidated statements of income. The effect on
deferred taxes of a change in tax rates is recognized in the tax
provision in the period that includes the enactment date.



| |               
| | --------------
| | Treasury Stock

The Company applies the cost method of accounting
for treasury stock. The cost method requires the Company to
record the cost of reacquiring treasury stock as a deduction
from the total capital. The treasury stock account is debited
for the cost of the shares acquired and will be credited upon
reissuance at cost on a first-in-first-out basis. If the
treasury shares are reissued at a price in excess of acquisition
cost, the excess will be credited to capital in excess of par
value from treasury stock. If the treasury shares are reissued
at less than acquisition cost, the deficiency will be treated
first as a reduction of any capital in excess of par related to
previous reissuances or retirements. If the balance in capital
in excess of par value from treasury stock is insufficient to
absorb the deficiency, the remainder is recorded as a reduction
of retained earnings; however, the Company has not yet reissued
any of its treasury stock.



| |                                    
| | -----------------------------------
| | Impairment of Long-Lived
    Assets

In August 2001, the FASB issued
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which was 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.

SFAS No. 144 retains the requirements
of SFAS No. 121 to (a) recognize an impairment
loss only if the carrying amount of a long-lived asset is not
recoverable from its undiscounted cash flows and
(b) measure an impairment loss as the difference between
the carrying amount and fair value of the asset. Goodwill will
not be allocated to long-lived assets, when tested for
impairment. Long-lived assets and certain identifiable
intangibles related to those assets to be held and used are
reviewed at least annually for impairment, or whenever events or
changes in circumstances indicate that the carrying amount may
not be recoverable.



| |                                     
| | ------------------------------------
| | Recent Accounting
    Pronouncements

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 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 did not have a significant impact on the
financial position, result of operations, or cash flows of the
Company.

In April 2002, the FASB issued
SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13,
and Technical Corrections, that, among various topics,
eliminated the requirement that all forms of gains or losses on
debt extinguishments be reported as extraordinary items. The
provision of SFAS No. 145 related to the
extinguishment of debt will be effective for fiscal years
beginning after May 15, 2002. The Company will adopt this
statement as of January 1, 2003. Adoption of this

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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

statement is not expected to have a significant
impact on the financial position, results of operations, or cash
flows of the Company, but it will have an impact on the
presentation of the results of operations.

In June 2002, the FASB issued
SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which addresses
financial accounting and reporting for costs associated with
exit or disposal activities and supersedes Emerging Issues Task
Force (EITF) Issue 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under
EITF Issue 94-3, a liability for an exit cost, as defined
in EITF Issue 94-3, is recognized at the date of an
entitys commitment to an exit plan. SFAS No. 146 also
establishes that the liability should initially be measured and
recorded at fair value. The Company will adopt the provisions of
SFAS No. 146 for exit or disposal activities that are
initiated after December 31, 2002. Adoption of this
statement is not expected to have a significant impact on the
financial position, results of operations, or cash flows of the
Company.

In October 2002, the FASB issued SFAS
No. 147, Acquisitions of Certain Financial
Institutions, which provides guidance on the accounting
for the acquisition of a financial institution. This statement
requires that the excess of the fair value of liabilities
assumed over the fair value of tangible and identifiable
intangible assets acquired in a business combination represents
goodwill that should be accounted for under SFAS No. 142,
Goodwill and Other Intangible Assets. Thus, the
specialized accounting guidance in paragraph 5 of SFAS
No. 72, Accounting for Certain Acquisitions of
Banking or Thrift Institutions, will not apply after
September 30, 2002. If certain criteria in SFAS
No. 147 are met, the amount of the unidentifiable
intangible asset will be reclassified to goodwill upon adoption
of this statement. Financial institutions meeting conditions
outlined in SFAS No. 147 will be required to restate
previously issued financial statements. Additionally, the scope
of SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, is amended to include
long-term customer-relationship intangible assets such as
depositor- and borrower-relationship intangible assets and
credit cardholder intangible assets. The Company has adopted the
new standard, effective October 1, 2002, and the adoption
of this standard did not have a material impact on the financial
position, results of operation, or cash flows of the Company.

SFAS No. 148, Accounting for
Stock-based Compensation  Transition and
Disclosure, an amendment of FASB Statement No. 123,
amends SFAS No. 123 to provide alternative methods of
transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. It also
amends the disclosure provisions of SFAS No. 123 to
require prominent disclosure in both annual and interim
financial statements about the method of accounting for
stock-based employee compensation and the effect of the method
used on reported results. The provisions of
SFAS No. 148 are effective for annual financial
statements for fiscal years ending after December 15, 2002,
and for financial reports containing condensed financial
statements for interim period beginning after December 15,
2002. The Company has not yet determined whether it will adopt
the fair value based method of accounting for stock-based
employee compensation.

In November 2002, the FASB issued Interpretation
(FIN) No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees and Indebtedness of Other, an interpretation of
SFAS Nos. 5, 57 and 107, and rescission of FIN
No. 34, Disclosure of Indirect Guarantees of Indebtedness
of Others. FIN No. 45 elaborates on the disclosures to be
made by the guarantor in its interim and annual financial
statements about its obligations under certain guarantees that
it has issued. It also requires that a guarantor recognize, at
the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial
recognition and measurement provisions of the interpretation are
applicable on a prospective basis to guarantees issued or
modified after December 31, 2002, while the provisions of
the disclosure requirements are effective for financial
statements of interim or annual

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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

periods ending after December 15, 2002. The
Company believes the adoption of such interpretation will not
have a material impact on its results of operations, financial
position or cash flows.



| |                                   
| | ----------------------------------
| | Earnings Per Share
    Calculation

The Company presents earnings per share
(EPS) under two formats: Basic and Diluted EPS.
Basic EPS is computed by dividing net income by the weighted
average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock, such as
in the money stock options and warrants, were
exercised or converted into common stock.

The table below sets forth the Companys
earnings per share calculations for the years ended
December 31, 2002, 2001 and 2000. 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 11 
Stockholders Equity and
Note 12  Capital and Debt Offerings.

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,
|                                                         |                         |                         
|                                                         |                         | 2002                     |        | 2001  |   | 2000
|(In thousands, except per share data)                    |                         |                          |        |       |   |     
|Weighted average shares outstanding:                     |                         |                          |        |       |   |      |        |       |   |   |        |      
|                                                         | Basic                   |                          |        | 6,382 |   |      |        | 5,291 |   |   |        | 5,300 |  
|                                                         | Warrants                |                          |        | 1,428 |   |      |        | 2,342 |   |   |        | 2,486 |  
|                                                         | Options(1)              |                          |        | 639   |   |      |        | 587   |   |   |        | 360   |  
|                                                         | Less: Treasury stock(2) |                          |        | (558  | ) |      |        | (655  | ) |   |        | (775  | )
|                                                         |                         |                          |        |       |   |      |        |       |   |   |        |      
|                                                         | Diluted                 |                          |        | 7,891 |   |      |        | 7,565 |   |   |        | 7,371 |  
|                                                         |                         |                          |        |       |   |      |        |       |   |   |        |      
|Net income before extraordinary item                     |                         | $                        | 23,902 |       |   | $    | 17,302 |       |   | $ | 14,284 |      
|                                                         |                         |                          |        |       |   |      |        |       |   |   |        |      
|Net income after extraordinary item                      |                         | $                        | 22,699 |       |   | $    | 16,833 |       |   | $ | 14,284 |      
|                                                         |                         |                          |        |       |   |      |        |       |   |   |        |      
|Basic earnings per share before extraordinary item       |                         | $                        | 3.75   |       |   | $    | 3.27   |       |   | $ | 2.69   |      
|Extraordinary item (net of taxes)                        |                         | $                        | (0.19  | )     |   | $    | (0.09  | )     |   | $ |       |      
|                                                         |                         |                          |        |       |   |      |        |       |   |   |        |      
|Basic earnings per share after extraordinary item        |                         | $                        | 3.56   |       |   | $    | 3.18   |       |   | $ | 2.69   |      
|                                                         |                         |                          |        |       |   |      |        |       |   |   |        |      
|Diluted earnings per share before extraordinary
    item |                         | $                        | 3.03   |       |   | $    | 2.29   |       |   | $ | 1.94   |      
|Extraordinary item (net of taxes)                        |                         | $                        | (0.15  | )     |   | $    | (0.06  | )     |   | $ |       |      
|                                                         |                         |                          |        |       |   |      |        |       |   |   |        |      
|Diluted earnings per share after extraordinary
    item  |                         | $                        | 2.88   |       |   | $    | 2.23   |       |   | $ | 1.94   |      
|                                                         |                         |                          |        |       |   |      |        |       |   |   |        |      



---



|    |                                                                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Excludes 65,854, 12,083 and 225,327 options
    outstanding for the year ended December 31, 2002, 2001 and
    2000, 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                                      

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##### 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.

|                                 |                         |                 |       |       |   |      |       |       |   |   |       |       |  
|-------------------------------- | ----------------------- | --------------- | ----- | ----- | - | ---- | ----- | ----- | - | - | ----- | ----- | -
|                                 |                         |                
|                                 |                         | At December 31,
|                                 |                         |                
|                                 |                         | 2002            |       | 2001  |   | 2000
|                                 |                         |                 |       |       |   |     
|Book Value Calculations          |                         |                 |       |       |   |      |       |       |   |   |       |      
|Year end shares outstanding:     |                         |                 |       |       |   |      |       |       |   |   |       |      
|                                 | Basic                   |                 |       | 7,388 |   |      |       | 5,360 |   |   |       | 5,175 |  
|                                 | Warrants                |                 |       | 895   |   |      |       | 2,179 |   |   |       | 2,486 |  
|                                 | Options(1)              |                 |       | 599   |   |      |       | 636   |   |   |       | 446   |  
|                                 | Less: Treasury Stock(2) |                 |       | (479  | ) |      |       | (646  | ) |   |       | (619  | )
|                                 |                         |                 |       |       |   |      |       |       |   |   |       |      
|                                 | Diluted                 |                 | $     | 8,403 |   |      | $     | 7,529 |   |   | $     | 7,488 |  
|                                 |                         |                 |       |       |   |      |       |       |   |   |       |      
|Basic book value per share       |                         | $               | 22.07 |       |   | $    | 22.47 |       |   | $ | 20.13 |      
|                                 |                         |                 |       |       |   |      |       |       |   |   |       |      
|Diluted book value per share     |                         | $               | 19.41 |       |   | $    | 16.00 |       |   | $ | 13.91 |      
|                                 |                         |                 |       |       |   |      |       |       |   |   |       |      
|Tangible book value per share(3) |                         | $               | 16.40 |       |   | $    | 16.00 |       |   | $ | 13.91 |      
|                                 |                         |                 |       |       |   |      |       |       |   |   |       |      



---



|    |                                                                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Excludes 165,250, 15,000 and 160,000 options
    outstanding at December 31, 2002, 2001 and 2000,
    respectively, for which the exercise price exceeded the average
    market price of the Companys common stock at period-end.                                                                                                                                    
|   
|(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 treasury stock. In this
    calculation, treasury stock was assumed repurchased at the
    average closing stock price for the respective period.
|   
|(3) | Excludes goodwill, intangible assets, net of tax,
    and unrealized gain on available-for-sale securities, net of tax.                                                                                                                                                                                                                                                



| |                   
| | ------------------
| | Stock Option Plans

SFAS No. 123, Accounting for
Stock-Based Compensation, permits entities to apply the
provisions of Accounting Principles Board Opinion No. 25
(APB 25), and related interpretations.
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. As such, compensation expense would be recorded on
the date of grant only if the current market price of the
underlying stock exceeded the exercise price, rather than
recognizing the fair value of all stock-based awards on the date
of grant as compensation expense over the vesting period. The
Company has elected to apply the provisions of APB 25 and
provide the pro forma disclosure requirements of
SFAS No. 123 in the notes to its consolidated
financial statements.

