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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,
    2003
|                                               
|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.     þ

As of June 30, 2003 (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 $243,941,536
(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
February 27, 2004 was 11,798,471 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 2004 Annual Meeting of Stockholders.



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HAWTHORNE FINANCIAL CORPORATION

ANNUAL REPORT ON FORM 10-K

|              |  |                                                                                           |  |      |    | 
|------------- |  | ----------------------------------------------------------------------------------------- |  | ---- | -- | 
|              |  |                                                                                           |  | Page
|              |  |                                                                                           |  |     
|PART I       
|Item 1.       |  | Business                                                                                  |  |      | 1  | 
|Item 2.       |  | Properties                                                                                |  |      | 31 | 
|Item 3.       |  | Legal Proceedings                                                                         |  |      | 32 | 
|Item 4.       |  | Submission of Matters to a
    Vote of Security Holders                                   |  |      | 32 | 
|Item 4A.      |  | Executive Officers                                                                        |  |      | 32 | 
|PART II      
|Item 5.       |  | Market for Registrants
    Common Equity and Related Stockholder Matters                 |  |      | 34 | 
|Item 6.       |  | Selected Financial Data                                                                   |  |      | 36 | 
|Item 7.       |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations |  |      | 38 | 
|Item 7A.      |  | Quantitative and Qualitative
    Disclosure about Market Risks                            |  |      | 59 | 
|Item 8.       |  | Financial Statements and
    Supplementary Data                                           |  |      | 60 | 
|Item 9.       |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure  |  |      | 61 | 
|Item 9A.      |  | Controls and Procedures                                                                   |  |      | 61 | 
|PART III     
|Item 10.      |  | Directors and Executive
    Officers of the Registrant                                    |  |      | 61 | 
|Item 11.      |  | Executive Compensation                                                                    |  |      | 61 | 
|Item 12.      |  | Security Ownership of
    Certain Beneficial Owners and Management                        |  |      | 61 | 
|Item 13.      |  | Certain Relationships and
    Related Transactions                                        |  |      | 62 | 
|Item 14       |  | Principal Accountant Fees
    and Services                                                |  |      | 62 | 
|PART IV      
|Item 15.      |  | Exhibits, Financial
    Statement Schedules and Reports on Form 8-K                       |  |      | 62 | 
|EXHIBIT 10.4 
|EXHIBIT 10.7 
|EXHIBIT 10.8 
|EXHIBIT 10.9 
|EXHIBIT 10.10
|EXHIBIT 23.1 
|EXHIBIT 31.0 
|EXHIBIT 32.0 



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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:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Announced Merger with Commercial
    Capital.On January 27, 2004, the
    Company announced that it had signed a definitive agreement to
    merge with Commercial Capital Bancorp, Inc.
    (Commercial Capital) that is anticipated to become
    effective in the second quarter of 2004. Factors associated with
    the merger that could adversely affect the Companys
    results of operations include: 1) the businesses of the
    Company and Commercial Capital may not be combined successfully,
    or the combination may take longer to accomplish than expected;
    2) the growth opportunities and cost savings from the
    merger of the Company and Commercial Capital may not be fully
    realized or may take longer to realize than expected;
    3) operating costs and business disruption following the
    completion of the merger, including adverse effects on
    relationships with employees, may be greater than expected;
    4) we may not obtain governmental approvals of the merger,
    or adverse regulatory conditions may be imposed in connection
    with governmental approvals of the merger; 5) the
    stockholders of either the Company or Commercial Capital may
    fail to approve the merger.
|
| |  | 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

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | 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 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. (First Fidelity)
    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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

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

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 Companys only operating segment is the
Bank, which 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).
The Bank currently operates 15 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.

Recent Developments

Three-For-Two Stock
Split.On September 25, 2003, the
Company announced that its Board of Directors approved a 3-for-2
stock split to be effected in the form of a 50% stock dividend.
The additional shares were distributed to shareholders of record
as of October 6, 2003 on October 27, 2003. The effect
of the stock split has been recognized and reflected in all
share and per share amounts for all periods presented.

On January 27, 2004, Hawthorne Financial
Corporation (Hawthorne) entered into an Agreement
and Plan of Reorganization (Agreement) with
Commercial Capital Bancorp (CCBI) and CCBI
Acquisition Corporation, pursuant to which Hawthorne will be
acquired by CCBI. Under the terms of the agreement, which has
been unanimously approved by the Boards of Directors of both
companies, shareholders of Hawthorne will receive
1.933 shares of CCBI common stock in exchange for each
share of Hawthorne stock. The transaction, which is expected to
be a reorganization for tax purposes, values each share of
Hawthorne common stock at $37.92, based on CCBIs closing
price of $26.15 on January 27, 2004. The value of the
transaction and value of each share of Hawthorne common stock on
consummation of the merger may be higher or lower depending on
the price of CCBIs common stock on such date. The
transaction is expected to close in the summer of 2004, pending
shareholder and regulatory approval and satisfaction of other
customary conditions. At December 31, 2003, CCBI had
$1.72 billion in total assets, $1.05 billion in total
loans, $645.6 million in total deposits and
$102.0 million in total equity. At December 31, 2003,
Hawthorne had $2.67 billion in total assets,
$2.15 billion in total loans, $1.72 billion in total
deposits and $185.3 million in total equity.

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.

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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. As
of September 30, 2003, the securities activities of HSFSC
were reorganized and are now being conducted through an
unincorporated division of the Bank. HSFSC is a licensed life
insurance agent for the purpose of receiving commissions on the
sale of fixed rate annuities. Registered representatives of
HSFSC sell mutual funds and variable rate annuities in the
Banks offices through a 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.

Operations

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 15 full service retail branches, 9 of which are located
in the South Bay region of Los Angeles 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, predominantly 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.

The Bank funds its loans and investments
predominantly with retail deposits generated through its
15 full service retail branches 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. During 2002 and 2003, the Bank
significantly increased its investment portfolio, which
primarily consists of mortgage backed securities
(MBS) and collateralized mortgage obligations
(CMO).

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
substantially 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

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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 with 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 borrowers
needs.

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 2.77 at December 31, 2003,
compared with 2.44 at December 31, 2002.

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 material 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

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##### Table of Contents



and loan holding company. Certain 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 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.

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 5 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.                                                                                                                                                    

The new legislation and its implementing
regulations will result in increased compliance costs, including
certain outside professional costs.

USA Patriot Act of
2001.The USA Patriot Act of 2001
(the Patriot Act), significantly expanded the
anti-money laundering and financial transparency laws, 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;

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##### Table of Contents





| |   |                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.

Fair and Accurate Credit Transactions
Act.In December, 2003, President Bush
signed into law the Fair and Accurate Credit Transactions Act
(FACT Act) which sets new obligations for financial
firms to help deter identity theft and give consumers more
control of their credit data. It also reauthorizes a federal ban
on state laws that interfere with corporate credit granting and
marketing practices. The FRB and the Federal Trade Commission
(FTC) are required to draft regulations to implement
the FACT Act. It is not possible at this time to determine the
impact of such regulations that are to be drafted; however, the
FRB and FTC recently announced that businesses will have until
December 1, 2004 to comply with the new initiatives.

Privacy.Federal
banking rules 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.

On December 22, 2003, the SEC issued the
advance notice of proposed rulemaking along with the federal
banking agencies and other government agencies seeking comment
on whether they should consider amending current regulations
to allow or require financial institutions to provide
alternative types of privacy notices, such as a short privacy
notice, that would be easier for consumers to understand.
The concept release lists more than 40 questions regarding which
the agencies seek comment from the public, organized in the
following categories: goals of a privacy notice, elements of a
privacy notice, language of a privacy notice, format of a
privacy notice, mandatory and permissible aspects of a privacy
notice, costs and benefits of a short notice, and other
categories.

In recent years, a number of states have
implemented their own versions of privacy laws. For example, in
2003, California adopted standards that are tougher than federal
law, allowing bank customers the opportunity to bar financial
companies from sharing information with their affiliates.



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

5



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##### Table of Contents



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.


Interagency Guidance on Response Programs to
Protect Against Identity Theft.On
August 12, 2003, the Federal bank and thrift regulatory
agencies requested public comment on proposed guidance that
would require financial institutions to develop programs to
respond to incidents of unauthorized access to customer
information, including procedures for notifying customers under
certain circumstances. The proposed guidance:



| |   |                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | interprets previously issued interagency customer
    information security guidelines that require financial
    institutions to implement information security programs designed
    to protect their customers information; and                                                                                                       
|
| |  | describes the components of a response program
    and sets a standard for providing notice to customers affected
    by unauthorized access to or use of customer information that
    could result in substantial harm or inconvenience to those
    customers, thereby reducing the risk of losses due to fraud or
    identity theft.

Dividends and Other Transfers of
Funds.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.

Generally, OTS regulations require a savings
association to file an application if:



| |   |                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | it is not eligible for expedited treatment of its
    other applications under OTS regulations;                                                                                                                                                                                                                            
|
| |  | the total amount of all of 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 2 years;                                                                               
|
| |  | it would not be at least adequately capitalized,
    under the prompt corrective action regulations of the OTS
    following the distribution; or                                                                                                                                                                          
|
| |  | the 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.

Alternatively, a savings association must give
the OTS notice of a capital distribution if the savings
association is not required to file an application, but:



| |   |                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | would not be well capitalized under the prompt
    corrective action regulations of the OTS following the
    distribution;                                                                                                                                                                                                         
|
| |  | the proposed capital distribution would reduce
    the amount of or retire any part of the savings
    associations common or preferred stock or retire any part
    of debt instruments like notes or debentures included in
    capital, other than regular payments required under a debt
    instrument approved by the OTS; or
|
| |  | 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, the OTS does not require the savings association to
submit an application or give notice when making the proposed
capital distribution. The OTS may prohibit a proposed capital
distribution that would otherwise be permitted if the OTS
determines that the distribution would constitute an unsafe or
unsound practice.

Transactions with
Affiliates.The Bank is subject to
certain restrictions imposed by federal law on any extensions of
credit to, or the issuance of a guarantee or letter of credit on
behalf of, any affiliates, the purchase

6



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##### Table of Contents



of, or investments in, stock or other securities
thereof, the taking of such securities as collateral for loans,
and the purchase of assets of any affiliates. Such restrictions
prevent any affiliates from borrowing from us unless the loans
are secured by marketable obligations of designated amounts.
Further, such secured loans and investments by us to or in any
affiliate are limited, individually, to 10.0% of our capital and
surplus (as defined by federal regulations), and such secured
loans and investments are limited, in the aggregate, to 20.0% of
our capital and surplus. Some of the entities included in the
definition of an affiliate are parent companies, sister banks,
sponsored and advised companies, investment companies whereby
the bank its affiliate serves as investment advisor, and
financial subsidiaries of the Bank. Additional restrictions on
transactions with affiliates may be imposed on us under the
prompt corrective action provisions of federal law. See
 Prompt Corrective Action and Other Enforcement
Mechanisms.


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. Additionally, savings
associations may request OTS permission to make loans in an
amount not to exceed the lesser of $30,000,000 or 30% of
unimpaired capital and surplus to develop residential housing,
provided:



| |   |                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------
| |  | the purchase price of each single-family dwelling
    in the development does not exceed $500,000;                 
|
| |  | the savings association is in compliance with its
    fully phased-in capital requirements;                        
|
| |  | the loans comply with applicable loan-to-value
    requirements; and                                               
|
| |  | the aggregate amount of loans made under this
    authority does not exceed 150% of unimpaired capital and surplus.

Notwithstanding the above limitations, a savings
association may have total loans and extensions of credit, for
any purpose, to one borrower outstanding at one time not to
exceed $500,000.

At December 31, 2003, the Banks
loans-to-one-borrower limit was $36.0 million based upon
the 15% of unimpaired capital and surplus measurement. At
December 31, 2003, the Banks 2 largest lending
relationships had outstanding balances of $20.9 million,
which consisted of 10 loans secured by multi-family real
estate, and $11.1 million, which consisted of 6 loans
with $10.3 million and $0.8 million secured by income
property development and multi-family real estate, respectively.
These loans were performing in accordance with their terms.

Qualified Thrift Lender
Test.Savings associations must meet a
QTL test, which test may be met either by maintaining a
specified level of assets in qualified thrift investments as
specified in HOLA or by meeting the definition of a
domestic building and loan association in the Code.
Qualified thrift investments are primarily residential mortgages
and related investments, including certain mortgage-related
securities. The required percentage of investments under HOLA is
65% of assets while the Code requires investments of 60% of
assets. An association must be in compliance with the QTL test
or the definition of domestic building and loan association on a
monthly basis in 9 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, 2003, the
Bank was in compliance with its QTL requirement and met the
definition of a domestic building and loan association.

Capital Standards.The federal banking agencies have adopted risk-based minimum
capital guidelines intended to provide a measure of capital that
reflects the degree of risk associated with a banking
organizations operations for both transactions reported on
the balance sheet as assets and transactions which are recorded
as off balance sheet items. Under these guidelines, nominal
dollar amounts of assets and credit equivalent amounts of off
balance sheet items are multiplied by one of several risk
adjustment percentages, which range from 0% for assets with low
credit risk federal banking agencies, to 100% for assets with
relatively high credit risk.

7



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##### Table of Contents



The risk-based capital ratio is determined by
classifying assets and certain off-balance sheet financial
instruments into weighted categories, with higher levels of
capital being required for those categories perceived as
representing greater risk. Under the capital guidelines, a
banking organizations total capital is divided into tiers.
Tier I capital consists of 1) common
equity, 2) qualifying noncumulative perpetual preferred
stock, 3) a limited amount of qualifying cumulative
perpetual preferred stock and 4) minority interests in the
equity accounts of consolidated subsidiaries (including
trust-preferred securities), less goodwill and certain other
intangible assets. Not more than 25% of qualifying Tier I
capital may consist of trust-preferred securities.
Tier II capital consists of hybrid capital
instruments, perpetual debt, mandatory convertible debt
securities, a limited amount of subordinated debt, preferred
stock that does not qualify as Tier I capital, a limited
amount of the allowance for loan and lease losses and a limited
amount of unrealized holding gains on equity securities.
Tier III capital consists of qualifying
unsecured subordinated debt. The sum of Tier II and
Tier III capital may not exceed the amount of Tier I
capital.