If compensation costs for the Stock Incentive
Plan and Stock Option Plans had been determined based on the
fair value at the grant date for awards in 2002, 2001 and 2000,
consistent with the provisions of

A-15



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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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,
|                                                                                                                                    |             |                         
|(Dollars in thousands                                                                                                               |             | 2002                     |        | 2001   |  | 2000
|except per share data)                                                                                                              |             |                          |        |        |  |     
|Net earnings after extraordinary item:                                                                                              |             |                          |        |        |  |      |      |        |  |   |      |       
|                                                                                                                                    | As reported |                          | $      | 22,699 |  |      | $    | 16,833 |  |   | $    | 14,284 | 
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of tax |             |                          | (2,037 | )      |  |      | (246 | )      |  |   | (262 | )     
|                                                                                                                                    |             |                          |        |        |  |      |      |        |  |   |      |       
|                                                                                                                                    | Pro forma   |                          | $      | 20,662 |  |      | $    | 16,587 |  |   | $    | 14,022 | 
|Basic earnings per share after extraordinary item:                                                                                  |             |                          |        |        |  |      |      |        |  |   |      |       
|                                                                                                                                    | As reported |                          | $      | 3.56   |  |      | $    | 3.18   |  |   | $    | 2.69   | 
|                                                                                                                                    | Pro forma   |                          | $      | 3.24   |  |      | $    | 3.14   |  |   | $    | 2.65   | 
|Diluted earnings per share after extraordinary
    item:                                                                            |             |                          |        |        |  |      |      |        |  |   |      |       
|                                                                                                                                    | As reported |                          | $      | 2.88   |  |      | $    | 2.23   |  |   | $    | 1.94   | 
|                                                                                                                                    | Pro forma   |                          | $      | 2.62   |  |      | $    | 2.19   |  |   | $    | 1.90   | 
|Weighted average fair value of options granted
    during the year, at date of grant                                                |             | $                        | 13.04  |        |  | $    | 6.34 |        |  | $ | 3.71 |       

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,
|                        |  |                         
|                        |  | 2002                     |                      | 2001 |  | 2000
|                        |  |                          |                      |      |  |     
|Dividend yield          |  |                          | n/a                  |      |  |      | n/a                  |  |  |  | n/a           | 
|Expected life           |  |                          | 6 months to 5  years |      |  |      | 6 months to 5  years |  |  |  | 2 to 4  years | 
|Expected volatility     |  |                          | 68.00%               |      |  |      | 61.12%               |  |  |  | 56.46%        | 
|Risk-free interest rate |  |                          | 1.76%                |      |  |      | 3.38%                |  |  |  | 4.76%         | 

Note 2  Cash and Cash
Equivalents

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

|                        |       |              |        |        |  |   |        |        | 
|----------------------- | ----- | ------------ | ------ | ------ |  | - | ------ | ------ | 
|                        |       |             
|                        |       | December 31,
|                        |       |             
|                        |       | 2002         |        | 2001  
|(Dollars in thousands)  |       |              |        |       
|Cash and due from banks |       | $            | 21,849 |        |  | $ | 18,583 |       
|Federal funds sold      |       |              |       |        |  |   | 80,000 |       
|                        |       |              |        |        |  |   |        |       
|                        | Total |              | $      | 21,849 |  |   | $      | 98,583 | 
|                        |       |              |        |        |  |   |        |       

A-16



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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Note 3  Investment
Securities

The table below sets forth the net balance at
cost, which includes the related premium/discount associated
with acquiring the investment, and fair value of
available-for-sale investment securities, with gross unrealized
gains and losses.

|                                             |                                           |                   |   |            |         |            |   |       |       |  |   |    |    |  |   |         |         | 
|-------------------------------------------- | ----------------------------------------- | ----------------- | - | ---------- | ------- | ---------- | - | ----- | ----- |  | - | -- | -- |  | - | ------- | ------- | 
|                                             |                                           |                  
|                                             |                                           | December 31, 2002
|                                             |                                           |                  
|                                             |                                           |                   |   | Gross      |         | Gross      |   |      
|                                             |                                           | Net Balance       |   | Unrealized |         | Unrealized |   | Fair 
|                                             |                                           | At Cost           |   | Gains      |         | Losses     |   | Value
|(Dollars in thousands)                       |                                           |                   |   |            |         |            |   |      
|Investment securities
    available-for-sale |                                           |                   |   |            |         |            |   |       |       |  |   |    |    |  |   |        
|                                             | Debt securities:                          |                   |   |            |         |            |   |       |       |  |   |    |    |  |   |         |        
|                                             | Mortgage-backed securities                |                   | $ | 145,294    |         |            | $ | 1,541 |       |  | $ |   |    |  | $ | 146,835 |        
|                                             | Collateralized mortgage obligations (CMO) |                   |   | 119,663    |         |            |   | 1,154 |       |  |   | 56 |    |  |   | 120,761 |        
|                                             |                                           |                   |   |            |         |            |   |       |       |  |   |    |    |  |   |        
|                                             |                                           | Total             |   | $          | 264,957 |            |   | $     | 2,695 |  |   | $  | 56 |  |   | $       | 267,596 | 
|                                             |                                           |                   |   |            |         |            |   |       |       |  |   |    |    |  |   |        

The table below sets forth the net balance at
cost and fair value of available-for-sale debt securities by
contractual maturity at December 31, 2002.

|                                             |                                |                    |   |          |         |          |   |         |         |  |  |      |      |  
|-------------------------------------------- | ------------------------------ | ------------------ | - | -------- | ------- | -------- | - | ------- | ------- |  |  | ---- | ---- | -
|                                             |                                |                   
|                                             |                                | Available-for-Sale
|                                             |                                |                   
|                                             |                                |                    |   | Weighted
|                                             |                                | Net Balance        |   | Fair     |         | Average 
|                                             |                                | At Cost            |   | Value    |         | Yield(1)
|(Dollars in thousands)                       |                                |                    |   |          |         |         
|Investment securities
    available-for-sale |                                |                    |   |          |         |          |   |         |         |  |  |     
|Debt securities:                             |                                |                    |   |          |         |          |   |         |         |  |  |     
|                                             | Within 1 year                  |                    | $ |         |         |          | $ |        |         |  |  |     |     
|                                             | After 1 year through 5 years   |                    |   |         |         |          |   |        |         |  |  |     |     
|                                             | After 5 years through 10 years |                    |   | 57,421   |         |          |   | 58,036  |         |  |  | 4.38 | %   
|                                             | Over 10 years                  |                    |   | 207,536  |         |          |   | 209,560 |         |  |  | 4.15 | %   
|                                             |                                |                    |   |          |         |          |   |         |         |  |  |     
|                                             |                                | Total              |   | $        | 264,957 |          |   | $       | 267,596 |  |  |      | 4.20 | %
|                                             |                                |                    |   |          |         |          |   |         |         |  |  |     



---



|    |                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Weighted average yield at the end of the year is
    based on a projected yield using prepayment assumptions in
    calculating the amortized cost of the securities.

Proceeds from the sale of available-for-sale
securities during the year were $39.4 million. The Company
realized a net gain of $0.1 million on the sale of various
investment securities ($13 thousand in realized losses).

Two securities with a net balance of cost and a
fair value of $4.9 million at December 31, 2002 were
pledged to secure a FHLB advance of $5.0 million.

A-17



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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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,                
|                          |                                |                             
|                          |                                | 2002                         |              | 2001                     
|(Dollars in thousands)    |                                |                              |              |                          
|Single family residential |                                | $                            | 854,220      |                           |         | $      | 918,877   |         
|                          | Income property:               |                              |              |                           |         |        |           |          |        
|                          |                                | Multi-family                 |              |                           | 690,137 |        |           |          | 255,183 |        
|                          |                                | Commercial                   |              |                           | 391,538 |        |           |          | 248,092 |        
|                          |                                | Development:(1)              |              |                           |         |        |           |          |         |        
|                          |                                |                              | Multi-family |                           |         | 85,655 |           |          |         | 135,983 |          
|                          |                                |                              | Commercial   |                           |         | 49,314 |           |          |         | 91,207  |          
|                          | Single family construction:    |                              |              |                           |         |        |           |          |        
|                          |                                | Single family residential(2) |              |                           | 114,637 |        |           |          | 159,224 |        
|                          | Land(3)                        |                              |              | 32,612                    |         |        |           | 50,984   |        
|                          | Other                          |                              |              | 10,978                    |         |        |           | 11,482   |        
|                          |                                |                              |              |                           |         |        |           |         
|                          |                                |                              |              | Gross loans receivable(4) |         |        | 2,229,091 |          |         |         | 1,871,032 | 
|Less:                     |                                |                              |              |                           |         |        |           |         
|                          | Undisbursed funds              |                              |              | (90,596                   | )       |        |           | (137,484 | )      
|                          | Deferred (fees) and costs, net |                              |              | 11,069                    |         |        |           | 6,337    |        
|                          | Allowance for credit losses    |                              |              | (35,309                   | )       |        |           | (30,602  | )      
|                          |                                |                              |              |                           |         |        |           |         
|Net loans receivable      |                                | $                            | 2,114,255    |                           |         | $      | 1,709,283 |         
|                          |                                |                              |              |                           |         |        |           |         



---



|    |                                                                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Predominantly loans to finance the construction
    of income-producing improvements.                                                                                                                                                                                                                            
|   
|(2) | Predominantly loans for the construction of
    individual and custom homes.                                                                                                                                                                                                                                     
|   
|(3) | 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.                                                                                                     
|   
|(4) | Gross loans receivable includes the principal
    balance of loans outstanding, plus outstanding but unfunded loan
    commitments, predominantly in connection with construction
    loans. Includes amortization of $0.8 million of the net
    premium associated with the loans acquired from First Fidelity.

A-18



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The table below summarizes the maturities for
fixed rate loans and the repricing intervals for adjustable rate
loans as of December 31, 2002.

|                       |                    |                        |   |                 |         |       |   |           |           |  |   |           |           | 
|---------------------- | ------------------ | ---------------------- | - | --------------- | ------- | ----- | - | --------- | --------- |  | - | --------- | --------- | 
|                       |                    |                       
|                       |                    | Principal Balance     
|                       |                    |                       
|                       |                    | Fixed Rate             |   | Adjustable Rate |         | Total
|(Dollars in thousands) |                    |                        |   |                 |         |      
|Interval               |                    |                        |   |                 |         |       |   |           |           |  |   |          
|                       | <3 months          |                        | $ | 9,769           |         |       | $ | 1,259,550 |           |  | $ | 1,269,319 |          
|                       | >3 to 6 months     |                        |   | 2,613           |         |       |   | 725,715   |           |  |   | 728,328   |          
|                       | >6 to 12 months    |                        |   | 6,601           |         |       |   | 49,131    |           |  |   | 55,732    |          
|                       | >1 to 2 years      |                        |   | 7,719           |         |       |   |          |           |  |   | 7,719     |          
|                       | >2 to 5 years      |                        |   | 29,702          |         |       |   | 579       |           |  |   | 30,281    |          
|                       | >5 to 10 years     |                        |   | 47,544          |         |       |   |          |           |  |   | 47,544    |          
|                       | >10 to 20 years    |                        |   | 24,941          |         |       |   |          |           |  |   | 24,941    |          
|                       | More than 20 years |                        |   | 65,227          |         |       |   |          |           |  |   | 65,227    |          
|                       |                    |                        |   |                 |         |       |   |           |           |  |   |          
|                       |                    | Gross loans receivable |   | $               | 194,116 |       |   | $         | 2,034,975 |  |   | $         | 2,229,091 | 
|                       |                    |                        |   |                 |         |       |   |           |           |  |   |          

The contractual weighted average interest rate on
loans at December 31, 2002 and 2001 was 6.82% and 7.69%,
respectively.

The table below summarizes nonaccrual loans for
the dates indicated.

|                            |                           |              |       |       |       |   |       |        |        | 
|--------------------------- | ------------------------- | ------------ | ----- | ----- | ----- | - | ----- | ------ | ------ | 
|                            |                           |             
|                            |                           | December 31,
|                            |                           |             
|                            |                           | 2002         |       | 2001 
|(Dollars in thousands)      |                           |              |       |      
|Single family residential   |                           | $            | 2,262 |       |       | $ | 6,438 |       
|Income property:            |                           |              |       |       |       |   |       |       
|                            | Multi-family              |              |       | 798   |       |   |       |       |       
|                            | Commercial                |              |       | 2,761 |       |   |       |       |       
|                            | Development               |              |       | 1,697 |       |   |       | 11,469 |       
|Single family construction: |                           |              |       |       |       |   |       |       
|                            | Single family residential |              |       |      |       |   |       | 2,187  |       
|Land                        |                           |              | 153   |       |       |   | 572   |       
|Other                       |                           |              | 4     |       |       |   |      |       
|                            |                           |              |       |       |       |   |       |       
|                            |                           | Total(1)     |       | $     | 7,675 |   |       | $      | 20,666 | 
|                            |                           |              |       |       |       |   |       |       



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | At December 31, 2002 and 2001, nonaccrual
    loans included three loans totaling $0.6 million and six
    loans totaling $4.7 million, respectively, in bankruptcy.
    There were no troubled debt restructured loans
    (TDRs) on nonaccrual status at December 31,
    2002 and December 31, 2001. Excludes $2.5 million and
    $4.7 million of TDRs that were paying in accordance with
    their modified terms at December 31, 2002 and 2001,
    respectively.