The guidelines require a minimum ratio of
qualifying total capital to risk-adjusted assets of 8% and a
minimum ratio of Tier 1 capital to risk-adjusted assets of
4%. In addition to the risk-based guidelines, federal banking
regulators require banking organizations to maintain a minimum
amount of Tier 1 capital to total assets, referred to as
the leverage ratio. For a banking organization rated in the
highest of the 5 categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital
to total assets must be 3%. In addition to these uniform
risk-based capital guidelines and leverage ratios that apply
across the industry, the regulators have the discretion to set
individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines
and ratios.

Proposed accounting rules regarding special
purpose entities (Fin 46) could disqualify trust-preferred
securities from Tier 1 capital status. The Companys
trust-preferred securities are recorded on the Holding
Companys books and are therefore not included in the
Banks Tier 1 capital.

In addition, federal banking regulators may set
capital requirements higher than the minimums described above
for financial institutions whose circumstances warrant it. For
example, a financial institution experiencing or anticipating
significant growth may be expected to maintain capital positions
substantially above the minimum supervisory levels without
significant reliance on intangible assets.

Prompt Corrective Action and Other Enforcement
Mechanisms.Federal banking agencies
possess broad powers to take corrective and other supervisory
action to resolve the problems of insured depository
institutions, including but not limited to those institutions
that fall below one or more prescribed minimum capital ratios.
Each federal banking agency has promulgated regulations defining
the following 5 categories in which an insured depository
institution will be placed, based on its capital ratios: well
capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized.
At December 31, 2003, the Bank exceeded the required ratios
for classification as a well capitalized institution.

An institution that, based upon its capital
levels, is classified as well capitalized, adequately
capitalized, or undercapitalized may be treated as though it
were in the next lower capital category if the appropriate
federal banking agency, after notice and opportunity for
hearing, determines that an unsafe or unsound condition or an
unsafe or unsound practice warrants such treatment. At each
successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking
agencies, however, may not treat a significantly
undercapitalized institution as critically undercapitalized
unless its capital ratio actually warrants such treatment.

In addition to measures taken under the prompt
corrective action provisions, commercial banking organizations
may be subject to potential enforcement actions by the federal
regulators for unsafe or unsound practices in conducting their
businesses or for violations of any law, rule, regulation, or
any condition imposed in writing by the agency or any written
agreement with the agency. Finally, pursuant to 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.

Safety and Soundness
Standards.The federal banking
agencies have adopted guidelines designed to assist the federal
banking agencies in identifying and addressing potential safety
and soundness concerns

8



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##### Table of Contents



before capital becomes impaired. The guidelines
set forth operational and managerial standards relating to:
(i) internal controls, information systems and internal
audit systems, (ii) loan documentation, (iii) credit
underwriting, (iv) asset growth, (v) earnings, and
(vi) compensation, fees and benefits. In addition, the
federal banking agencies have also adopted safety and soundness
guidelines with respect to asset quality and earnings standards.
These guidelines provide 6 standards for establishing and
maintaining a system to identify problem assets and prevent
those assets from deteriorating. Under these standards, an
insured depository institution should: (i) conduct periodic
asset quality reviews to identify problem assets,
(ii) estimate the inherent losses in problem assets and
establish reserves that are sufficient to absorb estimated
losses, (iii) compare problem asset totals to capital,
(iv) take appropriate corrective action to resolve problem
assets, (v) consider the size and potential risks of
material asset concentrations, and (vi) provide periodic
asset quality reports with adequate information for management
and the board of directors to assess the level of asset risk.
These guidelines also set forth standards for evaluating and
monitoring earnings and for ensuring that earnings are
sufficient for the maintenance of adequate capital and reserves.


Premiums for Deposit
Insurance.Through the BIF, the FDIC
insures our customer deposits up to prescribed limits for each
depositor. The amount of FDIC assessments paid by each BIF
member institution is based on its relative risk of default as
measured by regulatory capital ratios and other factors.
Specifically, the assessment rate is based on the
institutions capitalization risk category and supervisory
subgroup category. An institutions capitalization risk
category is based on the FDICs determination of whether
the institution is well capitalized, adequately capitalized or
less than adequately capitalized. An institutions
supervisory subgroup category is based on the FDICs
assessment of the financial condition of the institution and the
probability that FDIC intervention or other corrective action
will be required.

FDIC-insured depository institutions pay an
assessment rate equal to the rate assessed on deposits insured
by the Savings Association Insurance Fund (SAIF).

The assessment rate currently ranges from zero to
27 cents per $100 of domestic deposits. The FDIC may
increase or decrease the assessment rate schedule on a
semi-annual basis. Due to continued growth in deposits and some
recent bank failures, the BIF is nearing its minimum ratio of
1.25% of insured deposits as mandated by law. If the ratio drops
below 1.25%, it is likely the FDIC will be required to assess
premiums on all banks. Any increase in assessments or the
assessment rate could have a material adverse effect on the
companys earnings, depending on the amount of the
increase. Furthermore, the FDIC is authorized to raise insurance
premiums under certain circumstances.

The FDIC is authorized to terminate a depository
institutions deposit insurance upon a finding by the FDIC
that the institutions financial condition is unsafe or
unsound or that the institution has engaged in unsafe or unsound
practices or has violated any applicable rule, regulation, order
or condition enacted or imposed by the institutions
regulatory agency. The termination of deposit insurance for the
Bank could have a material adverse effect on the companys
earnings.

All FDIC-insured depository institutions must pay
an annual assessment to provide funds for the payment of
interest on bonds issued by the Financing Corporation, a federal
corporation chartered under the authority of the Federal Housing
Finance Board. The bonds, commonly referred to as FICO bonds,
were issued to capitalize the Federal Savings and Loan Insurance
Corporation. The FICO assessment rates effective for the fourth
quarter 2004 were 1.54 cents for each $100 of assessable
deposits. The FICO assessments are adjusted quarterly to reflect
changes in the assessment bases of the FDICs insurance
funds and do not vary depending on a depository
institutions capitalization or supervisory evaluations.

Interstate Banking and
Branching.A federal savings
association has the ability to establish branches outside its
home state. Commercial banks can also branch across state lines,
subject to any state law limitations or prohibitions.
Competition may increase further as banks branch across state
lines and enter new markets.

Community Reinvestment Act and Fair Lending
Developments.We are subject to
certain fair lending requirements and reporting obligations
involving home mortgage lending operations and Community
Reinvestment Act (CRA) activities. The CRA generally
requires the federal banking agencies to evaluate the

9



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record of a financial institution in meeting the
credit needs of its local communities, including low and
moderate-income neighborhoods. A bank may be subject to
substantial penalties and corrective measures for a violation of
certain fair lending laws. The federal banking agencies may take
compliance with such laws and CRA obligations into account when
regulating and supervising other activities. Furthermore,
financial institutions are subject to annual reporting and
public disclosure requirements for certain written agreements
that are entered into between insured depository institutions or
their affiliates and non-governmental entities or persons that
are made pursuant to, or in connection with, the fulfillment of
the CRA.


A banks compliance with its CRA obligations
is based on a performance-based evaluation system which bases
CRA ratings on an institutions lending service and
investment performance. When a bank applies for approval to
acquire another bank, the banking regulators will review the
assessment of each subsidiary bank of the applicant bank holding
company, and such records may be the basis for denying the
application. The Banks more recent CRA exam resulted in a
rating of outstanding.

On February 6, 2004, the federal banking
agencies proposed amendments to the CRA regulations that would:



| |   |                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | increase the definition of small
    institution from total assets of $250 million to
    $500 million, without regard to any holding company; and
|
| |  | take into account abusive lending practices by a
    bank or its affiliates in determining a banks CRA rating.                                     

Federal Home Loan Bank
System.The Bank is a member of the
Federal Home Loan Bank of San Francisco. 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 loans or advances to its
members in compliance with the policies and procedures
established by the Board of Directors of the individual FHLB. As
an FHLB member, the Bank is required to own capital stock in an
FHLB in an amount equal to the greater of:



| |   |                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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
|
| |  | 5% of its FHLB advances or borrowings.                                                                                                                                                    

At December 31, 2003, the Bank was in
compliance with this requirement.

A new capital plan of the FHLB-SF was approved by
the Federal Housing Finance Board and will be implemented on
April 1, 2004. The new capital plan incorporates a single
class of stock with a par value of $100 per share, and may
be issued, exchanged, redeemed, and repurchased only at par
value. Each member is required to own stock in amount equal to
the greater of:



| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | a membership stock requirement with an initial
    cap of $25 million (100% of membership asset
    value as defined), or
|
| |  | an activity based stock requirement (based on
    percentage of outstanding advances).                                     

The new capital stock is redeemable on
5 years written notice, subject to certain conditions.

We do not believe that the initial implementation
of the FHLB-SF new capital plan as approved will have a material
impact upon our 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-SF.

Federal Reserve
System.The FRB requires all
depository institutions to maintain non-interest bearing
reserves at specified levels against their transaction accounts
(primarily checking, NOW, and Super NOW checking accounts) and
non-personal time deposits. At December 31, 2003, we were
in compliance with these requirements.

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The Company owns all of the outstanding stock of
the Bank. The Companys capital consists of common
stockholders equity, which at December 31, 2003
amounted to $185.3 million, or 6.9% of the Companys
total assets.

As of December 31, 2003, 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, 2003, 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, 2003: |                                              |        |   |                   |  |                   |  |                   |   |            |   |         |  |  |  |      |   |  |   |         |  |  |  |      
|                         | Total capital to risk weighted assets        |        | $ | 230,052           |  |                   |  | 12.42             | % |            | $ | 148,202 |  |  |  | 8.00 | % |  | $ | 185,252 |  |  |  | 10.00 | %
|                         | Core capital to adjusted tangible assets     |        |   | 206,767           |  |                   |  | 7.81              | % |            |   | 105,851 |  |  |  | 4.00 | % |  |   | 132,314 |  |  |  | 5.00  | %
|                         | Tangible capital to adjusted tangible assets |        |   | 206,767           |  |                   |  | 7.81              | % |            |   | 39,694  |  |  |  | 1.50 | % |  |   | n/a     |  |  |  | n/a   |  
|                         | Tier 1 capital to risk weighted assets       |        |   | 206,767           |  |                   |  | 11.16             | % |            |   | n/a     |  |  |  | n/a  |   |  |   | 111,151 |  |  |  | 6.00  | %
|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  | %



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

11



---



##### Table of Contents



Employees

The Company employed 386 full time equivalent
employees at December 31, 2003. 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 consists almost
exclusively of loans secured by real estate, concentrated
primarily in the coastal counties of Southern California. The
Banks principal lending activities consist of single
family residential, construction and income property lending. At
December 31, 2003, approximately $2.1 billion, or
94.8% of the Banks total loan portfolio, was tied to
adjustable rate indices, such as MTA, LIBOR, CMT, Prime and
COFI. The Banks portfolio of adjustable rate loans
includes approximately $435.8 million of loans with an
initial fixed rate term of 3 to 5 years prior to
transitioning to a semi-annual adjustable rate loan
(hybrid ARMs). The net loan portfolio grew from
$2.1 billion at December 31, 2002, to
$2.2 billion at December 31, 2003.