The interest income recognized on loans that were
on nonaccrual status at December 31, 2002, 2001 and 2000,
was $0.1 million, $0.2 million and $1.7 million,
respectively. If these loans had been performing for the entire
year, the income recognized would have been $0.4 million,
$1.8 million and $3.3 million for 2002, 2001 and 2000,
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

A-19



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

included in the consolidated statements of income
for the periods indicated. For this purpose, a TDR is a loan
with respect to which, due to borrowers financial
difficulty and/or collateral impairment, (1) the original
interest rate was changed for a defined period of time,
(2) the loans maturity was extended 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, 2002: |                 |           |   |          |  |          |   |            |  |  |   |       |  |  |   |      
|                              | Permanent loans |           | $ | 2,468    |  |          | $ | 239        |  |  | $ | 153   |  |  | $ | 153   | 
|                              |                 |           |   |          |  |          |   |            |  |  |   |       |  |  |   |      
|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 | 
|                              |                 |           |   |          |  |          |   |            |  |  |   |       |  |  |   |      

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

|                           |                             |                         |        |        |   |      |        |        |   |   |        |        |  
|-------------------------- | --------------------------- | ----------------------- | ------ | ------ | - | ---- | ------ | ------ | - | - | ------ | ------ | -
|                           |                             |                        
|                           |                             | Year Ended December 31,
|                           |                             |                        
|                           |                             | 2002                    |        | 2001   |   | 2000
|(Dollars in thousands)     |                             |                         |        |        |   |     
|Balance, beginning of year |                             | $                       | 30,602 |        |   | $    | 29,450 |        |   | $ | 24,285 |       
|                           | Acquisition of FFIL Reserve |                         |        | 7,189  |   |      |        |       |   |   |        |       |  
|                           | Provision for credit losses |                         |        | 870    |   |      |        | 3,400  |   |   |        | 6,000  |  
|                           | Charge-offs                 |                         |        | (3,387 | ) |      |        | (2,358 | ) |   |        | (1,084 | )
|                           | Recoveries                  |                         |        | 35     |   |      |        | 110    |   |   |        | 249    |  
|                           |                             |                         |        |        |   |      |        |        |   |   |        |       
|Balance, end of year       |                             | $                       | 35,309 |        |   | $    | 30,602 |        |   | $ | 29,450 |       
|                           |                             |                         |        |        |   |      |        |        |   |   |        |       

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, 2002.

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 Year Ended December 31,
|                                                         |                                        |                                  
|                                                         |                                        | 2002                              |        | 2001  |  | 2000
|(Dollars in thousands)                                   |                                        |                                   |        |       |  |     
|Impaired loans with specific valuation allowances        |                                        | $                                 | 2,165  |       |  | $    | 18,554 |        |  | $ | 11,364 |       
|Impaired loans without specific valuation
    allowances |                                        |                                   | 7,814  |       |  |      | 5,679  |        |  |   | 26,583 |       
|Total allowance allocated to impaired loans              |                                        |                                   | (1,720 | )     |  |      | (3,870 | )      |  |   | (6,945 | )     
|                                                         |                                        |                                   |        |       |  |      |        |        |  |   |        |       
|                                                         | Total impaired loans, net of allowance |                                   | $      | 8,259 |  |      | $      | 20,363 |  |   | $      | 31,002 | 
|                                                         |                                        |                                   |        |       |  |      |        |        |  |   |        |       
|Average investment in impaired loans                     |                                        | $                                 | 12,452 |       |  | $    | 31,300 |        |  | $ | 38,000 |       
|Interest income recognized on impaired loans(1)          |                                        | $                                 | 384    |       |  | $    | 1,030  |        |  | $ | 2,775  |       



---



|    |                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------
|(1) | Income recorded utilizing the cash basis method
    of accounting was zero for 2002, 2001 and 2000.

There were nine loans amounting to
$5.1 million that were deemed impaired in 2002, which
consisted primarily of two loans totaling $3.9 million, or
76.47% of the new impaired loans. One $2.2 million
commercial loan was placed on nonaccrual status and deemed
impaired in July 2002 as a result of being contractually

A-20



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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

delinquent for 90 days or more and due to
the inability of the collateral (a 126,076 square foot
warehouse located in Fresno, CA) to generate sufficient cashflow
to service the loan. The Company initiated foreclosure
proceedings against the collateral, which are expected to be
completed in the second quarter of 2003. A $1.7 million
multi-family construction loan was placed on nonaccrual status
and deemed impaired in December 2002 as a result of being
contractually delinquent 90 days or more and due to the
borrowers noncompliance with pre-approved extension
requirements.

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. This loan was sold in March 2002 at its
net carrying value.

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

|                                          |               |              |        |       |  |   |         |       | 
|----------------------------------------- | ------------- | ------------ | ------ | ----- |  | - | ------- | ----- | 
|                                          |               |             
|                                          |               | December 31,
|                                          |               |             
|                                          |               | 2002         |        | 2001 
|(Dollars in thousands)                    |               |              |        |      
|Total impaired loans                      |               | $            | 9,979  |       |  | $ | 24,233  |      
|Impaired loans 90 days or more delinquent |               |              | (5,052 | )     |  |   | (660    | )    
|                                          |               |              |        |       |  |   |         |      
|                                          |               |              | 4,927  |       |  |   | 23,573  |      
|Impaired loans which are not TDRs         |               |              | (2,459 | )     |  |   | (18,871 | )    
|                                          |               |              |        |       |  |   |         |      
|                                          | Total TDRs(1) |              | $      | 2,468 |  |   | $       | 4,702 | 
|                                          |               |              |        |       |  |   |         |      



---



|    |                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------
|(1) | There were no classified TDRs at
    December 31, 2002, compared with $0.2 million at
    December 31, 2001.



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

At December 31, 2002, the Banks
loans-to-one-borrower limit was $30.9 million based upon
the 15% of unimpaired capital and surplus measurement. At
December 31, 2002, the Banks largest relationship
consisted of one borrower with outstanding commitments of
$16.8 million, which consisted of approximately
7 loans, with $15.2 million secured by income property
development real estate, $1.3 million secured by income
property multi-family real estate and $0.3 million secured
by land. All of these loans were performing in accordance with
their terms.

Approximately 96.7% and 97.8% of the Banks
loan portfolio were concentrated in Southern California at
December 31, 2002 and 2001, respectively.

Note 5  Real Estate
Owned

Real estate acquired in satisfaction of loans is
transferred to real estate owned at estimated fair values, less
any estimated selling 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.

A-21



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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The table below summarizes REO for the dates
indicated.

|                             |  |              |   |      |  |   |       | 
|---------------------------- |  | ------------ | - | ---- |  | - | ----- | 
|                             |  |             
|                             |  | December 31,
|                             |  |             
|                             |  | 2002         |   | 2001
|(Dollars in thousands)       |  |              |   |     
|Single family residential(1) |  | $            |  |      |  | $ | 1,312 | 
|                             |  |              |   |      |  |   |       | 



---



|    |                                                                                                
|--- | -----------------------------------------------------------------------------------------------
|(1) | The Company held no property at December 31,
    2002 and one property as of December 31, 2001.

The Company had no allowance for losses on real
estate owned at December 31, 2002, 2001 and 2000.

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,
|                                                 |                                     |                         
|                                                 |                                     | 2002                     |     | 2001 |   | 2000
|(Dollars in thousands)                           |                                     |                          |     |      |   |     
|Expenses associated with real estate operations: |                                     |                          |     |      |   |      |     |     |   |   |      |     
|                                                 | Repairs, maintenance and renovation |                          | $   | (21  | ) |      | $   | (22 | ) |   | $    | (294 | )
|                                                 | Insurance and property taxes        |                          |     |     |   |      |     | (10 | ) |   |      | (18  | )
|                                                 |                                     |                          |     |      |   |      |     |     |   |   |      |     
|                                                 |                                     |                          | (21 | )    |   |      | (32 | )   |   |   | (312 | )   
|Net income/(loss) from sales of REO              |                                     |                          | 87  |      |   |      | 106 |     |   |   | (166 | )   
|Property operations, net                         |                                     |                          | 5   |      |   |      | 131 |     |   |   | 30   |     
|Charge-off/provision for losses on REO           |                                     |                          |    |      |   |      |    |     |   |   | (476 | )   
|                                                 |                                     |                          |     |      |   |      |     |     |   |   |      |     
|Income/(loss) from real estate operations, net   |                                     | $                        | 71  |      |   | $    | 205 |     |   | $ | (924 | )   
|                                                 |                                     |                          |     |      |   |      |     |     |   |   |      |     

Note 6  Office Property and
Equipment  At Cost

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

|                            |                                           |              |       |         |        |   |       |         |        | 
|--------------------------- | ----------------------------------------- | ------------ | ----- | ------- | ------ | - | ----- | ------- | ------ | 
|                            |                                           |             
|                            |                                           | December 31,
|                            |                                           |             
|                            |                                           | 2002         |       | 2001   
|(Dollars in thousands)      |                                           |              |       |        
|Office buildings            |                                           | $            | 1,188 |         |        | $ | 1,188 |        
|Furniture and equipment     |                                           |              | 7,507 |         |        |   | 7,095 |        
|Computer hardware/ software |                                           |              | 5,273 |         |        |   | 3,844 |        
|Leasehold improvements      |                                           |              | 4,573 |         |        |   | 3,631 |        
|                            |                                           |              |       |         |        |   |       |        
|                            |                                           | Total        |       |         | 18,541 |   |       |         | 15,758 | 
|Less:                       |                                           |              |       |         |        |   |       |        
|                            | Accumulated depreciation and amortization |              |       | (13,625 | )      |   |       | (11,711 | )     
|                            |                                           |              |       |         |        |   |       |        
|                            |                                           |              | 4,916 |         |        |   | 4,047 |        
|Land                        |                                           |              | 190   |         |        |   | 190   |        
|                            |                                           |              |       |         |        |   |       |        
|                            |                                           | Net          |       | $       | 5,106  |   |       | $       | 4,237  | 
|                            |                                           |              |       |         |        |   |       |        

The Company recognized $1.4 million,
$2.0 million and $2.4 million of depreciation and
amortization expense related to office property and equipment
for the years ended December 31, 2002, 2001, and 2000,
respectively.

A-22



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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Note 7  Business Combinations,
Goodwill and Acquired Intangible Assets

On August 23, 2002, the Company acquired all
of the assets and liabilities of First Fidelity. Prior to the
acquisition, First Fidelity served Orange and San Diego
counties through their four branch offices. First Fidelity was a
real estate secured lender with 55% of its loans being secured
by multi-family residential properties and 45% of its loans
secured by commercial properties.

The acquisition of First Fidelity was accounted
for under the purchase method of accounting, and accordingly,
all assets and liabilities were adjusted to and recorded at
their estimated fair values as of the acquisition date. Goodwill
and other intangible assets represent the excess of purchase
price over the fair value of net assets acquired by the Company.
In accordance with SFAS No. 141, the Company recorded
goodwill for a purchase business combination to the extent that
the purchase price of the acquisition exceeded the net
identifiable assets and intangible assets of the acquired
company.

As a result of the adoption of
SFAS No. 142, Goodwill and Other Intangible
Assets, which eliminates amortization of goodwill, the
Company is required to evaluate goodwill annually, or more
frequently if impairment indicators arise. Since the
Companys acquisition of First Fidelity occurred on
August 23, 2002, intangible assets associated with this
acquisition, which have been allocated to the Companys
only operating segment (the Bank), will be evaluated in 2003 and
impairment, if any, will be reflected in the 2003 Financial
Statements. The Company identified no impairment indicators
since the acquisition. The Companys intangible assets,
other than goodwill, are amortized over their estimated useful
lives.