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

|                            |                              |              |           |          |   |         |        |       |  |         |           |         |   |         |        |       |  |         |           |          |   |  |        |       |  |   |           |          |   |  |        |       |  |   |           |          |   |  |        |       | 
|--------------------------- | ---------------------------- | ------------ | --------- | -------- | - | ------- | ------ | ----- |  | ------- | --------- | ------- | - | ------- | ------ | ----- |  | ------- | --------- | -------- | - |  | ------ | ----- |  | - | --------- | -------- | - |  | ------ | ----- |  | - | --------- | -------- | - |  | ------ | ----- | 
|                            |                              |             
|                            |                              | December 31,
|                            |                              |             
|                            |                              |              |           |          |   |         |        |       |  |        
|                            |                              | 2003         |           | 2002     |   | 2001    |        | 2000  |  | 1999   
|                            |                              |              |           |          |   |         |        |       |  |        
|                            |                              | Balance      |           | %        |   | Balance |        | %     |  | Balance |           | %       |   | Balance |        | %     |  | Balance |           | %       
|(Dollars in thousands)      |                              |              |           |          |   |         |        |       |  |         |           |         |   |         |        |       |  |         |           |         
|Single family residential   |                              | $            | 867,489   |          |   |         | 37.44  | %     |  | $       | 854,220   |         |   |         | 38.32  | %     |  | $       | 918,877   |          |   |  | 49.12  | %     |  | $ | 888,416   |          |   |  | 49.17  | %     |  | $ | 683,250   |          |   |  | 40.99  | %    
|Income property:            |                              |              |           |          |   |         |        |       |  |         |           |         |   |         |        |       |  |         |           |          |   |  |        |       |  |   |           |          |   |  |        |       |  |   |           |          |   |  |        |      
|                            | Multi-family(1)              |              |           | 764,421  |   |         |        | 32.99 |  |         |           | 690,137 |   |         |        | 30.96 |  |         |           | 255,183  |   |  |        | 13.64 |  |   |           | 253,039  |   |  |        | 14.00 |  |   |           | 222,616  |   |  |        | 13.36 | 
|                            | Commercial(1)                |              |           | 315,951  |   |         |        | 13.64 |  |         |           | 391,538 |   |         |        | 17.57 |  |         |           | 248,092  |   |  |        | 13.26 |  |   |           | 200,372  |   |  |        | 11.09 |  |   |           | 232,938  |   |  |        | 13.98 | 
|                            | Development(2)               |              |           | 160,585  |   |         |        | 6.93  |  |         |           | 134,969 |   |         |        | 6.06  |  |         |           | 227,190  |   |  |        | 12.14 |  |   |           | 203,894  |   |  |        | 11.28 |  |   |           | 148,092  |   |  |        | 8.88  | 
|Single family construction: |                              |              |           |          |   |         |        |       |  |         |           |         |   |         |        |       |  |         |           |          |   |  |        |       |  |   |           |          |   |  |        |       |  |   |           |          |   |  |        |      
|                            | Single family residential(3) |              |           | 153,080  |   |         |        | 6.61  |  |         |           | 114,637 |   |         |        | 5.14  |  |         |           | 159,224  |   |  |        | 8.51  |  |   |           | 199,478  |   |  |        | 11.04 |  |   |           | 298,753  |   |  |        | 17.92 | 
|Land(4)                     |                              |              | 44,356    |          |   |         | 1.91   |       |  |         | 32,612    |         |   |         | 1.46   |       |  |         | 50,984    |          |   |  | 2.72   |       |  |   | 46,520    |          |   |  | 2.57   |       |  |   | 59,095    |          |   |  | 3.55   |      
|Other                       |                              |              | 11,009    |          |   |         | 0.48   |       |  |         | 10,978    |         |   |         | 0.49   |       |  |         | 11,482    |          |   |  | 0.61   |       |  |   | 15,390    |          |   |  | 0.85   |       |  |   | 22,053    |          |   |  | 1.32   |      
|                            |                              |              |           |          |   |         |        |       |  |         |           |         |   |         |        |       |  |         |           |          |   |  |        |       |  |   |           |          |   |  |        |       |  |   |           |          |   |  |        |      
|Gross loans receivable(5)   |                              |              | 2,316,891 |          |   |         | 100.00 | %     |  |         | 2,229,091 |         |   |         | 100.00 | %     |  |         | 1,871,032 |          |   |  | 100.00 | %     |  |   | 1,807,109 |          |   |  | 100.00 | %     |  |   | 1,666,797 |          |   |  | 100.00 | %    
|                            |                              |              |           |          |   |         |        |       |  |         |           |         |   |         |        |       |  |         |           |          |   |  |        |       |  |   |           |          |   |  |        |       |  |   |           |          |   |  |        |      
|Less:                       |                              |              |           |          |   |         |        |       |  |         |           |         |   |         |        |       |  |         |           |          |   |  |        |       |  |   |           |          |   |  |        |       |  |   |           |          |   |  |        |      
|                            | Undisbursed funds            |              |           | (142,841 | ) |         |        |       |  |         |           | (90,596 | ) |         |        |       |  |         |           | (137,484 | ) |  |        |       |  |   |           | (171,789 | ) |  |        |       |  |   |           | (196,249 | ) |  |        |       | 
|                            | Deferred costs, net          |              |           | 13,602   |   |         |        |       |  |         |           | 11,069  |   |         |        |       |  |         |           | 6,337    |   |  |        |       |  |   |           | 2,197    |   |  |        |       |  |   |           | (1,295   | ) |  |        |       | 
|                            | Allowance for credit losses  |              |           | (33,538  | ) |         |        |       |  |         |           | (35,309 | ) |         |        |       |  |         |           | (30,602  | ) |  |        |       |  |   |           | (29,450  | ) |  |        |       |  |   |           | (24,285  | ) |  |        |       | 
|                            |                              |              |           |          |   |         |        |       |  |         |           |         |   |         |        |       |  |         |           |          |   |  |        |       |  |   |           |          |   |  |        |       |  |   |           |          |   |  |        |      
|Net loans receivable        |                              | $            | 2,154,114 |          |   |         |        |       |  | $       | 2,114,255 |         |   |         |        |       |  | $       | 1,709,283 |          |   |  |        |       |  | $ | 1,608,067 |          |   |  |        |       |  | $ | 1,444,968 |          |   |  |        |      
|                            |                              |              |           |          |   |         |        |       |  |         |           |         |   |         |        |       |  |         |           |          |   |  |        |       |  |   |           |          |   |  |        |       |  |   |           |          |   |  |        |      



---



|    |                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 properties. Also includes loans to finance
    the renovation of existing properties.                                            
|   
|(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.                 

12



---



##### Table of Contents



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

|                                                 |                           |                   |       |                   |    |        |       |           |       |  |       |       |    |   |       |       |       | 
|------------------------------------------------ | ------------------------- | ----------------- | ----- | ----------------- | -- | ------ | ----- | --------- | ----- |  | ----- | ----- | -- | - | ----- | ----- | ----- | 
|                                                 |                           |                   |       |                  
|                                                 |                           | December 31, 2003 |       | December 31, 2002
|                                                 |                           |                   |       |                  
|                                                 |                           | No. of            |       | Average           |    | No. of |       | Average  
|                                                 |                           | Loans             |       | Loan Size         |    | Loans  |       | Loan Size
|(Dollars in thousands)                           |                           |                   |       |                   |    |        |       |          
|Single family residential                        |                           |                   | 1,359 |                   |    | $      | 638   |           |       |  | 1,484 |       |    | $ | 576   |      
|Income property:                                 |                           |                   |       |                   |    |        |       |           |       |  |       |       |    |   |       |      
|                                                 | Multi-family              |                   |       | 1,260             |    |        |       | 607       |       |  |       | 1,309 |    |   |       | 527   |      
|                                                 | Commercial                |                   |       | 324               |    |        |       | 975       |       |  |       | 394   |    |   |       | 994   |      
|Development:                                     |                           |                   |       |                   |    |        |       |           |       |  |       |       |    |   |       |      
|                                                 |                           | Multi-family      |       |                   | 41 |        |       |           | 3,418 |  |       |       | 26 |   |       |       | 3,294 | 
|                                                 |                           | Commercial        |       |                   | 7  |        |       |           | 2,920 |  |       |       | 12 |   |       |       | 4,110 | 
|Single family construction:                      |                           |                   |       |                   |    |        |       |           |       |  |       |       |    |   |       |      
|                                                 | Single family residential |                   |       | 86                |    |        |       | 1,780     |       |  |       | 74    |    |   |       | 1,549 |      
|Land                                             |                           |                   | 38    |                   |    |        | 1,167 |           |       |  | 28    |       |    |   | 1,165 |      
|Other                                            |                           |                   | 5     |                   |    |        | 1,456 |           |       |  | 3     |       |    |   | 1,967 |      
|                                                 |                           |                   |       |                   |    |        |       |           |       |  |       |       |    |   |       |      
|Total loans, excluding overdrafts                |                           |                   | 3,120 |                   |    |        | 741   |           |       |  | 3,330 |       |    |   | 668   |      
|                                                 |                           |                   |       |                   |    |        |       |           |       |  |       |       |    |   |       |      
|Overdraft & overdraft protection
    outstanding |                           |                   | 357   |                   |    |        | 2     |           |       |  | 383   |       |    |   | 2     |      
|                                                 |                           |                   |       |                   |    |        |       |           |       |  |       |       |    |   |       |      

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

|                                      |                                 |                                 |                        |                   |   |        |           |            |        |           |    |   |   |  |           |        |        |           | 
|------------------------------------- | ------------------------------- | ------------------------------- | ---------------------- | ----------------- | - | ------ | --------- | ---------- | ------ | --------- | -- | - | - |  | --------- | ------ | ------ | --------- | 
|                                      |                                 |                                 |                        |                  
|                                      |                                 | December 31, 2003               |                        | December 31, 2002
|                                      |                                 |                                 |                        |                  
|                                      |                                 | No. of                          |                        | Gross             |   | No. of |           | Gross     
|                                      |                                 | Loans                           |                        | Commitment        |   | Loans  |           | Commitment
|(Dollars in thousands)                |                                 |                                 |                        |                   |   |        |           |           
|Loans in excess of $10.0 million:     |                                 |                                 |                        |                   |   |        |           |            |        |           |    |   |   |  |           |       
|Income property:                      |                                 |                                 |                        |                   |   |        |           |            |        |           |    |   |   |  |           |       
|                                      | Commercial                      |                                 |                        | 1                 |   |        | $         | 11,669     |        |           |    | 1 |   |  | $         | 11,789 |       
|Development:                          |                                 |                                 |                        |                   |   |        |           |            |        |           |    |   |   |  |           |       
|                                      | Commercial                      |                                 |                        |                  |   |        |           |           |        |           |    | 2 |   |  |           | 21,836 |       
|Single Family Construction:           |                                 |                                 |                        |                   |   |        |           |            |        |           |    |   |   |  |           |       
|                                      | Single Family Construction      |                                 |                        | 1                 |   |        |           | 10,985     |        |           |    |   |   |  |           |        |       
|                                      |                                 |                                 |                        |                   |   |        |           |            |        |           |    |   |   |  |           |       
|                                      |                                 |                                 | 2                      |                   |   |        | 22,654    |            |        |           | 3  |   |   |  | 33,625    |       
|                                      |                                 |                                 |                        |                   |   |        |           |            |        |           |    |   |   |  |           |       
|                                      | Percentage of total gross loans |                                 |                        |                   |   |        |           | 0.98       | %      |           |    |   |   |  |           | 1.51   | %     
|Loans between $5.0 and $10.0 million: |                                 |                                 |                        |                   |   |        |           |            |        |           |    |   |   |  |           |       
|                                      | Single family residential       |                                 |                        | 1                 |   |        |           | 6,388      |        |           |    | 3 |   |  |           | 22,984 |       
|                                      | Income property:                |                                 |                        |                   |   |        |           |            |        |           |    |   |   |  |           |        |       
|                                      |                                 | Multi-family                    |                        |                   | 8 |        |           |            | 49,805 |           |    |   | 3 |  |           |        | 18,865 |          
|                                      |                                 | Commercial                      |                        |                   | 5 |        |           |            | 28,986 |           |    |   | 5 |  |           |        | 32,462 |          
|                                      | Development:                    |                                 |                        |                   |   |        |           |            |        |           |    |   |   |  |           |        |       
|                                      |                                 | Multi-family                    |                        |                   | 9 |        |           |            | 53,412 |           |    |   | 6 |  |           |        | 38,678 |          
|                                      |                                 | Commercial                      |                        |                   | 1 |        |           |            | 7,365  |           |    |   | 4 |  |           |        | 23,445 |          
|                                      | Single family construction:     |                                 |                        |                   |   |        |           |            |        |           |    |   |   |  |           |        |       
|                                      |                                 | Single family residential       |                        |                   | 2 |        |           |            | 11,960 |           |    |   | 2 |  |           |        | 11,240 |          
|                                      |                                 | Land                            |                        |                   | 1 |        |           |            | 6,500  |           |    |   |  |  |           |        |       |          
|                                      |                                 |                                 |                        |                   |   |        |           |            |        |           |    |   |   |  |           |       
|                                      |                                 |                                 | 27                     |                   |   |        | 164,416   |            |        |           | 23 |   |   |  | 147,674   |       
|                                      |                                 |                                 |                        |                   |   |        |           |            |        |           |    |   |   |  |           |       
|                                      |                                 | Percentage of total gross loans |                        |                   |   |        |           |            | 7.10   | %         |    |   |   |  |           |        | 6.62   | %        
|Loans less than $5.0 million          |                                 |                                 |                        |                   |   |        | 2,129,821 |            |        |           |    |   |   |  | 2,047,792 |       
|                                      |                                 |                                 |                        |                   |   |        |           |            |        |           |    |   |   |  |           |       
|                                      |                                 | Percentage of total gross loans |                        |                   |   |        |           |            | 91.92  | %         |    |   |   |  |           |        | 91.87  | %        
|                                      |                                 |                                 | Gross loans receivable |                   |   |        |           |            | $      | 2,316,891 |    |   |   |  |           |        | $      | 2,229,091 | 
|                                      |                                 |                                 |                        |                   |   |        |           |            |        |           |    |   |   |  |           |       

13



---



##### Table of Contents



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

|                            |                           |                   |         |                   |  |         |       |         |   |   |         |           |  |  |       |        |  
|--------------------------- | ------------------------- | ----------------- | ------- | ----------------- |  | ------- | ----- | ------- | - | - | ------- | --------- |  |  | ----- | ------ | -
|                            |                           |                   |         |                  
|                            |                           | December 31, 2003 |         | December 31, 2002
|                            |                           |                   |         |                  
|                            |                           | Balance           |         | Percent           |  | Balance |       | Percent
|(Dollars in thousands)      |                           |                   |         |                   |  |         |       |        
|Single family residential   |                           | $                 | 864,510 |                   |  |         | 39.76 | %       |   | $ | 851,268 |           |  |  | 39.81 | %     
|Income property:            |                           |                   |         |                   |  |         |       |         |   |   |         |           |  |  |       |       
|                            | Multi-family              |                   |         | 764,078           |  |         |       | 35.15   | % |   |         | 689,100   |  |  |       | 32.22  | %
|                            | Commercial                |                   |         | 315,015           |  |         |       | 14.49   | % |   |         | 387,354   |  |  |       | 18.11  | %
|Development:                |                           |                   |         |                   |  |         |       |         |   |   |         |           |  |  |       |       
|                            | Multi-family              |                   |         | 93,299            |  |         |       | 4.29    | % |   |         | 57,037    |  |  |       | 2.67   | %
|                            | Commercial                |                   |         | 12,755            |  |         |       | 0.59    | % |   |         | 41,168    |  |  |       | 1.93   | %
|Single family construction: |                           |                   |         |                   |  |         |       |         |   |   |         |           |  |  |       |       
|                            | Single family residential |                   |         | 78,916            |  |         |       | 3.63    | % |   |         | 75,218    |  |  |       | 3.52   | %
|Land                        |                           |                   | 43,490  |                   |  |         | 2.00  | %       |   |   | 32,612  |           |  |  | 1.52  | %     
|Other                       |                           |                   | 1,987   |                   |  |         | 0.09  | %       |   |   | 4,738   |           |  |  | 0.22  | %     
|                            |                           |                   |         |                   |  |         |       |         |   |   |         |           |  |  |       |       
|                            | Total loan principal(1)   |                   | $       | 2,174,050         |  |         |       | 100.00  | % |   | $       | 2,138,495 |  |  |       | 100.00 | %
|                            |                           |                   |         |                   |  |         |       |         |   |   |         |           |  |  |       |       



---



|    |                                      
|--- | -------------------------------------
|(1) | Excludes net deferred fees and costs.



| |                                
| | -------------------------------
| | 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 of
1 month, 3 years, or 5 years. These loans
generally provide for a prepayment penalty of 6 months
interest for the first 1 to 3 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, 2003, $864.5 million,
or 39.8% of the total loan portfolio was secured by
single-family residential properties (88.2% secured by
owner-occupied properties), compared with $851.3 million,
or 39.8% of the total net loan portfolio at December 31,
2002.

New loans originated in 2003 had an average
loan-to-value of 69%.



| |                                                      
| | -----------------------------------------------------
| | 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 0.25% 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

14



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


New multi-family loans originated in 2003 had an
average loan-to-value of 70%. Maturities on these loans are
typically 15 years to 30 years with a 30 year
amortization period. In addition, the weighted average debt
coverage ratio on new multi-family loans originated in 2003 was
1.28.

The Bank generally originates adjustable rate
commercial loans. New commercial loans originated in 2003 had an
average loan-to value of 65%. 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 weighted average debt coverage ratio on new
commercial loans originated in 2003 was 1.31.

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  Construction and
    Bridge Loans

During 2003, the Bank continued to emphasize its
position as a provider of construction loans predominantly to
apartment developers, and to a lesser extent to developers of
other types of income property including office buildings,
shopping centers and industrial buildings. New loans originated
in 2003 had an average loan-to-value of 72%, as stabilized.
These loans generally have terms of 18 to 24 months and
include extension options, subject to the Banks approval.
There are generally no prepayment penalties associated with
these loans.

During 2003, 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 Lending 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.
New loans originated in 2003 had an average loan-to-value of
74%, as stabilized. These loans generally have terms of 18 to
24 months and include extension options, subject to the
Banks approval. There are generally no prepayment
penalties associated with these loans, however, a 0.5% to 1%
exit fee may apply.



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

The Bank provides financing for individual
speculative home construction and small tracts primarily to
local builders. To a lesser extent, the Bank provides
owner-occupied construction loans for homeowners. These loans
are generated through the Banks standing relationships
with local builders/developers and approved independent mortgage
brokers. These loans are adjustable, have maturities of 1 to
2 years and typically include extension options of up to
6 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 semi-monthly basis to assess the progress of
construction.



| |           
| | ----------
| | Land Loans

Land loans are originated with the intent to
convert the loan into a construction loan and are underwritten
on an individual basis. New loans originated in 2003 had an
average loan-to-value of 64%. 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

15



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applicable. These loans generally have terms of
12 months and may 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 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.



| |                           
| | --------------------------
| | Consumer and Other Lending

During 2001, the Bank launched an overdraft
protection program for its checking account customers. At
December 31, 2003, and December 31, 2002, the
outstanding overdraft protection lines totaled $0.5 million
and $0.7 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s 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 gross new loan originations, net
of internal refinances, for the periods indicated, in dollars
and as a percentage of total loans originated.

|                             |                              |                         |           |         |         |        |        |       |       |        |         |         |        |  |        |       |      |   |         |        |        |  |        |       |      |  
|---------------------------- | ---------------------------- | ----------------------- | --------- | ------- | ------- | ------ | ------ | ----- | ----- | ------ | ------- | ------- | ------ |  | ------ | ----- | ---- | - | ------- | ------ | ------ |  | ------ | ----- | ---- | -
|                             |                              |                        
|                             |                              | Year Ended December 31,
|                             |                              |                        
|                             |                              |                         |           |         |         |       
|                             |                              | 2003                    |           | 2002    |         | 2001  
|                             |                              |                         |           |         |         |       
|                             |                              | Amount                  |           | %       |         | Amount |        | %     |       | Amount |         | %      
|(Dollars in thousands)       |                              |                         |           |         |         |        |        |       |       |        |         |        
|Single family residential(1) |                              | $                       | 417,625   |         |         |        | 38.37  | %     |       | $      | 327,658 |         |        |  | 43.36  | %     |      | $ | 322,114 |        |        |  | 47.00  | %    
|Income property:             |                              |                         |           |         |         |        |        |       |       |        |         |         |        |  |        |       |      |   |         |        |        |  |        |      
|                             | Multi-family(2)              |                         |           | 322,285 |         |        |        | 29.62 | %     |        |         | 217,044 |        |  |        | 28.72 | %    |   |         | 82,779 |        |  |        | 12.08 | %   
|                             | Commercial(3)                |                         |           | 56,791  |         |        |        | 5.22  | %     |        |         | 42,265  |        |  |        | 5.59  | %    |   |         | 62,475 |        |  |        | 9.12  | %   
|                             | Development(4)               |                         |           |         |         |        |        |       |       |        |         |         |        |  |        |       |      |   |         |        |        |  |        |       |     
|                             |                              | Multi-family            |           |         | 119,621 |        |        |       | 10.99 | %      |         |         | 41,288 |  |        |       | 5.46 | % |         |        | 43,962 |  |        |       | 6.41 | %
|                             |                              | Commercial              |           |         | 15,747  |        |        |       | 1.45  | %      |         |         | 30,549 |  |        |       | 4.04 | % |         |        | 46,732 |  |        |       | 6.82 | %
|Single family construction:  |                              |                         |           |         |         |        |        |       |       |        |         |         |        |  |        |       |      |   |         |        |        |  |        |      
|                             | Single family residential(5) |                         |           | 123,249 |         |        |        | 11.33 | %     |        |         | 77,450  |        |  |        | 10.25 | %    |   |         | 91,445 |        |  |        | 13.34 | %   
|Land(6)                      |                              |                         | 32,913    |         |         |        | 3.02   | %     |       |        | 19,496  |         |        |  | 2.58   | %     |      |   | 35,849  |        |        |  | 5.23   | %    
|Other(7)                     |                              |                         |          |         |         |        |       |       |       |        |        |         |        |  |       |       |      |   | 14      |        |        |  | 0.00   | %    
|                             |                              |                         |           |         |         |        |        |       |       |        |         |         |        |  |        |       |      |   |         |        |        |  |        |      
|Total                        |                              | $                       | 1,088,231 |         |         |        | 100.00 | %     |       | $      | 755,750 |         |        |  | 100.00 | %     |      | $ | 685,370 |        |        |  | 100.00 | %    
|                             |                              |                         |           |         |         |        |        |       |       |        |         |         |        |  |        |       |      |   |         |        |        |  |        |      



---



|    |                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes unfunded commitments of
    $0.2 million, $0.2 million and $0.8 million at
    December 31, 2003, 2002 and 2001, respectively.                                         
|   
|(2) | Includes unfunded commitments of
    $0.1 million, $0.7 million and $0.3 million at
    December 31, 2003 2002 and 2001, respectively.                                          
|   
|(3) | There were no unfunded commitments at
    December 31, 2003. Includes unfunded commitments of
    $1.3 million and $1.5 million at December 31,
    2002 and 2001, respectively.

16



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|    |                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4) | Includes unfunded commitments of
    $48.2 million, $29.0 million and $38.4 million at
    December 31, 2003, 2002 and 2001, respectively.                                                                      
|   
|(5) | Includes unfunded commitments of
    $66.2 million, $30.8 million and $44.9 million at
    December 31, 2003, 2002 and 2001, respectively.                                                                      
|   
|(6) | Includes unfunded commitments of
    $0.9 million at December 31, 2003. There were no
    unfunded commitments at December 31, 2002. Includes
    unfunded commitments of $2.0 million at December 31,
    2001.
|   
|(7) | There were no unfunded commitments at
    December 31, 2003. Includes unfunded commitments of
    $2.9 million at December 31, 2002. There were no
    unfunded commitments at December 31, 2001.               

The table below summarizes the maturities for
fixed rate loans and the repricing intervals for adjustable rate
loans as of December 31, 2003.

|                       |                    |                        |   |            |         |       |   |           |           |  |   |           |           | 
|---------------------- | ------------------ | ---------------------- | - | ---------- | ------- | ----- | - | --------- | --------- |  | - | --------- | --------- | 
|                       |                    |                       
|                       |                    | Principal Balance     
|                       |                    |                       
|                       |                    |                        |   | Adjustable |         |      
|                       |                    | Fixed Rate             |   | Rate       |         | Total
|(Dollars in thousands) |                    |                        |   |            |         |      
|Interval               |                    |                        |   |            |         |       |   |           |           |  |   |          
|                       | <3 months          |                        | $ | 3,603      |         |       | $ | 1,152,896 |           |  | $ | 1,156,499 |          
|                       | >3 to 6 months     |                        |   | 8,065      |         |       |   | 524,274   |           |  |   | 532,339   |          
|                       | >6 to 12 months    |                        |   | 13,405     |         |       |   | 62,805    |           |  |   | 76,210    |          
|                       | >1 to 2 years      |                        |   | 9,844      |         |       |   | 62,701    |           |  |   | 72,545    |          
|                       | >2 to 5 years      |                        |   | 24,690     |         |       |   | 359,761   |           |  |   | 384,451   |          
|                       | >5 to 10 years     |                        |   | 28,816     |         |       |   | 12,468    |           |  |   | 41,284    |          
|                       | >10 to 20 years    |                        |   | 12,713     |         |       |   | 8,377     |           |  |   | 21,090    |          
|                       | More than 20 years |                        |   | 32,473     |         |       |   |          |           |  |   | 32,473    |          
|                       |                    |                        |   |            |         |       |   |           |           |  |   |          
|                       |                    | Gross loans receivable |   | $          | 133,609 |       |   | $         | 2,183,282 |  |   | $         | 2,316,891 | 
|                       |                    |                        |   |            |         |       |   |           |           |  |   |          

At December 31, 2003, the Banks
loans-to-one-borrower limit was $36.0 million based upon
the 15% of unimpaired capital and surplus measurement. At
December 31, 2003, the Banks 2 largest lending
relationships had outstanding commitments of $20.9 million,
which consisted of 10 loans secured by multi-family real
estate, and $21.7 million, which consisted of 6 loans
with $20.9 million and $0.8 million secured by income
property development and multi-family real estate, respectively.
These loans were performing in accordance with their terms.

Approximately 97.2% and 96.7% of the Banks
loan portfolio were concentrated in Southern California at
December 31, 2003 and 2002, respectively.

17



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##### Table of Contents



The table below sets forth, by contractual
maturity, the Banks loan portfolio at December 31,
2003. 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      |         | Total Loans
|                            |                             | One Year     |         | Five Years |        | Ten Years |         | Ten Years |         | Receivable 
|(Dollars in thousands)      |                             |              |         |            |        |           |         |           |         |            
|Single family residential   |                             | $            | 4,144   |            |        | $         | 11,213  |           |         | $           | 12,666  |         |   | $ | 839,466   |         |   | $ | 867,489   |         
|Income property:            |                             |              |         |            |        |           |         |           |         |             |         |         |   |   |           |         |   |   |           |         
|                            | Multi-family                |              |         | 12,421     |        |           |         | 39,816    |         |             |         | 109,097 |   |   |           | 603,088 |   |   |           | 764,422  |        
|                            | Commercial                  |              |         | 20,365     |        |           |         | 74,438    |         |             |         | 202,099 |   |   |           | 19,048  |   |   |           | 315,950  |        
|Development:                |                             |              |         |            |        |           |         |           |         |             |         |         |   |   |           |         |   |   |           |         
|                            |                             | Multi-family |         |            | 33,760 |           |         |           | 106,383 |             |         |         |  |   |           |         |  |   |           |          | 140,143 | 
|                            |                             | Commercial   |         |            | 14,438 |           |         |           | 6,004   |             |         |         |  |   |           |         |  |   |           |          | 20,442  | 
|Single family construction: |                             |              |         |            |        |           |         |           |         |             |         |         |   |   |           |         |   |   |           |         
|                            | Single family residential   |              |         | 95,201     |        |           |         | 57,879    |         |             |         |        |   |   |           |        |   |   |           | 153,080  |        
|Land                        |                             |              | 33,227  |            |        |           | 9,748   |           |         |             | 1,258   |         |   |   | 124       |         |   |   | 44,357    |         
|Other                       |                             |              | 6,585   |            |        |           | 1,041   |           |         |             |        |         |   |   | 3,382     |         |   |   | 11,008    |         
|                            |                             |              |         |            |        |           |         |           |         |             |         |         |   |   |           |         |   |   |           |         
|Gross loans receivable(1)   |                             | $            | 220,141 |            |        | $         | 306,522 |           |         | $           | 325,120 |         |   | $ | 1,465,108 |         |   | $ | 2,316,891 |         
|                            |                             |              |         |            |        |           |         |           |         |             |         |         |   |   |           |         |   |   |           |         
|Less:                       |                             |              |         |            |        |           |         |           |         |             |         |         |   |   |           |         |   |   |           |         
|                            | Undisbursed funds           |              |         |            |        |           |         |           |         |             |         |         |   |   |           |         |   |   |           | (142,841 | )      
|                            | Deferred costs, net         |              |         |            |        |           |         |           |         |             |         |         |   |   |           |         |   |   |           | 13,602   |        
|                            | Allowance for credit losses |              |         |            |        |           |         |           |         |             |         |         |   |   |           |         |   |   |           | (33,538  | )      
|                            |                             |              |         |            |        |           |         |           |         |             |         |         |   |   |           |         |   |   |           |         
|Net loans receivable        |                             |              |         |            |        |           |         |           |         |             |         |         |   |   |           |         |   | $ | 2,154,114 |         
|                            |                             |              |         |            |        |           |         |           |         |             |         |         |   |   |           |         |   |   |           |         



---



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

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 3 to
6 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,

18



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##### Table of Contents



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.