The following tables summarize the fair values of
assets and liabilities and the related premiums, discounts and
goodwill associated with the acquisition.

|                                          |                                           |                     |         |                     |         |                     |         |   |         |   |        |     |       | 
|----------------------------------------- | ----------------------------------------- | ------------------- | ------- | ------------------- | ------- | ------------------- | ------- | - | ------- | - | ------ | --- | ----- | 
|                                          |                                           | Book Values of      |         | Fair Values of      |         | Premiums/          
|                                          |                                           | Assets Acquired and |         | Assets Acquired and |         | Discounts at       
|                                          |                                           | Liabilities Assumed |         | Liabilities Assumed |         | Date of Acquisition
|(In thousands)                            |                                           |                     |         |                     |         |                    
|Loans receivable, net                     |                                           | $                   | 527,598 |                     |         | $                   | 530,122 |   |         | $ | 2,524  |    
|                                          | Discounts/deferred fees on acquired loans |                     |         | (927                | )       |                     |         |  |         |   |        | 927 |      
|Intangible assets subject to amortization |                                           |                     |        |                     |         |                     |        |   |         |   | 1,524  |    
|Investments                               |                                           |                     | 64,808  |                     |         |                     | 64,844  |   |         |   | 36     |    
|Fixed assets                              |                                           |                     | 543     |                     |         |                     | 242     |   |         |   | (301   | )  
|FHLB stock                                |                                           |                     | 8,595   |                     |         |                     | 8,595   |   |         |   |       |    
|Other assets                              |                                           |                     | 76,428  |                     |         |                     | 77,031  |   |         |   | 603    |    
|Deferred tax on valuations                |                                           |                     |        |                     |         |                     |        |   |         |   | (1,978 | )  
|                                          |                                           |                     |         |                     |         |                     |         |   |         |   |        |    
|                                          |                                           | Total Assets        |         |                     | 677,045 |                     |         |   | 680,834 |   |        |     | 3,335 | 
|                                          |                                           |                     |         |                     |         |                     |         |   |         |   |        |    
|Deposits                                  |                                           |                     | 449,893 |                     |         |                     | 453,790 |   |         |   | 3,897  |    
|FHLB advances                             |                                           |                     | 171,902 |                     |         |                     | 173,633 |   |         |   | 1,731  |    
|Other liabilities                         |                                           |                     | 6,386   |                     |         |                     | 6,386   |   |         |   |       |    
|Deferred tax on valuations                |                                           |                     |        |                     |         |                     |        |   |         |   | (2,364 | )  
|                                          |                                           |                     |         |                     |         |                     |         |   |         |   |        |    
|                                          |                                           | Total Liabilities   |         |                     | 628,181 |                     |         |   | 633,809 |   |        |     | 3,264 | 
|                                          |                                           |                     |         |                     |         |                     |         |   |         |   |        |    
|Net asset value                           |                                           | $                   | 48,864  |                     |         |                     |         |   |         | $ | 71     |    
|                                          |                                           |                     |         |                     |         |                     |         |   |         |   |        |    

A-23



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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|                                          |                     |                |         |        | 
|----------------------------------------- | ------------------- | -------------- | ------- | ------ | 
|                                          |                     | Purchase Price
|                                          |                     | and Goodwill  
|(In thousands)                            |                     |               
|Purchase Price and Goodwill
    Analysis: |                     |                |         |       
|                                          | Total consideration |                | $       | 69,847 | 
|                                          | Direct costs        |                |         | 2,058  | 
|                                          |                     |                |         |       
|Total purchase price                      |                     |                | 71,905  |       
|Net assets acquired                       |                     |                | (48,864 | )     
|Net asset valuation                       |                     |                | (71     | )     
|                                          |                     |                |         |       
|                                          | Goodwill            |                | $       | 22,970 | 
|                                          |                     |                |         |       

Premiums and discounts on loans are amortized on
a loan-by-loan basis using the effective interest method over
the estimated lives of the loans. Discounts on deposits and FHLB
advances are amortized over the respective estimated lives using
the effective interest method. Amortization of premiums and
discounts are reflected in interest income or interest expense
depending on the classification of the related asset or
liability.

The following table summarizes the Companys
intangible assets as of December 31, 2002.

|                                   |                         |                |     |                          |  |                     |    |     |  |  |         |  | 
|---------------------------------- | ----------------------- | -------------- | --- | ------------------------ |  | ------------------- | -- | --- |  |  | ------- |  | 
|                                   |                         |                |     | Accumulated Amortization |  |                    
|                                   |                         | Gross Carrying |     | for the Year Ended       |  | Weighted Average   
|                                   |                         | Amount(1)      |     | December 31, 2002        |  | Amortization Period
|(In thousands)                     |                         |                |     |                          |  |                    
|Intangible Assets:                 |                         |                |     |                          |  |                     |    |     |  |  |         | 
|Core deposit intangible  checking |                         | $              | 876 |                          |  | $                   | 60 |     |  |  | 5 years | 
|Core deposit intangible  savings  |                         |                | 648 |                          |  |                     | 76 |     |  |  | 5 years | 
|                                   |                         |                |     |                          |  |                     |    |     |  |  |         | 
|                                   | Total intangible assets |                | $   | 1,524                    |  |                     | $  | 136 |  |  |         |  | 
|                                   |                         |                |     |                          |  |                     |    |     |  |  |         | 



---



|    |                                                         
|--- | --------------------------------------------------------
|(1) | Reflects original amount at the time of
    acquisition.

As of December 31, 2002, the Companys
only intangible assets that are currently being amortized are
core deposit intangibles, with $136 thousand in
amortization expense charged to operating expense for the twelve
months ended December 31, 2002.

The following table summarizes the
premium/discount for fair value adjustments in connection with
the acquisition of First Fidelity:

|                          |  |                   |       |              |  |                |                 |  |  |  |          | 
|------------------------- |  | ----------------- | ----- | ------------ |  | -------------- | --------------- |  |  |  | -------- | 
|                          |  | Balance at        |       | Method of    |  | Estimated     
|                          |  | December 31, 2002 |       | Amortization |  | Remaining Life
|(Dollars in thousands)    |  |                   |       |              |  |               
|Premium on loans(1)       |  | $                 | 1,769 |              |  |                | Interest Method |  |  |  | 20 years | 
|Discount on deposits      |  | $                 | 2,742 |              |  |                | Interest Method |  |  |  | 5 years  | 
|Discount on FHLB advances |  | $                 | 1,190 |              |  |                | Interest Method |  |  |  | 8 years  | 



---



|    |                                                                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Approximately 18% of the premium on loans has an
    estimated remaining life of 16  20 years.
    However, approximately 82% of the total premium has a total
    weighted average remaining life of 9 years.

A-24



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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following table summarizes estimated future
amortization expense on core deposit intangibles:

|                    |  |                |     | 
|------------------- |  | -------------- | --- | 
|                    |  | Future        
|For the Years Ended |  | Amortization  
|December 31,        |  | Expense       
|                    |  |               
|                    |  | (In thousands)
|2003                |  | $              | 412 | 
|2004                |  |                | 355 | 
|2005                |  |                | 216 | 
|2006                |  |                | 156 | 
|2007                |  |                | 72  | 

Note 8  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, 2002             |        | December 31, 2001
|                                              |                              |                               |        |                  
|                                              |                              | Balance(1)                    |        | Percent           |           | WAIR      |      | WARM  |       | Balance(1) |      | Percent |   | WAIR |   | WARM
|(Dollars in thousands)                        |                              |                               |        |                   |           |           |      |       |       |            |      |         |   |      |   |     
|Transaction accounts:                         |                              |                               |        |                   |           |           |      |       |       |            |      |         |   |      |   |      |  |   |        |         |         |           |      |       |       |        |      |      |   |      |   |   
|                                              | Noninterest-bearing checking |                               | $      | 39,818            |           |           |      | 2.39  | %     |            |      |        |   |      |   |     |  |   | $      | 35,634  |         |           |      | 2.97  | %     |        |      |     |   |      |   |   | 
|                                              | Check/ NOW                   |                               |        | 77,648            |           |           |      | 4.67  | %     |            |      | 1.69    | % |      |   |     |  |   |        | 57,687  |         |           |      | 4.81  | %     |        |      | 1.98 | % |      |   |   | 
|                                              | Passbook                     |                               |        | 64,662            |           |           |      | 3.89  | %     |            |      | 1.60    | % |      |   |     |  |   |        | 40,751  |         |           |      | 3.39  | %     |        |      | 1.91 | % |      |   |   | 
|                                              | Money Market                 |                               |        | 455,218           |           |           |      | 27.38 | %     |            |      | 2.33    | % |      |   |     |  |   |        | 240,391 |         |           |      | 20.04 | %     |        |      | 2.85 | % |      |   |   | 
|                                              |                              |                               |        |                   |           |           |      |       |       |            |      |         |   |      |   |      |  |   |        |         |         |           |      |       |       |        |      |      |   |      |   |   
|                                              |                              | Total transaction accounts    |        |                   | 637,346   |           |      |       | 38.33 | %          |      |         |   |      |   |      |  |   |        |         | 374,463 |           |      |       | 31.21 | %      |      |      |   |      |   |    |  |  
|                                              |                              |                               |        |                   |           |           |      |       |       |            |      |         |   |      |   |      |  |   |        |         |         |           |      |       |       |        |      |      |   |      |   |   
|Certificates of deposit:
    7 day maturities |                              |                               | 30,793 |                   |           |           | 1.85 | %     |       |            | 1.40 | %       |   |      |  |      |  |   | 55,396 |         |         |           | 4.62 | %     |       |        | 2.33 | %    |   |      |  |   
|                                              | Less than 6 months           |                               |        | 116,857           |           |           |      | 7.03  | %     |            |      | 1.45    | % |      |   | 2    |  |   |        | 21,291  |         |           |      | 1.77  | %     |        |      | 2.42 | % |      |   | 2  | 
|                                              | 6 months to 1 year           |                               |        | 240,570           |           |           |      | 14.47 | %     |            |      | 2.11    | % |      |   | 3    |  |   |        | 268,100 |         |           |      | 22.35 | %     |        |      | 3.75 | % |      |   | 3  | 
|                                              | 1 to 2 years                 |                               |        | 426,270           |           |           |      | 25.64 | %     |            |      | 2.95    | % |      |   | 7    |  |   |        | 459,408 |         |           |      | 38.30 | %     |        |      | 4.66 | % |      |   | 6  | 
|                                              | More than 2 years            |                               |        | 210,974           |           |           |      | 12.69 | %     |            |      | 4.29    | % |      |   | 19   |  |   |        | 20,987  |         |           |      | 1.75  | %     |        |      | 4.82 | % |      |   | 16 | 
|                                              |                              |                               |        |                   |           |           |      |       |       |            |      |         |   |      |   |      |  |   |        |         |         |           |      |       |       |        |      |      |   |      |   |   
|                                              |                              | Total certificates of deposit |        |                   | 1,025,464 |           |      |       | 61.67 | %          |      |         |   |      |   |      |  |   |        |         | 825,182 |           |      |       | 68.79 | %      |      |      |   |      |   |    |  |  
|                                              |                              |                               |        |                   |           |           |      |       |       |            |      |         |   |      |   |      |  |   |        |         |         |           |      |       |       |        |      |      |   |      |   |   
|                                              |                              |                               | Total  |                   | $         | 1,662,810 |      |       |       | 100.00     | %    |         |   | 2.51 | % |      |  | 8 |        |         | $       | 1,199,645 |      |       |       | 100.00 | %    |      |   | 3.59 | % |    |  | 5 | 
|                                              |                              |                               |        |                   |           |           |      |       |       |            |      |         |   |      |   |      |  |   |        |         |         |           |      |       |       |        |      |      |   |      |   |   



---



|    |                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Deposits in excess of $100,000, were 29.87% of
    total deposits at December 31, 2002, compared to 28.00% of
    total deposits at December 31, 2001.

A-25



---



##### 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,
|                           |       |                        
|                           |       | 2002                    |        | 2001   |  | 2000
|(Dollars in thousands)     |       |                         |        |        |  |     
|Checking/ NOW              |       | $                       | 1,266  |        |  | $    | 1,246  |        |  | $ | 1,006  |       
|Passbook                   |       |                         | 905    |        |  |      | 892    |        |  |   | 582    |       
|Money market               |       |                         | 10,078 |        |  |      | 8,442  |        |  |   | 8,986  |       
|Certificates of deposit(1) |       |                         | 24,506 |        |  |      | 49,442 |        |  |   | 52,939 |       
|                           |       |                         |        |        |  |      |        |        |  |   |        |       
|                           | Total |                         | $      | 36,755 |  |      | $      | 60,022 |  |   | $      | 63,513 | 
|                           |       |                         |        |        |  |      |        |        |  |   |        |       



---



|    |                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------
|(1) | Includes accretion of $1.2 million of the
    discount associated with the deposits assumed from First
    Fidelity.

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, 2002
|                       |               |                                                         
|                       |               | Three                                                    |         | Over Three |         | Over Six      |         |         
|                       |               | Months or                                                |         | Through    |         | Through       |         | Over One |         |      
|                       |               | Less                                                     |         | Six Months |         | Twelve Months |         | Year     |         | Total
|(Dollars in thousands) |               |                                                          |         |            |         |               |         |          |         |      
|Balances< $100,000     |               |                                                          |         |            |         |               |         |          |         |       |         |         |         |  |         |         |         |  |         |        
|                       | 4.00% or less |                                                          | $       | 160,246    |         |               | $       | 97,577   |         |       | $       | 149,355 |         |  | $       | 105,798 |         |  | $       | 512,976 |          
|                       | 4.01% - 5.00% |                                                          |         | 26,723     |         |               |         | 6,878    |         |       |         | 13,775  |         |  |         | 27,862  |         |  |         | 75,238  |          
|                       | 5.01% - 6.00% |                                                          |         | 5,990      |         |               |         | 4,180    |         |       |         | 1,170   |         |  |         | 4,070   |         |  |         | 15,410  |          
|                       | 6.01% - 7.00% |                                                          |         | 2,150      |         |               |         | 701      |         |       |         | 1,139   |         |  |         | 1,832   |         |  |         | 5,822   |          
|                       | 7.01% or more |                                                          |         |           |         |               |         | 396      |         |       |         | 396     |         |  |         |        |         |  |         | 792     |          
|                       |               |                                                          |         |            |         |               |         |          |         |       |         |         |         |  |         |         |         |  |         |        
|                       |               |                                                          | 195,109 |            |         |               | 109,732 |          |         |       | 165,835 |         |         |  | 139,562 |         |         |  | 610,238 |        
|Balances> $100,000     |               |                                                          |         |            |         |               |         |          |         |       |         |         |         |  |         |         |         |  |         |        
|                       | 4.00% or less |                                                          |         | 144,264    |         |               |         | 111,195  |         |       |         | 51,079  |         |  |         | 39,174  |         |  |         | 345,712 |          
|                       | 4.01% - 5.00% |                                                          |         | 20,271     |         |               |         | 4,266    |         |       |         | 6,749   |         |  |         | 23,197  |         |  |         | 54,483  |          
|                       | 5.01% - 6.00% |                                                          |         | 6,296      |         |               |         | 2,756    |         |       |         | 874     |         |  |         | 2,206   |         |  |         | 12,132  |          
|                       | 6.01% - 7.00% |                                                          |         | 431        |         |               |         | 311      |         |       |         | 219     |         |  |         | 1,938   |         |  |         | 2,899   |          
|                       | 7.01% or more |                                                          |         |           |         |               |         |         |         |       |         |        |         |  |         |        |         |  |         |        |          
|                       |               |                                                          |         |            |         |               |         |          |         |       |         |         |         |  |         |         |         |  |         |        
|                       |               |                                                          | 171,262 |            |         |               | 118,528 |          |         |       | 58,921  |         |         |  | 66,515  |         |         |  | 415,226 |        
|                       |               |                                                          |         |            |         |               |         |          |         |       |         |         |         |  |         |         |         |  |         |        
|                       |               | Total                                                    |         | $          | 366,371 |               |         | $        | 228,260 |       |         | $       | 224,756 |  |         | $       | 206,077 |  |         | $       | 1,025,464 | 
|                       |               |                                                          |         |            |         |               |         |          |         |       |         |         |         |  |         |         |         |  |         |        