19



---



##### 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,                                                                                
|                                                                       |                                                               |                                                                                             
|                                                                       |                                                               | 2003                                                                                         |                                   | 2002   |      | 2001   |           | 2000   |      | 1999  
|(Dollars in thousands)                                                 |                                                               |                                                                                              |                                   |        |      |        |           |        |      |       
|Risk elements:                                                         |                                                               |                                                                                              |                                   |        |      |        |           |        |      |        |           |        |      |        |           |        |      |        |           |       
|                                                                       | Nonaccrual loans(1)                                           |                                                                                              | $                                 | 8,885  |      |        | $         | 7,675  |      |        | $         | 20,666 |      |        | $         | 31,601 |      |        | $         | 44,031 |     
|                                                                       | Real estate owned, net                                        |                                                                                              |                                   |       |      |        |           |       |      |        |           | 1,312  |      |        |           | 2,859  |      |        |           | 5,587  |     
|                                                                       |                                                               |                                                                                              |                                   |        |      |        |           |        |      |        |           |        |      |        |           |        |      |        |           |       
|                                                                       |                                                               |                                                                                              | 8,885                             |        |      |        | 7,675     |        |      |        | 21,978    |        |      |        | 34,460    |        |      |        | 49,618    |       
|                                                                       | Performing loans classified substandard or lower
    (2)      |                                                                                              |                                   | 5,553  |      |        |           | 16,002 |      |        |           | 37,341 |      |        |           | 40,642 |      |        |           | 25,646 |     
|                                                                       |                                                               |                                                                                              |                                   |        |      |        |           |        |      |        |           |        |      |        |           |        |      |        |           |       
|                                                                       |                                                               |                                                                                              | Total classified assets           |        | $    | 14,438 |           |        | $    | 23,677 |           |        | $    | 59,319 |           |        | $    | 75,102 |           |        | $    | 75,264 | 
|                                                                       |                                                               |                                                                                              |                                   |        |      |        |           |        |      |        |           |        |      |        |           |        |      |        |           |       
|                                                                       |                                                               |                                                                                              | Total classified loans            |        | $    | 14,438 |           |        | $    | 23,677 |           |        | $    | 58,007 |           |        | $    | 72,243 |           |        | $    | 69,677 | 
|                                                                       |                                                               |                                                                                              |                                   |        |      |        |           |        |      |        |           |        |      |        |           |        |      |        |           |       
|Loans restructured and paying in accordance with
    modified terms(3) |                                                               | $                                                                                            | 2,310                             |        |      | $      | 2,468     |        |      | $      | 4,506     |        |      | $      | 14,933    |        |      | $      | 15,394    |       
|                                                                       |                                                               |                                                                                              |                                   |        |      |        |           |        |      |        |           |        |      |        |           |        |      |        |           |       
|Loans before allowance for credit losses                               |                                                               | $                                                                                            | 2,187,652                         |        |      | $      | 2,149,564 |        |      | $      | 1,739,885 |        |      | $      | 1,637,517 |        |      | $      | 1,469,253 |       
|                                                                       |                                                               |                                                                                              |                                   |        |      |        |           |        |      |        |           |        |      |        |           |        |      |        |           |       
|Loans receivable, net of specific allowance                            |                                                               | $                                                                                            | 2,187,652                         |        |      | $      | 2,149,376 |        |      | $      | 1,736,310 |        |      | $      | 1,631,721 |        |      | $      | 1,468,445 |       
|                                                                       |                                                               |                                                                                              |                                   |        |      |        |           |        |      |        |           |        |      |        |           |        |      |        |           |       
|Delinquent loans                                                       |                                                               |                                                                                              |                                   |        |      |        |           |        |      |        |           |        |      |        |           |        |      |        |           |       
|                                                                       | 30 - 89 days                                                  |                                                                                              | $                                 | 1,724  |      |        | $         | 5,357  |      |        | $         | 2,742  |      |        | $         | 12,407 |      |        | $         | 9,063  |     
|                                                                       | 90 + days                                                     |                                                                                              |                                   | 4,892  |      |        |           | 7,175  |      |        |           | 4,982  |      |        |           | 14,509 |      |        |           | 14,916 |     
|                                                                       |                                                               |                                                                                              |                                   |        |      |        |           |        |      |        |           |        |      |        |           |        |      |        |           |       
|                                                                       |                                                               |                                                                                              | Total delinquent loans            |        | $    | 6,616  |           |        | $    | 12,532 |           |        | $    | 7,724  |           |        | $    | 26,916 |           |        | $    | 23,979 | 
|                                                                       |                                                               |                                                                                              |                                   |        |      |        |           |        |      |        |           |        |      |        |           |        |      |        |           |       
|Allowance for credit losses:                                           |                                                               |                                                                                              |                                   |        |      |        |           |        |      |        |           |        |      |        |           |        |      |        |           |       
|                                                                       | General                                                       |                                                                                              | $                                 | 33,538 |      |        | $         | 35,121 |      |        | $         | 27,027 |      |        | $         | 23,654 |      |        | $         | 23,477 |     
|                                                                       | Specific (4)                                                  |                                                                                              |                                   |       |      |        |           | 188    |      |        |           | 3,575  |      |        |           | 5,796  |      |        |           | 808    |     
|                                                                       |                                                               |                                                                                              |                                   |        |      |        |           |        |      |        |           |        |      |        |           |        |      |        |           |       
|                                                                       |                                                               |                                                                                              | Total allowance for credit losses |        | $    | 33,538 |           |        | $    | 35,309 |           |        | $    | 30,602 |           |        | $    | 29,450 |           |        | $    | 24,285 | 
|                                                                       |                                                               |                                                                                              |                                   |        |      |        |           |        |      |        |           |        |      |        |           |        |      |        |           |       
|                                                                       |                                                               | Total allowance for credit losses to loans                                                   |                                   |        | 1.53 | %      |           |        | 1.64 | %      |           |        | 1.76 | %      |           |        | 1.80 | %      |           |        | 1.65 | %     
|                                                                       |                                                               |                                                                                              |                                   |        |      |        |           |        |      |        |           |        |      |        |           |        |      |        |           |       
|                                                                       |                                                               | Total general allowance for credit losses to
    loans receivable, net of specific allowance |                                   |        | 1.53 | %      |           |        | 1.63 | %      |           |        | 1.56 | %      |           |        | 1.45 | %      |           |        | 1.60 | %     
|                                                                       |                                                               |                                                                                              |                                   |        |      |        |           |        |      |        |           |        |      |        |           |        |      |        |           |       
|Core capital                                                           |                                                               | $                                                                                            | 206,767                           |        |      | $      | 183,942   |        |      | $      | 154,981   |        |      | $      | 140,387   |        |      | $      | 127,160   |       
|                                                                       |                                                               |                                                                                              |                                   |        |      |        |           |        |      |        |           |        |      |        |           |        |      |        |           |       
|Risk-based capital                                                     |                                                               | $                                                                                            | 230,052                           |        |      | $      | 206,175   |        |      | $      | 169,278   |        |      | $      | 151,914   |        |      | $      | 139,815   |       
|                                                                       |                                                               |                                                                                              |                                   |        |      |        |           |        |      |        |           |        |      |        |           |        |      |        |           |       
|Ratio of classified assets to:                                         |                                                               |                                                                                              |                                   |        |      |        |           |        |      |        |           |        |      |        |           |        |      |        |           |       
|                                                                       | Loans receivable, net of specific allowance                   |                                                                                              |                                   | 0.66   | %    |        |           | 1.10   | %    |        |           | 3.42   | %    |        |           | 4.60   | %    |        |           | 5.13   | %   
|                                                                       |                                                               |                                                                                              |                                   |        |      |        |           |        |      |        |           |        |      |        |           |        |      |        |           |       
|                                                                       | Bank core capital and general allowance for
    credit losses |                                                                                              |                                   | 6.01   | %    |        |           | 10.81  | %    |        |           | 32.59  | %    |        |           | 45.78  | %    |        |           | 49.96  | %   
|                                                                       |                                                               |                                                                                              |                                   |        |      |        |           |        |      |        |           |        |      |        |           |        |      |        |           |       
|                                                                       | Core capital                                                  |                                                                                              |                                   | 6.98   | %    |        |           | 12.87  | %    |        |           | 38.28  | %    |        |           | 53.50  | %    |        |           | 59.19  | %   
|                                                                       |                                                               |                                                                                              |                                   |        |      |        |           |        |      |        |           |        |      |        |           |        |      |        |           |       
|                                                                       | Risk-based capital                                            |                                                                                              |                                   | 6.28   | %    |        |           | 11.48  | %    |        |           | 35.04  | %    |        |           | 49.44  | %    |        |           | 53.83  | %   
|                                                                       |                                                               |                                                                                              |                                   |        |      |        |           |        |      |        |           |        |      |        |           |        |      |        |           |       

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---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The interest income recognized on loans that were
    on nonaccrual status at December 31, 2003, 2002, 2001, 2000
    and 1999 was $0.2 million, $0.1 million,
    $0.2 million, $1.7 million and $2.3 million,
    respectively. If these loans had been performing for the entire
    year, the income recognized would have been $0.7 million,
    $0.4 million, $1.8 million, $3.3 million and
    $4.5 million for 2003, 2002, 2001, 2000 and 1999,
    respectively.                                                                                                                                                                     
|   
|(2) | Excludes nonaccrual loans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(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 1 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, 2003 and December 31, 2002.
Net loan charge-offs were $0.9 million (0.04% of loans, net
of specific allowance) and $3.4 million (0.16% of loans,
net of specific allowance) for the years ended 2003 and 2002,
respectively. Net loan charge-offs for the fourth quarter of
2003 and 2002 were $0.2 million and $0.6 million,
respectively. The Bank did not require a specific valuation
allowance at December 31, 2003, compared to
$0.2 million at December 31, 2002.

The table below sets forth information concerning
the Banks gross classified loans, by category, as of
December 31, 2003.

|                             |              |                        |    |            |    |        |       |                  |       |        |   |       |   |   |       |     |       |  |    |   |    |   |        |     |        | 
|---------------------------- | ------------ | ---------------------- | -- | ---------- | -- | ------ | ----- | ---------------- | ----- | ------ | - | ----- | - | - | ----- | --- | ----- |  | -- | - | -- | - | ------ | --- | ------ | 
|                             |              | No. of                 |    | Nonaccrual |    | No. of |       | Other            |       | No. of |   |      
|                             |              | Loans                  |    | Loans      |    | Loans  |       | Classified Loans |       | Loans  |   | Total
|(Dollars in thousands)       |              |                        |    |            |    |        |       |                  |       |        |   |      
|Single family residential(1) |              |                        | 12 |            |    | $      | 8,879 |                  |       |        | 6 |       |   | $ | 4,682 |     |       |  | 18 |   |    | $ | 13,561 |    
|Income property:             |              |                        |    |            |    |        |       |                  |       |        |   |       |   |   |       |     |       |  |    |   |    |   |        |    
|                             | Multi-family |                        |    |           |    |        |       |                 |       |        |   | 1     |   |   |       | 448 |       |  |    | 1 |    |   |        | 448 |       
|                             | Commercial   |                        |    |           |    |        |       |                 |       |        |   |      |   |   |       |    |       |  |    |  |    |   |        |    |       
|Development:                 |              |                        |    |            |    |        |       |                  |       |        |   |       |   |   |       |     |       |  |    |   |    |   |        |    
|                             | Multi-family |                        |    |           |    |        |       |                 |       |        |   |      |   |   |       |    |       |  |    |  |    |   |        |    |       
|                             | Commercial   |                        |    |            |    |        |       |                 |       |        |   |      |   |   |       |    |       |  |    |  |    |   |        |    |       
|Land                         |              |                        |   |            |    |        |      |                  |       |        | 1 |       |   |   | 423   |     |       |  | 1  |   |    |   | 423    |    
|Other                        |              |                        | 2  |            |    |        | 6     |                  |       |        |  |       |   |   |      |     |       |  | 2  |   |    |   | 6      |    
|                             |              |                        |    |            |    |        |       |                  |       |        |   |       |   |   |       |     |       |  |    |   |    |   |        |    
|                             |              | Gross classified loans |    |            | 14 |        |       | $                | 8,885 |        |   |       | 8 |   |       | $   | 5,553 |  |    |   | 22 |   |        | $   | 14,438 | 
|                             |              |                        |    |            |    |        |       |                  |       |        |   |       |   |   |       |     |       |  |    |   |    |   |        |    



---



|    |                                                                                                                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As of December 31, 2003, included 4 loans,
    with balances over $1.0 million, totaling
    $7.5 million, representing 84.6% of total nonaccrual loans.
    In January 2004, the Bank foreclosed on 1 of these SFR loans,
    resulting in an REO in the amount of $1.9 million and a
    charge-off of $0.1 million which was previously reserved as
    a specific allowance.



| |                            
| | ---------------------------
| | 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 Statements 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 portfolio to estimate
these inherent losses and to assess the overall

21



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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
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 our key
lending areas, the effects of which may not be 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 an additional amount of up to
approximately 5% of the total GVA 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 identified 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.

22



---



##### Table of Contents



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

|                                                              |                             |                           |       |        |       |        |   |        |       |        |   |       |       |        |   |       |       |        |   |       |       |        |  
|------------------------------------------------------------- | --------------------------- | ------------------------- | ----- | ------ | ----- | ------ | - | ------ | ----- | ------ | - | ----- | ----- | ------ | - | ----- | ----- | ------ | - | ----- | ----- | ------ | -
|                                                              |                             |                          
|                                                              |                             | December 31,             
|(Dollars in thousands)                                        |                             |                          
|                                                              |                             | 2003                      |       | 2002   |       | 2001   |   | 2000   |       | 1999  
|                                                              |                             |                           |       |        |       |        |   |        |       |       
|Dollars:                                                      |                             |                           |       |        |       |        |   |        |       |        |   |       |       |        |   |       |       |        |   |      
|                                                              | Single family residential   |                           | $     | 12,082 |       |        | $ | 10,822 |       |        | $ | 9,878 |       |        | $ | 8,075 |       |        | $ | 7,095 |      
|                                                              | Income property:            |                           |       |        |       |        |   |        |       |        |   |       |       |        |   |       |       |        |   |       |      
|                                                              |                             | Multi-family              |       |        | 9,176 |        |   |        | 8,517 |        |   |       | 2,009 |        |   |       | 906   |        |   |       | 646   |       
|                                                              |                             | Commercial                |       |        | 4,903 |        |   |        | 7,272 |        |   |       | 4,531 |        |   |       | 4,236 |        |   |       | 6,907 |       
|                                                              |                             | Development               |       |        | 2,287 |        |   |        | 2,948 |        |   |       | 8,420 |        |   |       | 7,877 |        |   |       | 2,067 |       
|                                                              | Single family construction: |                           |       |        |       |        |   |        |       |        |   |       |       |        |   |       |       |        |   |       |      
|                                                              |                             | Single family residential |       |        | 1,175 |        |   |        | 1,317 |        |   |       | 2,679 |        |   |       | 5,075 |        |   |       | 4,801 |       
|                                                              | Land                        |                           |       | 1,037  |       |        |   | 1,211  |       |        |   | 1,818 |       |        |   | 1,914 |       |        |   | 1,470 |      
|                                                              | Other                       |                           |       | 66     |       |        |   | 199    |       |        |   | 144   |       |        |   | 260   |       |        |   | 311   |      
|                                                              | Unallocated(1)              |                           |       | 2,812  |       |        |   | 3,023  |       |        |   | 1,123 |       |        |   | 1,107 |       |        |   | 988   |      
|                                                              |                             |                           |       |        |       |        |   |        |       |        |   |       |       |        |   |       |       |        |   |      
|                                                              |                             |                           | Total |        | $     | 33,538 |   |        | $     | 35,309 |   |       | $     | 30,602 |   |       | $     | 29,450 |   |       | $     | 24,285 |  
|                                                              |                             |                           |       |        |       |        |   |        |       |        |   |       |       |        |   |       |       |        |   |      
|Percentage of year end allowance:                             |                             |                           |       |        |       |        |   |        |       |        |   |       |       |        |   |       |       |        |   |      
|                                                              | Single family residential   |                           |       | 36.03  | %     |        |   | 30.65  | %     |        |   | 32.28 | %     |        |   | 27.42 | %     |        |   | 29.22 | %    
|                                                              | Income property:            |                           |       |        |       |        |   |        |       |        |   |       |       |        |   |       |       |        |   |       |      
|                                                              |                             | Multi-family              |       |        | 27.36 |        |   |        | 24.12 |        |   |       | 6.57  |        |   |       | 3.08  |        |   |       | 2.66  |       
|                                                              |                             | Commercial                |       |        | 14.62 |        |   |        | 20.60 |        |   |       | 14.80 |        |   |       | 14.38 |        |   |       | 28.44 |       
|                                                              |                             | Development               |       |        | 6.82  |        |   |        | 8.35  |        |   |       | 27.52 |        |   |       | 26.75 |        |   |       | 8.51  |       
|                                                              | Single family construction: |                           |       |        |       |        |   |        |       |        |   |       |       |        |   |       |       |        |   |       |      
|                                                              |                             | Single family residential |       |        | 3.50  |        |   |        | 3.73  |        |   |       | 8.75  |        |   |       | 17.23 |        |   |       | 19.77 |       
|                                                              | Land                        |                           |       | 3.09   |       |        |   | 3.43   |       |        |   | 5.94  |       |        |   | 6.50  |       |        |   | 6.05  |      
|                                                              | Other                       |                           |       | 0.20   |       |        |   | 0.56   |       |        |   | 0.47  |       |        |   | 0.88  |       |        |   | 1.28  |      
|                                                              | Unallocated                 |                           |       | 8.38   |       |        |   | 8.56   |       |        |   | 3.67  |       |        |   | 3.76  |       |        |   | 4.07  |      
|                                                              |                             |                           |       |        |       |        |   |        |       |        |   |       |       |        |   |       |       |        |   |      
|                                                              |                             |                           | Total |        |       | 100.00 | % |        |       | 100.00 | % |       |       | 100.00 | % |       |       | 100.00 | % |       |       | 100.00 | %
|                                                              |                             |                           |       |        |       |        |   |        |       |        |   |       |       |        |   |       |       |        |   |      
|Percentage of reserves to total net loans by
    category(2): |                             |                           |       |        |       |        |   |        |       |        |   |       |       |        |   |       |       |        |   |      
|                                                              | Single family residential   |                           |       | 1.40   | %     |        |   | 1.27   | %     |        |   | 1.08  | %     |        |   | 0.91  | %     |        |   | 1.05  | %    
|                                                              | Income property:            |                           |       |        |       |        |   |        |       |        |   |       |       |        |   |       |       |        |   |       |      
|                                                              |                             | Multi-family              |       |        | 1.20  |        |   |        | 1.24  |        |   |       | 0.79  |        |   |       | 0.36  |        |   |       | 0.29  |       
|                                                              |                             | Commercial                |       |        | 1.56  |        |   |        | 1.88  |        |   |       | 1.93  |        |   |       | 2.26  |        |   |       | 3.26  |       
|                                                              |                             | Development               |       |        | 2.16  |        |   |        | 3.00  |        |   |       | 4.92  |        |   |       | 6.05  |        |   |       | 2.08  |       
|                                                              | Single family construction: |                           |       |        |       |        |   |        |       |        |   |       |       |        |   |       |       |        |   |       |      
|                                                              |                             | Single family residential |       |        | 1.49  |        |   |        | 1.75  |        |   |       | 2.57  |        |   |       | 3.98  |        |   |       | 2.42  |       
|                                                              | Land                        |                           |       | 2.39   |       |        |   | 3.71   |       |        |   | 3.73  |       |        |   | 4.21  |       |        |   | 2.93  |      
|                                                              | Other                       |                           |       | 3.33   |       |        |   | 4.20   |       |        |   | 2.18  |       |        |   | 3.06  |       |        |   | 2.24  |      
|                                                              |                             |                           | Total |        |       | 1.55   | % |        |       | 1.65   | % |       |       | 1.77   | % |       |       | 1.80   | % |       |       | 1.65   | %



---



|    |                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | During 2003 $1.4 million in reserves for
    unfunded commitments were reclassified to other liabilities.                                                                                                                                               
|   
|(2) | Percent of allowance for credit losses to net
    loan portfolio, excluding deferred costs, net. The change in the
    percentage of allowance to total loans by category is a result
    of different levels of classified assets within each category.

23



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##### Table of Contents



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

|                                                                            |                           |                         |           |      |      |      |           |        |        |      |           |        |        |   |           |      |      |   |           |        |        |  
|--------------------------------------------------------------------------- | ------------------------- | ----------------------- | --------- | ---- | ---- | ---- | --------- | ------ | ------ | ---- | --------- | ------ | ------ | - | --------- | ---- | ---- | - | --------- | ------ | ------ | -
|                                                                            |                           |                        
|                                                                            |                           | Year Ended December 31,
|(Dollars in thousands)                                                      |                           |                        
|                                                                            |                           | 2003                    |           | 2002 |      | 2001 |           | 2000   |        | 1999
|                                                                            |                           |                         |           |      |      |      |           |        |        |     
|Average loans outstanding                                                   |                           | $                       | 2,128,322 |      |      | $    | 1,833,856 |        |        | $    | 1,696,785 |        |        | $ | 1,547,206 |      |      | $ | 1,411,697 |       
|                                                                            |                           |                         |           |      |      |      |           |        |        |      |           |        |        |   |           |      |      |   |           |       
|Total allowance for credit losses at beginning of
    period                |                           | $                       | 35,309    |      |      | $    | 30,602    |        |        | $    | 29,450    |        |        | $ | 24,285    |      |      | $ | 17,111    |       
|Acquisition of FFIL Reserve                                                 |                           |                         |          |      |      |      | 7,189     |        |        |      |          |        |        |   |          |      |      |   |          |       
|Provision for credit losses                                                 |                           |                         | 500       |      |      |      | 870       |        |        |      | 3,400     |        |        |   | 6,000     |      |      |   | 12,000    |       
|Reserve for loan commitments                                                |                           |                         | (1,393    | )    |      |      |           |        |        |      |           |        |        |   |           |      |      |   |           |       
|Charge-offs:                                                                |                           |                         |           |      |      |      |           |        |        |      |           |        |        |   |           |      |      |   |           |       
|                                                                            | Single family residential |                         |           | (6   | )    |      |           | (476   | )      |      |           | (2,289 | )      |   |           | (354 | )    |   |           | (1,910 | )     
|Income property:                                                            |                           |                         |           |      |      |      |           |        |        |      |           |        |        |   |           |      |      |   |           |       
|                                                                            | Multi-family              |                         |           |     |      |      |           |       |        |      |           | (26    | )      |   |           |     |      |   |           | (186   | )     
|                                                                            | Commercial                |                         |           | (575 | )    |      |           | (665   | )      |      |           |       |        |   |           | (573 | )    |   |           | (512   | )     
|                                                                            | Development               |                         |           | (129 | )    |      |           | (2,246 | )      |      |           |       |        |   |           |     |      |   |           |       |       
|Single family construction:                                                 |                           |                         |           |      |      |      |           |        |        |      |           |        |        |   |           |      |      |   |           |       
|                                                                            | Single family residential |                         |           |     |      |      |           |       |        |      |           | (43    | )      |   |           | (147 | )    |   |           |       |       
|Land                                                                        |                           |                         | (136      | )    |      |      |          |        |        |      |          |        |        |   |          |      |      |   | (1,140    | )     
|Other                                                                       |                           |                         | (88       | )    |      |      |          |        |        |      |          |        |        |   | (10       | )    |      |   | (1,124    | )     
|Recoveries:                                                                 |                           |                         |           |      |      |      |           |        |        |      |           |        |        |   |           |      |      |   |           |       
|                                                                            | Single family residential |                         |           | 6    |      |      |           |       |        |      |           |       |        |   |           |     |      |   |           |       |       
|Income property:                                                            |                           |                         |           |      |      |      |           |        |        |      |           |        |        |   |           |      |      |   |           |       
|                                                                            | Multi-family              |                         |           |     |      |      |           |       |        |      |           |       |        |   |           |     |      |   |           |       |       
|                                                                            | Commercial                |                         |           | 5    |      |      |           |       |        |      |           |       |        |   |           |     |      |   |           |       |       
|Single family construction:                                                 |                           |                         |           |      |      |      |           |        |        |      |           |        |        |   |           |      |      |   |           |       
|                                                                            | Single family residential |                         |           |     |      |      |           |       |        |      |           |       |        |   |           |     |      |   |           |       |       
|Land                                                                        |                           |                         |          |      |      |      |          |        |        |      |          |        |        |   |          |      |      |   |          |       
|Other                                                                       |                           |                         | 45        |      |      |      | 35        |        |        |      | 110       |        |        |   | 249       |      |      |   | 46        |       
|                                                                            |                           |                         |           |      |      |      |           |        |        |      |           |        |        |   |           |      |      |   |           |       
|                                                                            |                           | Net charge-offs         |           |      | (878 | )    |           |        | (3,352 | )    |           |        | (2,248 | ) |           |      | (835 | ) |           |        | (4,826 | )
|                                                                            |                           |                         |           |      |      |      |           |        |        |      |           |        |        |   |           |      |      |   |           |       
|Total allowance for credit losses at end of period                          |                           | $                       | 33,538    |      |      | $    | 35,309    |        |        | $    | 30,602    |        |        | $ | 29,450    |      |      | $ | 24,285    |       
|                                                                            |                           |                         |           |      |      |      |           |        |        |      |           |        |        |   |           |      |      |   |           |       
|Ratio of net charge-offs to average loans
    outstanding during the period |                           |                         | 0.04      | %    |      |      | 0.18      | %      |        |      | 0.13      | %      |        |   | 0.05      | %    |      |   | 0.34      | %     
|Ratio of allowance to average loans outstanding                             |                           |                         | 1.58      | %    |      |      | 1.93      | %      |        |      | 1.80      | %      |        |   | 1.90      | %    |      |   | 1.72      | %     
|Ratio of net charge-offs to specific allowance at
    beginning of period   |                           |                         | 467.02    | %    |      |      | 93.76     | %      |        |      | 38.79     | %      |        |   | 103.34    | %    |      |   | 93.09     | %     

24



---



##### Table of Contents





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

Real estate acquired in satisfaction of loans is
transferred to REO at the lower of the carrying value or the
estimated fair value, less any estimated disposal costs
(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 charge-off, if the fair value is
lower. The fair value of collateral includes capitalized costs.
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.