A-26



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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|                       |               |                                                          |         |         |         |      |         |        |         |      |        |       |        |  |       |       |       |  |        |        |        |  |         |         |           | 
|---------------------- | ------------- | -------------------------------------------------------- | ------- | ------- | ------- | ---- | ------- | ------ | ------- | ---- | ------ | ----- | ------ |  | ----- | ----- | ----- |  | ------ | ------ | ------ |  | ------- | ------- | --------- | 
|                       |               |                                                         
|                       |               | Certificates of Deposit Outstanding at December 31, 2002
|                       |               |                                                         
|                       |               | 2003                                                     |         | 2004    |         | 2005 |         | 2006   |         | 2007 |        | Total
|(Dollars in thousands) |               |                                                          |         |         |         |      |         |        |         |      |        |      
|Balances< $100,000     |               |                                                          |         |         |         |      |         |        |         |      |        |       |        |  |       |       |       |  |        |        |        |  |         |        
|                       | 4.00% or less |                                                          | $       | 407,178 |         |      | $       | 99,013 |         |      | $      | 5,397 |        |  | $     | 135   |       |  | $      | 1,253  |        |  | $       | 512,976 |          
|                       | 4.01% - 5.00% |                                                          |         | 47,376  |         |      |         | 9,355  |         |      |        | 6,545 |        |  |       | 2,364 |       |  |        | 9,598  |        |  |         | 75,238  |          
|                       | 5.01% - 6.00% |                                                          |         | 11,340  |         |      |         | 3,613  |         |      |        | 238   |        |  |       | 191   |       |  |        | 28     |        |  |         | 15,410  |          
|                       | 6.01% - 7.00% |                                                          |         | 3,990   |         |      |         | 624    |         |      |        | 1,123 |        |  |       | 85    |       |  |        |       |        |  |         | 5,822   |          
|                       | 7.01% or more |                                                          |         | 792     |         |      |         |       |         |      |        |      |        |  |       |      |       |  |        |       |        |  |         | 792     |          
|                       |               |                                                          |         |         |         |      |         |        |         |      |        |       |        |  |       |       |       |  |        |        |        |  |         |        
|                       |               |                                                          | 470,676 |         |         |      | 112,605 |        |         |      | 13,303 |       |        |  | 2,775 |       |       |  | 10,879 |        |        |  | 610,238 |        
|Balances> $100,000     |               |                                                          |         |         |         |      |         |        |         |      |        |       |        |  |       |       |       |  |        |        |        |  |         |        
|                       | 4.00% or less |                                                          |         | 306,538 |         |      |         | 35,859 |         |      |        | 2,763 |        |  |       | 244   |       |  |        | 308    |        |  |         | 345,712 |          
|                       | 4.01% - 5.00% |                                                          |         | 31,286  |         |      |         | 6,973  |         |      |        | 3,561 |        |  |       | 1,529 |       |  |        | 11,134 |        |  |         | 54,483  |          
|                       | 5.01% - 6.00% |                                                          |         | 9,926   |         |      |         | 1,114  |         |      |        |      |        |  |       | 528   |       |  |        | 564    |        |  |         | 12,132  |          
|                       | 6.01% - 7.00% |                                                          |         | 961     |         |      |         | 989    |         |      |        | 949   |        |  |       |      |       |  |        |       |        |  |         | 2,899   |          
|                       | 7.01% or more |                                                          |         |        |         |      |         |       |         |      |        |      |        |  |       |      |       |  |        |       |        |  |         |        |          
|                       |               |                                                          |         |         |         |      |         |        |         |      |        |       |        |  |       |       |       |  |        |        |        |  |         |        
|                       |               |                                                          | 348,711 |         |         |      | 44,935  |        |         |      | 7,273  |       |        |  | 2,301 |       |       |  | 12,006 |        |        |  | 415,226 |        
|                       |               |                                                          |         |         |         |      |         |        |         |      |        |       |        |  |       |       |       |  |        |        |        |  |         |        
|                       |               | Total                                                    |         | $       | 819,387 |      |         | $      | 157,540 |      |        | $     | 20,576 |  |       | $     | 5,076 |  |        | $      | 22,885 |  |         | $       | 1,025,464 | 
|                       |               |                                                          |         |         |         |      |         |        |         |      |        |       |        |  |       |       |       |  |        |        |        |  |         |        

Note 9  FHLB
Advances

A primary alternate funding source for the Bank a
credit line with the FHLB with a maximum advance of up to 40% of
the total Bank assets subject to sufficient qualifying
collateral. The FHLB system functions as a source of credit to
savings institutions that are members of the FHLB. Advances are
secured by the Banks mortgage loans, the capital stock of
the FHLB owned by the Bank and certain investment securities
owned by the Bank. Subject to the FHLBs advance policies
and requirements, these advances can be requested for any
business purpose in which the Bank is authorized to engage. In
granting advances, the FHLB considers a members
creditworthiness and other relevant factors. At
December 31, 2002, the Company had an approved line of
credit with the FHLB for a maximum advance of up to 40% of the
Banks total assets ($996.5 million as of
December 31, 2002) based on qualifying collateral. In
February 2003, the FHLB increased this line of

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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

credit to 45% of total Bank assets. The table
below summarizes the balance and rate of FHLB advances,
excluding discounts on advances associated with the purchase of
First Fidelity, for the dates indicated.

|                       |            |              |   |          |         |           |  |          |      |   |   |         |         |  |  |      |      |  
|---------------------- | ---------- | ------------ | - | -------- | ------- | --------- |  | -------- | ---- | - | - | ------- | ------- |  |  | ---- | ---- | -
|                       |            |             
|                       |            | December 31,
|                       |            |             
|                       |            |              |   |         
|                       |            | 2002         |   | 2001    
|                       |            |              |   |         
|                       |            |              |   | Average  |         |           |  | Average 
|                       |            |              |   | Rate at  |         |           |  | Rate at 
|                       |            | Principal    |   | Year end |         | Principal |  | Year end
|(Dollars in thousands) |            |              |   |          |         |           |  |         
|Original Term:         |            |              |   |          |         |           |  |          |      |   |   |         |         |  |  |     
|                       | Overnight  |              | $ | 40,000   |         |           |  | 1.30     | %    |   | $ |        |         |  |  | 0.00 | %   
|                       | 12 Months  |              |   |         |         |           |  | 0.00     | %    |   |   |        |         |  |  | 0.00 | %   
|                       | 24 Months  |              |   | 23,000   |         |           |  | 4.51     | %    |   |   | 40,000  |         |  |  | 2.89 | %   
|                       | 36 Months  |              |   | 236,000  |         |           |  | 2.89     | %    |   |   | 185,000 |         |  |  | 2.88 | %   
|                       | 60 Months  |              |   | 135,000  |         |           |  | 5.92     | %    |   |   | 135,000 |         |  |  | 5.92 | %   
|                       | 84 Months  |              |   | 25,000   |         |           |  | 4.18     | %    |   |   | 25,000  |         |  |  | 4.18 | %   
|                       | 120 Months |              |   | 140,000  |         |           |  | 5.18     | %    |   |   | 99,000  |         |  |  | 5.19 | %   
|                       |            |              |   |          |         |           |  |          |      |   |   |         |         |  |  |     
|                       |            | Total        |   | $        | 599,000 |           |  |          | 4.12 | % |   | $       | 484,000 |  |  |      | 4.27 | %
|                       |            |              |   |          |         |           |  |          |      |   |   |         |         |  |  |     

The following table sets forth the remaining
maturities of FHLB advances, excluding discounts on advances
associated with the purchase of First Fidelity, as of
December 31, 2002.

|                       |      |       |         |            |  |       |         |         |  |   |         |         | 
|---------------------- | ---- | ----- | ------- | ---------- |  | ----- | ------- | ------- |  | - | ------- | ------- | 
|                       |      | Fixed |         | Adjustable |  |      
|                       |      | Rate  |         | Rate       |  | Total
|(Dollars in thousands) |      |       |         |            |  |      
|Year                   |      |       |         |            |  |       |         |         |  |   |         |        
|                       | 2003 |       | $       | 118,000    |  |       | $       | 114,000 |  |   | $       | 232,000 | 
|                       | 2004 |       |         | 121,000    |  |       |         |        |  |   |         | 121,000 | 
|                       | 2005 |       |         | 81,000     |  |       |         |        |  |   |         | 81,000  | 
|                       | 2006 |       |         |           |  |       |         |        |  |   |         |        | 
|                       | 2007 |       |         |           |  |       |         |        |  |   |         |        | 
|Thereafter             |      |       | 165,000 |            |  |       |        |         |  |   | 165,000 |        
|                       |      |       |         |            |  |       |         |         |  |   |         |        
|                       |      | $     | 485,000 |            |  | $     | 114,000 |         |  | $ | 599,000 |        
|                       |      |       |         |            |  |       |         |         |  |   |         |        

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

|                                                 |  |                         |           |      |  |      |         |   |  |   |         |  
|------------------------------------------------ |  | ----------------------- | --------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                 |  |                        
|                                                 |  | Year Ended December 31,
|                                                 |  |                        
|                                                 |  | 2002                    |           | 2001 |  | 2000
|(Dollars in thousands)                           |  |                         |           |      |  |     
|Average balance during the year                  |  | $                       | 511,614   |      |  | $    | 407,836 |   |  | $ | 346,983 |  
|Average interest rate during the year            |  |                         | 4.23      | %    |  |      | 5.07    | % |  |   | 5.82    | %
|Maximum month-end balance during the year        |  | $                       | 611,500   |      |  | $    | 484,000 |   |  | $ | 384,000 |  
|Loans collateralizing the agreements at year end |  | $                       | 1,567,788 |      |  | $    | 858,276 |   |  | $ | 751,628 |  

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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Note 10  Income
Taxes

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

|                                         |         |                         |        |        |        |      |        |        |        |   |        |        |        |  
|---------------------------------------- | ------- | ----------------------- | ------ | ------ | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | -
|                                         |         |                        
|                                         |         | Year Ended December 31,
|                                         |         |                        
|                                         |         | 2002                    |        | 2001   |        | 2000
|(Dollars in thousands)                   |         |                         |        |        |        |     
|Current income tax expense:              |         |                         |        |        |        |      |        |        |        |   |        |       
|                                         | Federal |                         | $      | 14,465 |        |      | $      | 10,752 |        |   | $      | 9,203  |       
|                                         | State   |                         |        | 4,043  |        |      |        | 3,356  |        |   |        | 2,129  |       
|                                         |         |                         |        |        |        |      |        |        |        |   |        |       
|                                         |         | Total current           |        |        | 18,508 |      |        |        | 14,108 |   |        |        | 11,332 |  
|Deferred income tax (benefit) expense:   |         |                         |        |        |        |      |        |        |        |   |        |       
|                                         | Federal |                         |        | (828   | )      |      |        | (341   | )      |   |        | (1,843 | )     
|                                         | State   |                         |        | (1,421 | )      |      |        | (1,155 | )      |   |        | 1,179  |       
|                                         |         |                         |        |        |        |      |        |        |        |   |        |       
|                                         |         | Total deferred          |        |        | (2,249 | )    |        |        | (1,496 | ) |        |        | (664   | )
|                                         |         |                         |        |        |        |      |        |        |        |   |        |       
|Income tax provision                     |         |                         | 16,259 |        |        |      | 12,612 |        |        |   | 10,668 |       
|Income tax benefit on extraordinary item |         |                         | (763   | )      |        |      | (342   | )      |        |   |       |       
|                                         |         |                         |        |        |        |      |        |        |        |   |        |       
|                                         |         | Total                   |        | $      | 15,496 |      |        | $      | 12,270 |   |        | $      | 10,668 |  
|                                         |         |                         |        |        |        |      |        |        |        |   |        |       

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

|                                 |                                          |              |        |        |         |   |       |        |         |  
|-------------------------------- | ---------------------------------------- | ------------ | ------ | ------ | ------- | - | ----- | ------ | ------- | -
|                                 |                                          |             
|                                 |                                          | December 31,
|                                 |                                          |             
|                                 |                                          | 2002         |        | 2001  
|(Dollars in thousands)           |                                          |              |        |       
|Deferred income tax liabilities: |                                          |              |        |        |         |   |       |       
|                                 | Loan fees                                |              | $      | (5,052 | )       |   | $     | (7,339 | )      
|                                 | FHLB stock                               |              |        | (3,923 | )       |   |       | (2,943 | )      
|                                 | Unrealized gain on investment securities |              |        | (1,414 | )       |   |       |       |        
|                                 | Depreciation                             |              |        | (6     | )       |   |       | (204   | )      
|                                 | Other                                    |              |        | (3,982 | )       |   |       | (700   | )      
|                                 |                                          |              |        |        |         |   |       |       
|                                 |                                          | Total        |        |        | (14,377 | ) |       |        | (11,186 | )
|Deferred income tax assets:      |                                          |              |        |        |         |   |       |       
|                                 | Bad debts                                |              |        | 12,470 |         |   |       | 12,424 |        
|                                 | Loan loss (net of state)                 |              |        | 3,717  |         |   |       |       |        
|                                 | Federal NOL                              |              |        | 589    |         |   |       |       |        
|                                 | Other                                    |              |        | 7,669  |         |   |       | 3,125  |        
|                                 |                                          |              |        |        |         |   |       |       
|                                 |                                          | Total        |        |        | 24,445  |   |       |        | 15,549  |  
|                                 |                                          |              |        |        |         |   |       |       
|Deferred tax assets, net         |                                          | $            | 10,068 |        |         | $ | 4,363 |       
|                                 |                                          |              |        |        |         |   |       |       

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##### 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.

|                                         |                                                           |                         |        |       |        |      |        |       |        |   |        |       |        | 
|---------------------------------------- | --------------------------------------------------------- | ----------------------- | ------ | ----- | ------ | ---- | ------ | ----- | ------ | - | ------ | ----- | ------ | 
|                                         |                                                           |                        
|                                         |                                                           | Year Ended December 31,
|                                         |                                                           |                        
|                                         |                                                           | 2002                    |        | 2001  |        | 2000
|(Dollars in thousands)                   |                                                           |                         |        |       |        |     
|Federal income tax                       |                                                           | $                       | 14,000 |       |        | $    | 10,470 |       |        | $ | 8,733  |      
|Addition resulting from:                 |                                                           |                         |        |       |        |      |        |       |        |   |        |      
|                                         | California franchise tax, net of federal income
    taxes |                         |        | 1,930 |        |      |        | 1,937 |        |   |        | 1,785 |       
|                                         | Other                                                     |                         |        | 329   |        |      |        | 205   |        |   |        | 150   |       
|                                         |                                                           |                         |        |       |        |      |        |       |        |   |        |      
|Income tax provision                     |                                                           |                         | 16,259 |       |        |      | 12,612 |       |        |   | 10,668 |      
|Income tax benefit on extraordinary item |                                                           |                         | (763   | )     |        |      | (342   | )     |        |   |       |      
|                                         |                                                           |                         |        |       |        |      |        |       |        |   |        |      
|                                         |                                                           | Total                   |        | $     | 15,496 |      |        | $     | 12,270 |   |        | $     | 10,668 | 
|                                         |                                                           |                         |        |       |        |      |        |       |        |   |        |      

Note 11  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, 2002, the ESOP owned
77,050 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 thereafter, and have been employed for
6 months, worked at least 500 hours, and are over
21 years of age. Contributions under the plan were
$0.6 million, $0.5 million and $0.4 million for
the years ended December 31, 2002, 2001 and 2000,
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 in effect on the last date of the calendar year
quarter immediately preceding the valuation date, plus 2.50%.
The average interest crediting rate was 7.25% and 7.52%,
respectively, for 2002 and 2001. The expense of funding the
deferred compensation plan was $0.5 million and
$0.4 million, respectively, for the years ended
December 31, 2002 and 2001.



| |                   
| | ------------------
| | 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, 2002, 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 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,
2003, the number of stock options available under the Stock
Incentive Plan was 106,267.

A-30



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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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

|                                 |                     |                         |         |                |   |        |       |                |  |        |         |                |   |   |       |       |  |  |         |          |   |   |       |       | 
|-------------------------------- | ------------------- | ----------------------- | ------- | -------------- | - | ------ | ----- | -------------- |  | ------ | ------- | -------------- | - | - | ----- | ----- |  |  | ------- | -------- | - | - | ----- | ----- | 
|                                 |                     |                        
|                                 |                     | Year Ended December 31,
|                                 |                     |                        
|                                 |                     |                         |         |                |   |       
|                                 |                     | 2002                    |         | 2001           |   | 2000  
|                                 |                     |                         |         |                |   |       
|                                 |                     |                         |         | Weighted       |   |        |       | Weighted       |  |        |         | Weighted      
|                                 |                     |                         |         | Average        |   |        |       | Average        |  |        |         | Average       
|                                 |                     | Shares                  |         | Exercise Price |   | Shares |       | Exercise Price |  | Shares |         | Exercise Price
|(Dollars in thousands)           |                     |                         |         |                |   |        |       |                |  |        |         |               
|Outstanding, beginning of year   |                     |                         | 651,050 |                |   | $      | 12.32 |                |  |        | 606,300 |                |   | $ | 9.58  |       |  |  | 787,800 |          |   | $ | 10.79 |      
|                                 | Granted             |                         |         | 323,400        |   |        |       | 26.16          |  |        |         | 206,650        |   |   |       | 17.44 |  |  |         | 301,500  |   |   |       | 8.51  | 
|                                 | Exercised           |                         |         | (105,383       | ) |        |       | 10.65          |  |        |         | (84,150        | ) |   |       | 5.28  |  |  |         | (235,500 | ) |   |       | 4.74  | 
|                                 | Canceled or expired |                         |         | (105,167       | ) |        |       | 14.82          |  |        |         | (77,750        | ) |   |       | 12.22 |  |  |         | (247,500 | ) |   |       | 16.72 | 
|                                 |                     |                         |         |                |   |        |       |                |  |        |         |                |   |   |       |       |  |  |         |          |   |   |       |      
|Outstanding, end of year         |                     |                         | 763,900 |                |   | $      | 18.06 |                |  |        | 651,050 |                |   | $ | 12.32 |       |  |  | 606,300 |          |   | $ | 9.58  |      
|                                 |                     |                         |         |                |   |        |       |                |  |        |         |                |   |   |       |       |  |  |         |          |   |   |       |      
|Options exercisable, end of year |                     |                         | 279,100 |                |   |        |       |                |  |        | 129,817 |                |   |   |       |       |  |  | 142,300 |          |   |   |       |      
|                                 |                     |                         |         |                |   |        |       |                |  |        |         |                |   |   |       |       |  |  |         |          |   |   |       |      

The table below summarizes information about
stock options outstanding and exercisable at December 31,
2002.

|                |  |             |         |                       |  |             |      |                  |  |  |         |     |  |   |       | 
|--------------- |  | ----------- | ------- | --------------------- |  | ----------- | ---- | ---------------- |  |  | ------- | --- |  | - | ----- | 
|                |  |             |         |                       |  |            
|                |  |             |         |                       |  | Exercisable
|                |  |             |         | Weighted Average      |  |            
|Range of        |  | Number      |         | Remaining Contractual |  | Number      |      | Weighted Average
|Exercise Prices |  | Outstanding |         | Life (Years)          |  | Outstanding |      | Price           
|                |  |             |         |                       |  |             |      |                 
|$ 4.65-$ 7.45   |  |             | 19,100  |                       |  |             | 2.39 |                  |  |  | 19,100  |     |  | $ | 4.78  | 
|$ 7.45-$10.25   |  |             | 189,500 |                       |  |             | 7.50 |                  |  |  | 11,000  |     |  | $ | 7.81  | 
|$13.06-$15.86   |  |             | 75,000  |                       |  |             | 4.56 |                  |  |  | 75,000  |     |  | $ | 14.45 | 
|$15.86-$18.66   |  |             | 162,100 |                       |  |             | 9.50 |                  |  |  | 136,000 |     |  | $ | 16.72 | 
|$18.66-$21.46   |  |             | 102,950 |                       |  |             | 9.05 |                  |  |  | 13,000  |     |  | $ | 19.75 | 
|$24.26-$27.07   |  |             | 50,000  |                       |  |             | 9.74 |                  |  |  |        | (1) |  |   |      | 
|$27.07-$29.87   |  |             | 77,500  |                       |  |             | 9.72 |                  |  |  |        | (1) |  |   |      | 
|$29.87-$32.67   |  |             | 87,750  |                       |  |             | 9.76 |                  |  |  | 25,000  |     |  | $ | 32.67 | 
|                |  |             |         |                       |  |             |      |                  |  |  |         |     |  |   |       | 
|                |  |             | 763,900 |                       |  |             | 8.24 |                  |  |  | 279,100 |     |  | $ | 16.51 | 
|                |  |             |         |                       |  |             |      |                  |  |  |         |     |  |   |       | 



---



| | 
| | 
| | 



|    |                                    
|--- | -----------------------------------
|(1) | These options were granted in 2002.

Note 12  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. During
2002, the Company repurchased the balance of its
12.5% Senior Notes, the majority of which were redeemed on
December 31, 2002 at the call premium of 106.25%. The
repurchases resulted in an extraordinary item, net of tax, of
$1.2 million, or $0.15 per diluted share during the
twelve months ended December 31, 2002.

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, 2002, cumulative repurchases, under the
Companys repurchase program, included
1,182,983 shares at an average price of $20.88.

A-31



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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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.



| |                   
| | ------------------
| | Capital Securities

In 2001 and 2002, the Company organized four
statutory business trusts and wholly owned subsidiaries of the
Company (the Capital Trusts), which issued an
aggregate of $51.0 million of fixed and floating rate
Capital Securities. 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 the Capital Trusts
(collectively, the Common Securities and together
with the Capital Securities the Trust Securities).
The Capital Trusts exist for the sole purpose of issuing the
Trust Securities and investing the proceeds thereof in fixed
rate and floating rate, junior subordinated deferrable interest
debentures issued by the Company and engaging in certain other
limited activities. Interest on the Capital Securities is
payable semi-annually.

The table below sets forth information concerning
the Companys Capital Securities as of December 31,
2002.

|                       |      |            |  |          |                        |      |  |         |          |      |  |          |         |      |  |              |        |  |  |  |       |   |  |  |       |   |  |  |               |  |  |  |          | 
|---------------------- | ---- | ---------- |  | -------- | ---------------------- | ---- |  | ------- | -------- | ---- |  | -------- | ------- | ---- |  | ------------ | ------ |  |  |  | ----- | - |  |  | ----- | - |  |  | ------------- |  |  |  | -------- | 
|                       |      |            |  |          |                        |      |  |         |          |      |  |          |         |     
|(Dollars in thousands) |      |            |  |          |                        |      |  |         |          |      |  |          |         |     
|                       |      | Date of    |  | Maturity |                        |      |  | Initial |          |      |  |          |         |     
|Ownership              |      | Subsidiary |  | Issuance |                        | Date |  | Amount  |          | Rate |  | Rate Cap |         | Rate |  | Call Date(1)
|                       |      |            |  |          |                        |      |  |         |          |      |  |          |         |      |  |             
|                       | 100% |            |  |          | HFC Capital Trust I    |      |  |         | 3/28/01  |      |  |          | 6/8/31  |      |  | $            | 9,000  |  |  |  | 10.18 | % |  |  | N/A   |   |  |  | Fixed         |  |  |  | 10 Years | 
|                       | 100% |            |  |          | HFC Capital Trust II   |      |  |         | 11/28/01 |      |  |          | 12/8/31 |      |  | $            | 5,000  |  |  |  | 5.17  | % |  |  | 11.00 | % |  |  | LIBOR + 3.75% |  |  |  | 5 Years  | 
|                       | 100% |            |  |          | HFC Capital Trust  III |      |  |         | 4/10/02  |      |  |          | 4/10/32 |      |  | $            | 22,000 |  |  |  | 5.32  | % |  |  | 11.00 | % |  |  | LIBOR + 3.70% |  |  |  | 5 Years  | 
|                       | 100% |            |  |          | HFC Capital Trust IV   |      |  |         | 11/1/02  |      |  |          | 11/1/32 |      |  | $            | 15,000 |  |  |  | 4.97  | % |  |  | 12.00 | % |  |  | LIBOR + 3.35% |  |  |  | 5 Years  | 



---



|    |                                                                            
|--- | ---------------------------------------------------------------------------
|(1) | Exercise of the call option on any of the capital
    securities is at par.