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,
|                          |                      |             
|                          |                      | 2003         |   | 2002 |  | 2001
|(Dollars in thousands)    |                      |              |   |      |  |     
|Single family residential |                      | $            |  |      |  | $    |  |   |  | $ | 1,312 |  
|                          | Allowance for losses |              |   |     |  |      |   |  |  |   |       |  | 
|                          |                      |              |   |      |  |      |   |   |  |   |       |  
|Real estate owned, net    |                      | $            |  |      |  | $    |  |   |  | $ | 1,312 |  
|                          |                      |              |   |      |  |      |   |   |  |   |       |  

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

|                                                  |                      |                         |   |      |  |      |   |      |  |      |   |   |  |   |    |     |   |   |    |     |  
|------------------------------------------------- | -------------------- | ----------------------- | - | ---- |  | ---- | - | ---- |  | ---- | - | - |  | - | -- | --- | - | - | -- | --- | -
|                                                  |                      |                        
|                                                  |                      | Year Ended December 31,
|                                                  |                      |                        
|                                                  |                      | 2003                    |   | 2002 |  | 2001 |   | 2000 |  | 1999
|(Dollars in thousands)                            |                      |                         |   |      |  |      |   |      |  |     
|Total allowance for losses at beginning of period |                      | $                       |  |      |  | $    |  |      |  | $    |  |   |  | $ | 29 |     |   | $ | 45 |    
|                                                  | Provision for losses |                         |   |     |  |      |   |     |  |      |   |  |  |   |    |    |   |   |    | 80  |  
|                                                  | Charge-offs          |                         |   |     |  |      |   |     |  |      |   |  |  |   |    | (29 | ) |   |    | (96 | )
|                                                  |                      |                         |   |      |  |      |   |      |  |      |   |   |  |   |    |     |   |   |    |    
|Total allowance for losses at end of period       |                      | $                       |  |      |  | $    |  |      |  | $    |  |   |  | $ |   |     |   | $ | 29 |    
|                                                  |                      |                         |   |      |  |      |   |      |  |      |   |   |  |   |    |     |   |   |    |    



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

25



---



##### Table of Contents



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.

|                        |                                           |             |   |            |         |            |   |            |       |  |   |       |       |  |   |         |         | 
|----------------------- | ----------------------------------------- | ----------- | - | ---------- | ------- | ---------- | - | ---------- | ----- |  | - | ----- | ----- |  | - | ------- | ------- | 
|                        |                                           |             |   | Gross      |         | Gross      |   |           
|                        |                                           | Net Balance |   | Unrealized |         | Unrealized |   |           
|                        |                                           | At Cost     |   | Gains      |         | Losses     |   | Fair Value
|(Dollars in thousands)  |                                           |             |   |            |         |            |   |           
|As of December 31, 2003 |                                           |             |   |            |         |            |   |            |       |  |   |       |       |  |   |        
|                        | Investment securities available-for-sale: |             |   |            |         |            |   |            |       |  |   |       |       |  |   |         |        
|                        | Mortgage-backed securities                |             | $ | 305,491    |         |            | $ | 1,169      |       |  | $ | 2,354 |       |  | $ | 304,306 |        
|                        | Collateralized mortgage obligations (CMO) |             |   | 77,384     |         |            |   | 389        |       |  |   | 792   |       |  |   | 76,981  |        
|                        |                                           |             |   |            |         |            |   |            |       |  |   |       |       |  |   |        
|                        |                                           | Total       |   | $          | 382,875 |            |   | $          | 1,558 |  |   | $     | 3,146 |  |   | $       | 381,287 | 
|                        |                                           |             |   |            |         |            |   |            |       |  |   |       |       |  |   |        
|As of December 31, 2002 |                                           |             |   |            |         |            |   |            |       |  |   |       |       |  |   |        
|                        | Investment securities available-for-sale: |             |   |            |         |            |   |            |       |  |   |       |       |  |   |         |        
|                        | 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 following table reflects the Companys
gross unrealized losses and fair value of available-for-sale
investment securities, aggregated by investment category and the
length of time that individual securities have been in a
continuous unrealized loss position, at December 31, 2003.

|                                          |       |                     |         |                   |  |            |       |            |  |            |   |            |  |   |   |   |  |   |         |         |  |   |       |       | 
|----------------------------------------- | ----- | ------------------- | ------- | ----------------- |  | ---------- | ----- | ---------- |  | ---------- | - | ---------- |  | - | - | - |  | - | ------- | ------- |  | - | ----- | ----- | 
|                                          |       |                     |         |                   |  |           
|                                          |       | Less Than 12 Months |         | 12 Months or More |  | Total     
|                                          |       |                     |         |                   |  |           
|                                          |       |                     |         | Unrealized        |  |            |       | Unrealized |  |            |   | Unrealized
|                                          |       | Fair Value          |         | Losses            |  | Fair Value |       | Losses     |  | Fair Value |   | Losses    
|(Dollars in thousands)                    |       |                     |         |                   |  |            |       |            |  |            |   |           
|Investment securities available-for-sale: |       |                     |         |                   |  |            |       |            |  |            |   |            |  |   |   |   |  |   |         |         |  |   |       |      
|Mortgage-backed securities                |       | $                   | 196,475 |                   |  | $          | 2,354 |            |  | $          |  |            |  | $ |  |   |  | $ | 196,475 |         |  | $ | 2,354 |      
|Collateralized mortgage obligations (CMO) |       |                     | 39,729  |                   |  |            | 792   |            |  |            |  |            |  |   |  |   |  |   | 39,729  |         |  |   | 792   |      
|                                          |       |                     |         |                   |  |            |       |            |  |            |   |            |  |   |   |   |  |   |         |         |  |   |       |      
|                                          | Total |                     | $       | 236,204           |  |            | $     | 3,146      |  |            | $ |           |  |   | $ |  |  |   | $       | 236,204 |  |   | $     | 3,146 | 
|                                          |       |                     |         |                   |  |            |       |            |  |            |   |            |  |   |   |   |  |   |         |         |  |   |       |      

The unrealized positions on our mortgage-backed
securities and collateralized mortgage obligations are purely a
function of the volatility with interest rates in 2003, as they
have no credit risk in that they are all rated AAA by Standard
and Poors, redeem at maturity or when called at par and have the
implicit guarantee of the United States Treasury.

The contractual maturities of MBS and CMO
investment securities available-for-sale, excluding periodic
principal payments and reductions due to estimated prepayments,
at December 31, 2003 were as follows.

|                       |                                           |                                |                             |            |         |           |  |   |         |         |  |  |      |      |  
|---------------------- | ----------------------------------------- | ------------------------------ | --------------------------- | ---------- | ------- | --------- |  | - | ------- | ------- |  |  | ---- | ---- | -
|                       |                                           |                               
|                       |                                           | Available-for-Sale            
|                       |                                           |                               
|                       |                                           |                                |                             | Weighted  
|                       |                                           | Net Balance                    |                             |            |         | Average  
|                       |                                           | At Cost                        |                             | Fair Value |         | Yield (1)
|(Dollars in thousands) |                                           |                                |                             |            |         |          
|Investment securities  |                                           |                                |                             |            |         |           |  |   |         |         |  | 
|                       | Investment securities available-for-sale: |                                |                             |            |         |           |  |   |         |         |  |  |     
|                       |                                           | After 5 years through 10 years |                             | $          | 107,533 |           |  | $ | 107,687 |         |  |  | 3.73 | %   
|                       |                                           | Over 10 years                  |                             |            | 275,342 |           |  |   | 273,600 |         |  |  | 3.78 | %   
|                       |                                           |                                |                             |            |         |           |  |   |         |         |  | 
|                       |                                           |                                | Total investment securities |            | $       | 382,875   |  |   | $       | 381,287 |  |  |      | 3.77 | %
|                       |                                           |                                |                             |            |         |           |  |   |         |         |  | 



---



|    |                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Weighted average yield at December 31, 2003
    is based on a projected yield using prepayment assumptions in
    calculating the amortized cost of the securities.

26



---



##### Table of Contents



At December 31, 2003, the weighted average
effective duration and weighted average life of the Banks
investment securities portfolio were approximately 2.33 and
3.55 years, respectively. The portfolio had a weighted
average coupon of 4.42%. The weighted average book price of the
portfolio was 101.79% (net premium of $6.7 million). At
December 31, 2003, the Bank did not hold securities of any
non-governmental agency issuer where the aggregate book value of
such securities exceed 10% of stockholders equity.

Proceeds from the sales of available-for-sale
investment securities during 2003 and 2002 were
$124.0 million and $39.4 million, respectively. The Bank
recognized a net gain of $101.7 thousand on the sale of various
investment securities ($419.3 thousand in realized gains
and $317.6 thousand in realized losses) for 2003, compared with
a net gain of $135.5 thousand ($13 thousand in
realized losses) for 2002. The Company held no investment
securities during 2001.

Fifty-one securities with net balances at cost
and fair value of $277.6 million and $275.9 million,
respectively, at December 31, 2003 were pledged to secure
FHLB advances of $274.3 million. At December 31, 2002,
2 securities with net balances at cost and fair value of
$4.9 million were pledged to secure a FHLB advance of
$5.0 million.

Risks Associated with Investment
Securities.The securities in the
Banks investment portfolio (primarily MBS) 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 a decline in fair
value, if any, is deemed to be other than temporary,
it will be treated as an impairment and reflected in
earnings. 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.



| |             
| | ------------
| | Other Assets

On March 31, 2003, the Bank invested
$25.0 million in Bank Owned Life Insurance
(BOLI) policies, which were included in other
assets. Increases in the cash surrender value of these policies
are recorded as other noninterest revenue. At December 31,
2003, the investment in BOLI was $26.4 million.

Sources of Funds

The Banks principal sources of funds 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, repayments and sales of loans and
investment securities, as well as from the sale of other assets,
including REO.



| |         
| | --------
| | Deposits

At December 31, 2003, the Bank operated
15 full service retail-banking locations with 3 primary
product lines; 1) checking and savings accounts,
2) money market accounts, and 3) certificates of
deposit. Of the Banks 15 retail branches, 7 are
located in the South Bay region. The Bank also has
3 branches in Orange County, 2 branches in
San Diego County, 1 branch in Los Angeles, and
2 branches in the San Fernando Valley, 1 of which is
in Ventura County. At December 31, 2003, the Banks
retail branches by region each carried an average deposit
balance of $228.0 million, $103.8 million,
$62.9 million and $54.0 million in the
San Fernando Valley, South Bay, San Diego and Orange
regions, respectively, which is substantially higher than most
local banks. The Bank does not operate a money desk or otherwise
solicit Brokered Deposits.

27



---



##### Table of Contents



The Bank has several types of deposit accounts
principally designed to attract short term deposits. The table
below summarizes the 12 month average on deposits and the
weighted average interest costs incurred thereon during the
periods indicated. See Item 7 
Managements Discussion and Analysis of Financial Condition
and Results of Operations  Net Interest Income.

|                           |       |                         |           |           |  |          |      |         |   |          |       |          |   |         |         |           |  |          |      |      |   |  |       |        |   |   |         |           |  |  |      |      |   |  |       |        |  
|-------------------------- | ----- | ----------------------- | --------- | --------- |  | -------- | ---- | ------- | - | -------- | ----- | -------- | - | ------- | ------- | --------- |  | -------- | ---- | ---- | - |  | ----- | ------ | - | - | ------- | --------- |  |  | ---- | ---- | - |  | ----- | ------ | -
|                           |       |                        
|                           |       | Year Ended December 31,
|                           |       |                        
|                           |       |                         |           |           |  |         
|                           |       | 2003                    |           | 2002      |  | 2001    
|                           |       |                         |           |           |  |         
|                           |       |                         |           | 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       |       | $                       | 45,312    |           |  |          |     |         |   |          | 2.59  | %        |   | $       | 37,258  |           |  |          |     |      |   |  | 2.78  | %      |   | $ | 32,956  |           |  |  |     |      |   |  | 2.69  | %     
|Checking/ NOW              |       |                         | 82,120    |           |  |          | 1.04 | %       |   |          | 4.73  | %        |   |         | 66,993  |           |  |          | 1.89 | %    |   |  | 5.01  | %      |   |   | 49,014  |           |  |  | 2.48 | %    |   |  | 4.00  | %     
|Passbook                   |       |                         | 72,226    |           |  |          | 1.39 | %       |   |          | 4.16  | %        |   |         | 51,065  |           |  |          | 1.77 | %    |   |  | 3.82  | %      |   |   | 35,345  |           |  |  | 2.52 | %    |   |  | 2.89  | %     
|Money market               |       |                         | 472,660   |           |  |          | 2.04 | %       |   |          | 27.20 | %        |   |         | 378,728 |           |  |          | 2.66 | %    |   |  | 28.32 | %      |   |   | 215,243 |           |  |  | 3.94 | %    |   |  | 17.58 | %     
|Certificates of deposit(1) |       |                         | 1,065,671 |           |  |          | 2.26 | %       |   |          | 61.32 | %        |   |         | 803,391 |           |  |          | 3.05 | %    |   |  | 60.07 | %      |   |   | 892,016 |           |  |  | 5.54 | %    |   |  | 72.84 | %     
|                           |       |                         |           |           |  |          |      |         |   |          |       |          |   |         |         |           |  |          |      |      |   |  |       |        |   |   |         |           |  |  |      |      |   |  |       |       
|                           | Total |                         | $         | 1,737,989 |  |          |      | 2.10    | % |          |       | 100.00   | % |         | $       | 1,337,435 |  |          |      | 2.83 | % |  |       | 100.00 | % |   | $       | 1,224,574 |  |  |      | 5.04 | % |  |       | 100.00 | %
|                           |       |                         |           |           |  |          |      |         |   |          |       |          |   |         |         |           |  |          |      |      |   |  |       |        |   |   |         |           |  |  |      |      |   |  |       |       



---



|    |                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes $185.0 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 through the FHLB, with a maximum advance of up
to 45% 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. As of
December 31, 2003, the net funds available to the Company,
pursuant to the FHLB borrowing arrangement, totaled
$254.9 million ($1.16 billion, less the advances
outstanding of $697.7 million and the outstanding letters
of credit used as collateral for state deposits of
$203.5 million). At December 31, 2003, the Banks
outstanding advances of $697.7 million had a weighted
averaged interest rate of 2.75% 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 $2.1 million of
expenses associated with the early retirement of the senior
notes in 2002.



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

In 2001 and 2002, the Company organized
4 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

28



---



##### Table of Contents



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 provisions of FIN 46R are required to be
adopted by the Company prior to the first reporting period that
ends after March 15, 2004. The adoption of FIN 46 did
not have, and the adoption of FIN 46R is not expected to
have, a significant impact on the financial position, results of
operations, or cash flows of the Company.