Note 13  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, 2002 and
2001, that the Bank meets all capital adequacy requirements to
which it is subject. As of December 31, 2002 and 2001, 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, 2002, that management believes have changed
the Banks category. Through December 31, 2002, the
Bank agreed to maintain minimum core capital and risk-based
capital ratios of 6.5% and 11.0%, respectively; however,
subsequent to December 31, 2002, these agreed upon
increased ratio levels were no longer required. The following
table compares the

A-32



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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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, 2002: |                                              |        |   |                   |  |                   |  |                   |   |            |   |         |  |  |  |      |   |  |   |         |  |  |  |      
|                         | Total capital to risk weighted assets        |        | $ | 206,175           |  |                   |  | 11.68             | % |            | $ | 141,263 |  |  |  | 8.00 | % |  | $ | 176,579 |  |  |  | 10.00 | %
|                         | Core capital to adjusted tangible assets     |        |   | 183,942           |  |                   |  | 7.46              | % |            |   | 98,663  |  |  |  | 4.00 | % |  |   | 123,329 |  |  |  | 5.00  | %
|                         | Tangible capital to adjusted tangible assets |        |   | 183,942           |  |                   |  | 7.46              | % |            |   | 36,999  |  |  |  | 1.50 | % |  |   | n/a     |  |  |  | n/a   |  
|                         | Tier 1 capital to risk weighted assets       |        |   | 183,942           |  |                   |  | 10.42             | % |            |   | n/a     |  |  |  | n/a  |   |  |   | 105,947 |  |  |  | 6.00  | %
|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  | %

Note 14  Commitments and
Contingencies



| |           
| | ----------
| | Litigation

The Bank is a defendant in a construction defect
case entitled Stone Water Terrace HOA v. Hawthorne
Savings and Loan Association. In this action, Plaintiff
alleges, under several theories of recovery, that the Bank is
responsible for construction defects in a 43-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. The Bank denies the
allegations in the complaint and has cross-complained against
all of the subcontractors for indemnity. Discovery has
commenced, and Plaintiffs are claiming damages of approximately
$3.6 million. In pretrial motions, the Court has held that
the Bank cannot be held liable to Plaintiffs in connection with
defects found in 23 units, which were completed and sold
before the Bank foreclosed on the project. 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 be material. 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 a 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

A-33



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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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, 2002, the Company had
commitments to fund the undisbursed portion of existing
construction and land loans of $76.2 million and income
property and estate loans of $5.1 million. The commitments
to fund the undisbursed portion of existing lines of credit,
excluding construction and land lines of credit, totaled
$9.3 million.

In addition, as of December 31, 2002, the
Company had commitments to fund $70.5 million in loans
approved by the Bank.

The Company from time to time enters into certain
types of contracts that contingently require the Company to
indemnify parties against third party claims. These contracts
primarily relate to: (i) certain real estate leases, under
which the Company may be required to indemnify property owners
for environmental and other liabilities, and other claims
arising from the Companys use of the applicable premises;
and (ii) certain agreements with the Companys
officers, directors and employees under which the company may be
required to indemnify such persons for liabilities arising out
of their employment relationship.

The terms of such obligations vary. Generally, a
maximum obligation is not explicitly stated. Since the obligated
amounts of these types of agreements often are not explicitly
stated, the overall maximum amount of the obligations cannot be
reasonably estimated. Historically, the Company has not been
obligated to make significant payments of these obligations and
no liabilities have been recorded for these obligations on its
balance sheets as of December 31, 2002.



| |       
| | ------
| | 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, 2002
are as follows:

|                       |  |        |       | 
|---------------------- |  | ------ | ----- | 
|(Dollars in thousands) |  |       
|Year                   |  | Amount
|                       |  |       
|2003                   |  | $      | 2,330 | 
|2004                   |  |        | 2,107 | 
|2005                   |  |        | 1,754 | 
|2006                   |  |        | 481   | 
|2007                   |  |        | 435   | 
|Thereafter             |  |        | 1,256 | 
|                       |  |        |       | 
|                       |  | $      | 8,363 | 
|                       |  |        |       | 

Lease expense, excluding CAM expenses, for office
facilities was $2.0 million, $1.9 million and
$1.6 million for the years ended December 31, 2002,
2001 and 2000, respectively.

Note 15  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

A-34



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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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. There were no outstanding letters of credit issued
by the Bank at December 31, 2002 and 2001.

As of December 31, 2002, the Federal Home
Loan Bank issued six letters of credit (LC) for
a total of $193.5 million. The purpose of the LCs is to
fulfill the collateral requirements for five deposits totaling
$150.0 million placed by the State of California with the
Bank. The LCs are issued in favor of the State Treasurer of the
State of California and mature over the next six months. The
maturities coincide with the maturities of the States
deposits. There are no issuance fees associated with these LCs;
however, a maintenance fee of 15 basis points per annum is paid
monthly by the Bank.

Note 16  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,  
|                       |                                          |                          
|                       |                                          |                           |   |           
|                       |                                          | 2002                      |   | 2001      
|                       |                                          |                           |   |           
|                       |                                          | Carrying                  |   | Estimated  |           | Carrying |   | Estimated 
|                       |                                          | Amount                    |   | Fair Value |           | Amount   |   | Fair Value
|(Dollars in thousands) |                                          |                           |   |            |           |          |   |           
|Assets:                |                                          |                           |   |            |           |          |   |            |           |  |   |           |         |  |   |          
|                       | Cash and cash equivalents                |                           | $ | 21,849     |           |          | $ | 21,849     |           |  | $ | 98,583    |         |  | $ | 98,583    |        
|                       | Investment securities available-for-sale |                           |   | 267,596    |           |          |   | 267,596    |           |  |   |          |         |  |   |          |        
|                       | Loans receivables                        |                           |   | 2,114,255  |           |          |   | 2,159,032  |           |  |   | 1,709,283 |         |  |   | 1,741,696 |        
|                       | Investment in FHLB stock                 |                           |   | 34,705     |           |          |   | 34,705     |           |  |   | 24,464    |         |  |   | 24,464    |        
|                       | Accrued interest receivable              |                           |   | 11,512     |           |          |   | 11,512     |           |  |   | 9,677     |         |  |   | 9,677     |        
|Liabilities            |                                          |                           |   |            |           |          |   |            |           |  |   |           |         |  |   |          
|                       | Deposits:                                |                           |   |            |           |          |   |            |           |  |   |           |         |  |   |           |        
|                       |                                          | Noninterest-bearing check |   |            | 39,818    |          |   |            | 39,818    |  |   |           | 35,634  |  |   |           | 35,634  | 
|                       |                                          | Checking/ NOW             |   |            | 77,648    |          |   |            | 77,648    |  |   |           | 57,687  |  |   |           | 57,687  | 
|                       |                                          | Passbook                  |   |            | 64,475    |          |   |            | 64,475    |  |   |           | 40,751  |  |   |           | 40,751  | 
|                       |                                          | Money market              |   |            | 455,405   |          |   |            | 455,405   |  |   |           | 240,391 |  |   |           | 240,391 | 
|                       |                                          | Certificates of deposit   |   |            | 1,025,464 |          |   |            | 1,026,818 |  |   |           | 825,182 |  |   |           | 827,998 | 
|                       | FHLB advances                            |                           |   | 600,190    |           |          |   | 625,281    |           |  |   | 484,000   |         |  |   | 498,786   |        
|                       | Senior notes                             |                           |   |           |           |          |   |           |           |  |   | 25,778    |         |  |   | 27,325    |        
|                       | Capital securities                       |                           |   | 51,000     |           |          |   | 53,160     |           |  |   | 14,000    |         |  |   | 14,000    |        
|                       | Accrued interest payable                 |                           |   | 1,514      |           |          |   | 1,514      |           |  |   | 933       |         |  |   | 933       |        

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.

A-35



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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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 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 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, 2002 and 2001. 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 17  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 2002, 2001 and 2000, totaled $12
thousand, $0.1 million and $0.1 million, respectively.

In the ordinary course of business, the Company
has 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.

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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

During the years ended December 31, 2002 and
December 31, 2001, there were no loans granted to executive
officers and directors. During the year ended December 31,
2000, the Company granted $0.2 million in loans to
executive officers and directors. In 2002 and 2001, as
stipulated in the deferred compensation loan agreement, the
Company forgave $152 thousand and $76 thousand, respectively, of
the $0.2 million loan granted in 2000.

Note 18  Extraordinary
Item

During the year ended December 31, 2002, the
Company repurchased $25.8 million of its Senior Notes at an
average price of 106.2% of par value, as discussed in
Notes to Consolidated Financial Statements 
Note 12  Capital and Debt Offerings. The
majority of the senior notes, or $22.6 million, were
redeemed on December 31, 2002 at the call premium of
106.25%. Payment of the premium and recognition of the prepaid
offering costs associated with the Senior Notes, resulted in an
extraordinary loss of $1.2 million, net of related income
taxes of $1.2 million, or approximately $0.15 per
diluted share.

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.

In April 2002, the FASB issued
SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13,
and Technical Corrections, that, among various topics,
eliminated the requirement that all forms of gains or losses on
debt extinguishments be reported as extraordinary items. The
provision of SFAS No. 145 related to the
extinguishment of debt will be effective for fiscal years
beginning after May 15, 2002. The Company will adopt this
statement as of January 1, 2003. Adoption of this statement
is not expected to have a significant impact on the financial
position, results of operations, or cash flows of the Company,
but it will have an impact on the presentation of the results of
operations.

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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Note 19  Parent Company Only
Financial Statements

The following parent company only financial
statements of Hawthorne Financial Corporation should be read in
conjunction with the other Notes to Consolidated Financial
Statements.




STATEMENTS OF FINANCIAL CONDITION

|                                          |                                        |                                            |         |              |         |   |         |         |         | 
|----------------------------------------- | -------------------------------------- | ------------------------------------------ | ------- | ------------ | ------- | - | ------- | ------- | ------- | 
|                                          |                                        | December 31,                               |         | December 31,
|                                          |                                        | 2002                                       |         | 2001        
|(Dollars in thousands)                    |                                        |                                            |         |             
|Assets:                                   |                                        |                                            |         |              |         |   |         |        
|Cash at the Bank and cash equivalents     |                                        | $                                          | 1,749   |              |         | $ | 2,828   |        
|Loans receivable, net                     |                                        |                                            |        |              |         |   | 152     |        
|Investment in subsidiaries                |                                        |                                            | 209,414 |              |         |   | 155,460 |        
|Other assets                              |                                        |                                            | 5,912   |              |         |   | 2,384   |        
|                                          |                                        |                                            |         |              |         |   |         |        
|                                          |                                        | Total assets                               |         | $            | 217,075 |   |         | $       | 160,824 | 
|                                          |                                        |                                            |         |              |         |   |         |        
|                                         
|Liabilities and Stockholders
    Equity: |                                        |                                            |         |              |         |   |         |        
|Liabilities:                              |                                        |                                            |         |              |         |   |         |        
|                                          | Senior notes                           |                                            | $       |             |         |   | $       | 25,778  |        
|                                          | Capital securities                     |                                            |         | 52,600       |         |   |         | 14,455  |        
|                                          | Accounts payable and other liabilities |                                            |         | 1,409        |         |   |         | 142     |        
|                                          |                                        |                                            |         |              |         |   |         |        
|                                          |                                        | Total liabilities                          |         |              | 54,009  |   |         |         | 40,375  | 
|                                          |                                        |                                            |         |              |         |   |         |        
|                                          | Stockholders equity                   |                                            |         | 163,066      |         |   |         | 120,449 |        
|                                          |                                        |                                            |         |              |         |   |         |        
|                                          |                                        | Total liabilities and stockholders equity |         | $            | 217,075 |   |         | $       | 160,824 | 
|                                          |                                        |                                            |         |              |         |   |         |        

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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Note 19  Parent Company Only
Financial Statements (continued)




STATEMENTS OF INCOME

|                                                                |                     |                         |        |      |  |      |        |    |  |   |        |    | 
|--------------------------------------------------------------- | ------------------- | ----------------------- | ------ | ---- |  | ---- | ------ | -- |  | - | ------ | -- | 
|                                                                |                     |                        
|                                                                |                     | Year Ended December 31,
|                                                                |                     |                        
|(Dollars in thousands)                                          |                     | 2002                    |        | 2001 |  | 2000
|                                                                |                     |                         |        |      |  |     
|Interest revenues from investments                              |                     | $                       | 138    |      |  | $    | 41     |    |  | $ | 38     |   
|Interest costs                                                  |                     |                         | 5,474  |      |  |      | 4,716  |    |  |   | 4,989  |   
|                                                                |                     |                         |        |      |  |      |        |    |  |   |        |   
|Net interest income                                             |                     |                         | (5,336 | )    |  |      | (4,675 | )  |  |   | (4,951 | ) 
|Noninterest revenues                                            |                     |                         |        |      |  |      |        |    |  |   |        |   
|                                                                | Other non-operating |                         |        |     |  |      |        | 95 |  |   |        | 25 | 
|Operating costs                                                 |                     |                         | (1,569 | )    |  |      | (1,133 | )  |  |   | (1,137 | ) 
|                                                                |                     |                         |        |      |  |      |        |    |  |   |        |   
|Loss before income taxes and equity in
    subsidiaries         |                     |                         | (6,905 | )    |  |      | (5,713 | )  |  |   | (6,063 | ) 
|Income tax benefit                                              |                     |                         | 2,466  |      |  |      | 2,397  |    |  |   | 2,620  |   
|                                                                |                     |                         |        |      |  |      |        |    |  |   |        |   
|Income before income taxes and extraordinary item               |                     |                         | (4,439 | )    |  |      | (3,316 | )  |  |   | (3,443 | ) 
|Equity in net earnings of subsidiary                            |                     |                         | 28,341 |      |  |      | 20,618 |    |  |   | 17,727 |   
|                                                                |                     |                         |        |      |  |      |        |    |  |   |        |   
|Income before extraordinary item                                |                     |                         | 23,902 |      |  |      | 17,302 |    |  |   | 14,284 |   
|Extraordinary item, related to early
    extinguishment of debt |                     |                         | (1,203 | )    |  |      | (469   | )  |  |   |       |   
|                                                                |                     |                         |        |      |  |      |        |    |  |   |        |   
|Net income                                                      |                     | $                       | 22,699 |      |  | $    | 16,833 |    |  | $ | 14,284 |   
|                                                                |                     |                         |        |      |  |      |        |    |  |   |        |   

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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Note 19  Parent Company Only
Financial Statements (continued)




STATEMENTS OF CASH FLOWS

|                                                         |                                                              |                                                                   |                                           |                                       |         |       |        |         |         |       |        |        |         |       |      |  
|-------------------------------------------------------- | ------------------------------------------------------------ | ----------------------------------------------------------------- | ----------------------------------------- | ------------------------------------- | ------- | ----- | ------ | ------- | ------- | ----- | ------ | ------ | ------- | ----- | ---- | -
|                                                         |                                                              |                                                                  
|                                                         |                                                              | Years Ended December 31                                          
|(Dollars in thousands)                                   |                                                              |                                                                  
|                                                         |                                                              | 2002                                                              |                                           | 2001                                  |         | 2000 
|                                                         |                                                              |                                                                   |                                           |                                       |         |      
|Cash Flows from Operating Activities:                    |                                                              |                                                                   |                                           |                                       |         |       |        |         |         |       |        |       
|                                                         | Net income                                                   |                                                                   | $                                         | 22,699                                |         |       | $      | 16,833  |         |       | $      | 14,284 |        
|                                                         | Adjustments:                                                 |                                                                   |                                           |                                       |         |       |        |         |         |       |        |        |        
|                                                         |                                                              | Equity in net undistributed earnings of subsidiary                |                                           |                                       | (28,341 | )     |        |         | (20,618 | )     |        |        | (17,727 | )    
|                                                         |                                                              | Net loss on extinguishment of debt                                |                                           |                                       | 1,203   |       |        |         |        |       |        |        |        |      
|                                                         |                                                              | Amortization                                                      |                                           |                                       | 887     |       |        |         | 255     |       |        |        | 361     |      
|                                                         |                                                              | Deferred compensation expense                                     |                                           |                                       | 152     |       |        |         | 76      |       |        |        |        |      
|                                                         |                                                              | Increase/(decrease) in interest receivable                        |                                           |                                       | 14      |       |        |         |        |       |        |        | (6      | )    
|                                                         |                                                              | (Increase)/decrease in other assets                               |                                           |                                       | (2,993  | )     |        |         | 789     |       |        |        | 2,904   |      
|                                                         |                                                              | Increase/(decrease) in accounts payable and other
    liabilities |                                           |                                       | 1,267   |       |        |         | (537    | )     |        |        | (152    | )    
|                                                         |                                                              |                                                                   |                                           |                                       |         |       |        |         |         |       |        |       
|                                                         |                                                              |                                                                   |                                           | Net cash used in operating activities |         |       | (5,112 | )       |         |       | (3,202 | )      |         |       | (336 | )
|                                                         |                                                              |                                                                   |                                           |                                       |         |       |        |         |         |       |        |       
|Cash Flows from Investing Activities:                    |                                                              |                                                                   |                                           |                                       |         |       |        |         |         |       |        |       
|                                                         | Net (increase) in loans receivable                           |                                                                   |                                           |                                      |         |       |        |        |         |       |        | (228   | )      
|                                                         |                                                              |                                                                   |                                           |                                       |         |       |        |         |         |       |        |       
|                                                         |                                                              |                                                                   |                                           | Net cash used in investing activities |         |       |       |         |         |       |       |        |         |       | (228 | )
|                                                         |                                                              |                                                                   |                                           |                                       |         |       |        |         |         |       |        |       
|Cash Flows from Financing Activities:                    |                                                              |                                                                   |                                           |                                       |         |       |        |         |         |       |        |       
|                                                         | Net proceeds from exercise of stock options and
    warrants |                                                                   |                                           | 3,856                                 |         |       |        | 461     |         |       |        | 1,117  |        
|                                                         | Treasury stock purchases                                     |                                                                   |                                           | (18,176                               | )       |       |        | (2,977  | )       |       |        | (3,544 | )      
|                                                         | Cash dividend received                                       |                                                                   |                                           | 33,570                                |         |       |        | 6,000   |         |       |        | 4,500  |        
|                                                         | Acquisition of First Fidelity, net of cash
    acquired      |                                                                   |                                           | (24,836                               | )       |       |        |        |         |       |        |       |        
|                                                         | Reduction in senior notes                                    |                                                                   |                                           | (27,381                               | )       |       |        | (13,580 | )       |       |        | (642   | )      
|                                                         | Proceeds from capital securities                             |                                                                   |                                           | 37,000                                |         |       |        | 14,000  |         |       |        |       |        
|                                                         |                                                              |                                                                   |                                           |                                       |         |       |        |         |         |       |        |       
|                                                         |                                                              |                                                                   | Net cash provided by financing activities |                                       |         | 4,033 |        |         |         | 3,904 |        |        |         | 1,431 |     
|                                                         |                                                              |                                                                   |                                           |                                       |         |       |        |         |         |       |        |       
|Net (decrease)/increase in cash and cash
    equivalents |                                                              |                                                                   | (1,079                                    | )                                     |         |       | 702    |         |         |       | 867    |       
|Cash and cash equivalents, beginning of year             |                                                              |                                                                   | 2,828                                     |                                       |         |       | 2,126  |         |         |       | 1,259  |       
|                                                         |                                                              |                                                                   |                                           |                                       |         |       |        |         |         |       |        |       
|Cash and cash equivalents, end of year                   |                                                              | $                                                                 | 1,749                                     |                                       |         | $     | 2,828  |         |         | $     | 2,126  |       
|                                                         |                                                              |                                                                   |                                           |                                       |         |       |        |         |         |       |        |       

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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Note 20  Quarterly Information
(unaudited)

|                                                          |                                     |                                           |        |         |       |              |        |             |       |   |        |        |        |   |        |        |        | 
|--------------------------------------------------------- | ----------------------------------- | ----------------------------------------- | ------ | ------- | ----- | ------------ | ------ | ----------- | ----- | - | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                                          |                                     |                                          
|                                                          |                                     | Three Months Ended for 2002              
|                                                          |                                     |                                          
|                                                          |                                     | March 31                                  |        | June 30 |       | September 30 |        | December 31
|(Dollars in thousands, except per share data)             |                                     |                                           |        |         |       |              |        |            
|Interest revenues                                         |                                     | $                                         | 33,369 |         |       | $            | 31,543 |             |       | $ | 33,630 |        |        | $ | 38,652 |       
|Interest costs                                            |                                     |                                           | 15,796 |         |       |              | 15,038 |             |       |   | 16,019 |        |        |   | 17,234 |       
|                                                          |                                     |                                           |        |         |       |              |        |             |       |   |        |        |        |   |        |       
|                                                          | Net interest income                 |                                           |        | 17,573  |       |              |        | 16,505      |       |   |        | 17,611 |        |   |        | 21,418 |       
|Provision for credit losses                               |                                     |                                           | 500    |         |       |              | 170    |             |       |   | 100    |        |        |   | 100    |       
|                                                          |                                     |                                           |        |         |       |              |        |             |       |   |        |        |        |   |        |       
|Net interest income after provision for credit
    losses |                                     |                                           | 17,073 |         |       |              | 16,335 |             |       |   | 17,511 |        |        |   | 21,318 |       
|Noninterest revenues                                      |                                     |                                           | 1,293  |         |       |              | 1,195  |             |       |   | 1,741  |        |        |   | 2,158  |       
|Income from real estate operations, net                   |                                     |                                           | 69     |         |       |              |       |             |       |   | 2      |        |        |   |       |       
|Noninterest expenses:                                     |                                     |                                           |        |         |       |              |        |             |       |   |        |        |        |   |        |       
|                                                          | General and administrative expenses |                                           |        | 8,061   |       |              |        | 8,259       |       |   |        | 9,999  |        |   |        | 11,892 |       
|                                                          | Other/legal settlements             |                                           |        | 20      |       |              |        |            |       |   |        | 198    |        |   |        | 105    |       
|                                                          |                                     |                                           |        |         |       |              |        |             |       |   |        |        |        |   |        |       
|                                                          |                                     | Total general and administrative expenses |        |         | 8,081 |              |        |             | 8,259 |   |        |        | 10,197 |   |        |        | 11,997 | 
|                                                          |                                     |                                           |        |         |       |              |        |             |       |   |        |        |        |   |        |       
|Income before income taxes and extraordinary item         |                                     |                                           | 10,354 |         |       |              | 9,271  |             |       |   | 9,057  |        |        |   | 11,479 |       
|Income tax provision                                      |                                     |                                           | 4,452  |         |       |              | 3,987  |             |       |   | 3,321  |        |        |   | 4,499  |       
|                                                          |                                     |                                           |        |         |       |              |        |             |       |   |        |        |        |   |        |       
|Net income before extraordinary item                      |                                     |                                           | 5,902  |         |       |              | 5,284  |             |       |   | 5,736  |        |        |   | 6,980  |       
|Extraordinary item, net of taxes                          |                                     |                                           |       |         |       |              |       |             |       |   | (125   | )      |        |   | (1,078 | )     
|                                                          |                                     |                                           |        |         |       |              |        |             |       |   |        |        |        |   |        |       
|Net income after extraordinary item                       |                                     | $                                         | 5,902  |         |       | $            | 5,284  |             |       | $ | 5,611  |        |        | $ | 5,902  |       
|                                                          |                                     |                                           |        |         |       |              |        |             |       |   |        |        |        |   |        |       
|Basic earnings per share before extraordinary item        |                                     | $                                         | 1.10   |         |       | $            | 0.91   |             |       | $ | 0.83   |        |        | $ | 0.94   |       
|                                                          |                                     |                                           |        |         |       |              |        |             |       |   |        |        |        |   |        |       
|Basic earnings per share after extraordinary item         |                                     | $                                         | 1.10   |         |       | $            | 0.91   |             |       | $ | 0.81   |        |        | $ | 0.79   |       
|                                                          |                                     |                                           |        |         |       |              |        |             |       |   |        |        |        |   |        |       
|Diluted earnings per share before extraordinary
    item  |                                     | $                                         | 0.77   |         |       | $            | 0.69   |             |       | $ | 0.71   |        |        | $ | 0.83   |       
|                                                          |                                     |                                           |        |         |       |              |        |             |       |   |        |        |        |   |        |       
|Diluted earnings per share after extraordinary
    item   |                                     | $                                         | 0.77   |         |       | $            | 0.69   |             |       | $ | 0.69   |        |        | $ | 0.70   |       
|                                                          |                                     |                                           |        |         |       |              |        |             |       |   |        |        |        |   |        |       

A-41



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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



Note 20  Quarterly Information
(unaudited)  (continued)


|                                                          |                                     |                                           |        |         |       |              |        |             |       |   |        |        |       |   |        |        |       | 
|--------------------------------------------------------- | ----------------------------------- | ----------------------------------------- | ------ | ------- | ----- | ------------ | ------ | ----------- | ----- | - | ------ | ------ | ----- | - | ------ | ------ | ----- | 
|                                                          |                                     |                                          
|                                                          |                                     | Three Months Ended for 2001              
|                                                          |                                     |                                          
|                                                          |                                     | March 31                                  |        | June 30 |       | September 30 |        | December 31
|(Dollars 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/legal settlements             |                                           |        | 110     |       |              |        |            |       |   |        |       |       |   |        |       |      
|                                                          |                                     |                                           |        |         |       |              |        |             |       |   |        |        |       |   |        |       
|                                                          |                                     | Total general and administrative 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   |       
|                                                          |                                     |                                           |        |         |       |              |        |             |       |   |        |        |       |   |        |       

A-42