The table below sets forth information concerning
the Companys Capital Securities as of December 31,
2003.

|                       |      |            |  |          |                        |      |  |         |          |          |  |      |          |      |  |               |        |  |  |  |       |   |  |  |              |   |  |  |       |   |  |  |          | 
|---------------------- | ---- | ---------- |  | -------- | ---------------------- | ---- |  | ------- | -------- | -------- |  | ---- | -------- | ---- |  | ------------- | ------ |  |  |  | ----- | - |  |  | ------------ | - |  |  | ----- | - |  |  | -------- | 
|                       |      |           
|(Dollars in thousands) |      |           
|                       |      | Date of    |  | Maturity |                        |      |  | Current |          |         
|Ownership              |      | Subsidiary |  | Issuance |                        | Date |  | Amount  |          | Rate Cap |  | Rate |          | Rate |  | Call Date (1)
|                       |      |            |  |          |                        |      |  |         |          |          |  |      |          |      |  |              
|                       | 100% |            |  |          | HFC Capital Trust I    |      |  |         | 3/28/01  |          |  |      | 6/8/31   |      |  | $             | 9,000  |  |  |  | N/A   |   |  |  | Fixed        |   |  |  | 10.18 | % |  |  | 10 Years | 
|                       | 100% |            |  |          | HFC Capital Trust II   |      |  |         | 11/28/01 |          |  |      | 12/8/31  |      |  |               | 5,000  |  |  |  | 11.00 | % |  |  | LIBOR + 3.75 | % |  |  | 4.98  | % |  |  | 5 Years  | 
|                       | 100% |            |  |          | HFC Capital Trust  III |      |  |         | 4/10/02  |          |  |      | 4/22/32  |      |  |               | 22,000 |  |  |  | 11.00 | % |  |  | LIBOR + 3.70 | % |  |  | 4.92  | % |  |  | 5 Years  | 
|                       | 100% |            |  |          | HFC Capital Trust IV   |      |  |         | 11/1/02  |          |  |      | 11/15/32 |      |  |               | 15,000 |  |  |  | 12.00 | % |  |  | LIBOR + 3.35 | % |  |  | 4.62  | % |  |  | 5 Years  | 
|                       |      |            |  |          |                        |      |  |         |          |          |  |      |          |      |  |               |        |  |  |  |       |   |  |  |              |   |  |  |       |   |  |  |          | 
|                       |      |            |  |          |                        |      |  |         |          |          |  |      |          |      |  | $             | 51,000 |  |  |  |       |   |  |  |              |   |  |  |       |   |  |  |          | 
|                       |      |            |  |          |                        |      |  |         |          |          |  |      |          |      |  |               |        |  |  |  |       |   |  |  |              |   |  |  |       |   |  |  |          | 



---



|    |                                                                            
|--- | ---------------------------------------------------------------------------
|(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. There were no changes
in the carrying amount of goodwill during 2003. The
Companys intangible assets, other than goodwill, are
amortized over their estimated useful lives.

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, 2003.

|                                   |                         |                |     |                          |  |   |     |     | 
|---------------------------------- | ----------------------- | -------------- | --- | ------------------------ |  | - | --- | --- | 
|                                   |                         |                |     | Accumulated Amortization
|                                   |                         | Gross Carrying |     | for the Year Ended      
|                                   |                         | Amount (1)     |     | December 31, 2003       
|(In thousands)                     |                         |                |     |                         
|Intangible Assets:                 |                         |                |     |                          |  |   |     |    
|Core deposit intangible  checking |                         | $              | 876 |                          |  | $ | 268 |    
|Core deposit intangible  savings  |                         |                | 648 |                          |  |   | 280 |    
|                                   |                         |                |     |                          |  |   |     |    
|                                   | Total intangible assets |                | $   | 1,524                    |  |   | $   | 548 | 
|                                   |                         |                |     |                          |  |   |     |    



---



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

29



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##### Table of Contents



As of December 31, 2003, the Companys
only intangible assets that are currently being amortized are
core deposit intangibles, with $412 thousand in amortization
expense charged to operating expense for the twelve months ended
December 31, 2003.

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

|                                 |  |              |     | 
|-------------------------------- |  | ------------ | --- | 
|                                 |  | Future      
|                                 |  | Amortization
|For the Years Ended December 31, |  | Expense     
|                                 |  |             
|(In thousands)                   |  |             
|2004                             |  | $            | 355 | 
|2005                             |  |              | 216 | 
|2006                             |  |              | 156 | 
|2007                             |  |              | 72  | 
|2008 and thereafter              |  |              | 177 | 

30



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##### Table of Contents








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

As of December 31, 2003, the Company had 16
leased and 2 wholly owned properties. The leased properties
included its corporate headquarters, Tustin Loan Center, 13
branch offices (2 of which were ground leases for sites on which
the Company has built branch offices), and 1 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, 2003. 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 |                        |             |  |               
|        |                                           | of Term    |  | Options  |  | Rental  |                        | Square Feet |  | Net Book Value
|        |                                           |            |  |          |  |         |                        |             |  |               
|Leased: |                                           |            |  |          |  |         |                        |             |  |                |   |         |         |       |  |        |         |   |   |        
|        | El Segundo Corporate                      |            |  | 11/30/05 |  |         |                        | One 5-year  |  |                | $ | 106,647 |         |       |  | 61,190 |         |   | $ | 258,449 |          
|        | Torrance Branch                           |            |  | 08/31/05 |  |         |                        | N/A         |  |                |   | 9,124   |         |       |  | 4,300  |         |   |   | 93,430  |          
|        | Westlake Branch                           |            |  | 06/30/10 |  |         |                        | Two 5-year  |  |                |   | 16,033  |         |       |  | 7,700  |         |   |   | 45,887  |          
|        | Manhattan Beach Branch                    |            |  | 10/30/10 |  |         |                        | Four 5-year |  |                |   | 4,590   |         |       |  | 4,590  |         |   |   | 32,441  |          
|        | Warehouse                                 |            |  | 06/30/04 |  |         |                        | N/A         |  |                |   | 4,200   |         |       |  | 10,000 |         |   |   | 31,864  |          
|        | Tarzana Branch                            |            |  | 01/31/05 |  |         |                        | Four 5-year |  |                |   | 3,729   |         |       |  | 3,352  |         |   |   | 79,351  |          
|        | Redondo Beach Branch                      |            |  | 04/30/04 |  |         |                        | Two 5-year  |  |                |   | 4,252   |         |       |  | 1,403  |         |   |   | 21,981  |          
|        | Hermosa Beach Branch                      |            |  | 01/15/06 |  |         |                        | One 5-year  |  |                |   | 2,722   |         |       |  | 588    |         |   |   | 31,170  |          
|        | Gardena Branch                            |            |  | 12/31/06 |  |         |                        | Two 5-year  |  |                |   | 3,375   |         |       |  | 1,500  |         |   |   | 59,624  |          
|        | Tustin Loan Center                        |            |  | 06/14/04 |  |         |                        | N/A         |  |                |   | 21,628  |         |       |  | 14,814 |         |   |   | 171,105 |          
|        | Irvine (North Park) Branch                |            |  | 10/31/12 |  |         |                        | N/A         |  |                |   | 7,317   |         |       |  | 2,483  |         |   |   | 164,555 |          
|        | Irvine (Oak Creek) Branch                 |            |  | 04/30/13 |  |         |                        | N/A         |  |                |   | 8,484   |         |       |  | 2,424  |         |   |   | 191,015 |          
|        | Orange Branch                             |            |  | 10/30/05 |  |         | One 2.5-yearOne 5-year |             |  | 4,349          |   |         |         | 1,536 |  |        |         |  |  
|        | Del Mar Branch                            |            |  | 10/31/07 |  |         |                        | One 5-year  |  |                |   | 5,983   |         |       |  | 1,770  |         |   |   | 89,963  |          
|        | San Diego Branch                          |            |  | 10/31/05 |  |         |                        | One 2-year  |  |                |   | 3,407   |         |       |  | 1,446  |         |   |   |        |          
|        | Baldwin Hills                             |            |  | 10/31/06 |  |         |                        | One 5-year  |  |                |   | 7,064   |         |       |  | 5,100  |         |   |   | 47,635  |          
|        |                                           |            |  |          |  |         |                        |             |  |                |   |         |         |       |  |        |         |   |   |        
|        |                                           | Total      |  |          |  |         |                        |             |  |                |   | $       | 212,904 |       |  |        | 124,196 |   |   |         | 1,318,470 | 
|        |                                           |            |  |          |  |         |                        |             |  |                |   |         |         |       |  |        |         |   |   |        
|Owned:  |                                           |            |  |          |  |         |                        |             |  |                |   |         |         |       |  |        |         |   |   |        
|        | Hawthorne Branch                          |            |  |          |  |         |                        |             |  |                |   |         |         |       |  | 10,000 |         |   | $ | 82,988  |          
|        | Westchester Branch                        |            |  |          |  |         |                        |             |  |                |   |         |         |       |  | 8,800  |         |   |   | 246,219 |          
|        | Manhattan Beach Branch (building only)(1) |            |  |          |  |         |                        |             |  |                |   |         |         |       |  | 4,590  |         |   |   | 32,441  |          
|        | Tarzana Branch (building only)(1)         |            |  |          |  |         |                        |             |  |                |   |         |         |       |  | 3,352  |         |   |   | 79,351  |          
|        |                                           |            |  |          |  |         |                        |             |  |                |   |         |         |       |  |        |         |   |   |        
|        |                                           | Total      |  |          |  |         |                        |             |  |                |   |         |         |       |  |        | 26,742  |   |   |         | 440,999   | 
|        |                                           |            |  |          |  |         |                        |             |  |                |   |         |         |       |  |        |         |   |   |        



---



|    |                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------
|(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 $1.1 million at
December 31, 2003.

31



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##### Table of Contents



At December 31, 2003, the net book values of
the Companys office property, and furniture, fixtures and
equipment, excluding data processing equipment, were
$4.2 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.






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

Litigation

From time to time, the Company is party to claims
and legal proceedings arising in the ordinary course of
business. Management evaluates the Companys and/or the
Banks exposure to the cases individually and in the
aggregate and provides for potential losses on such litigation,
if the amount of the loss is estimable and the loss is probable.
Management believes that there are no pending litigation matters
at the current time that are material. However, litigation is
inherently uncertain and no assurance can be given that any
current or future litigation will not result in any loss that
might be material to the Company.






|        |                                                        
|------- | -------------------------------------------------------
|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 2003.






|         |                   
|-------- | ------------------
|Item 4A. | Executive Officers

The following table sets forth, as of
February 27, 2004, 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   |  |     | 42 |                                                |  | 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      |  |     | 60 |                                                |  | 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 (formerly Touche Ross & Co.) from 1977
    through 1983.                                                                                                                                                
|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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

32



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##### Table of Contents



|               |  |     |    |                                                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-------------- |  | --- | -- | ---------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name           |  | Age |    | Position with the Company and Prior Experience
|               |  |     |    |                                               
|Eileen Lyon    |  |     | 46 |                                                |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|JoLene M. Wryn |  |     | 49 |                                                |  | Senior Vice President, Director of Human
    Resources since September 2003. Prior to joining Hawthorne,
    Ms. Wryn was Vice President, Human Resources Director of
    Long Beach Acceptance Corp. from December 2002 to September
    2003. Human Resources Director of MetLife Investors Group, a
    subsidiary of MetLife from July 2000 to June 2002. Vice
    President of Human Resources of Rockwell Federal Credit Union
    from July 1999 to July 2000. Senior Vice President and Director
    of Human Resources of Downey Financial Corporation from December
    1991 through May 1998. Prior to that, Ms. Wryn was Vice
    President and Compensation Manager with Great American Bank from
    1990 to 1991 and Senior Compensation Analyst and Administration
    Officer from 1989 to 1990. She served as a Compensation Analyst
    with San Diego Gas & Electric from 1988 to 1989.

33



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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.comor through their mailing address:
P.O. Box 3315, South Hacksensack, New Jersey,
07606. The following table sets forth the high and low sales
prices, adjusted for the 3-for-2 stock split, of the Common
Stock as reported by Nasdaq for the periods indicated below.

|                             |  |      |       |     |  |   |       | 
|---------------------------- |  | ---- | ----- | --- |  | - | ----- | 
|                             |  | High |       | Low
|                             |  |      |       |    
|Year ended December 31, 2003 |  |      |       |     |  |   |       | 
|First quarter                |  | $    | 20.44 |     |  | $ | 19.13 | 
|Second quarter               |  |      | 23.11 |     |  |   | 19.32 | 
|Third quarter                |  |      | 26.80 |     |  |   | 22.79 | 
|Fourth quarter               |  |      | 29.47 |     |  |   | 25.90 | 
|Year ended December 31, 2002 |  |      |       |     |  |   |       | 
|First quarter                |  | $    | 19.50 |     |  | $ | 12.67 | 
|Second quarter               |  |      | 21.67 |     |  |   | 19.17 | 
|Third quarter                |  |      | 22.15 |     |  |   | 16.47 | 
|Fourth quarter               |  |      | 19.71 |     |  |   | 17.13 | 

Stockholders

As of February 27, 2004, there were
approximately 414 holders of record.

Recent Sales of Unregistered
Securities

In 2001 and 2002, our special purpose business
trusts issued an aggregate of $51.0 million of trust
preferred securities in a series of unrelated private placement
offerings. In connection with these transactions, we issued
certain junior subordinated debentures and guarantees. Certain
information regarding these unregistered offerings is set forth
below:

|                       |  |                  |          |        |  |                 |            |                      |  |                                  |                            |  |                         |   |                         |  
|---------------------- |  | ---------------- | -------- | ------ |  | --------------- | ---------- | -------------------- |  | -------------------------------- | -------------------------- |  | ----------------------- | - | ----------------------- | -
|                       |  |                  |          |        |  |                 |            | Securities Exemption
|Special Purpose Entity |  | Date of Issuance |          | Amount |  | Placement Agent |            | Relied On           
|                       |  |                  |          |        |  |                 |            |                     
|HFC Capital Trust I    |  |                  | 3/28/01  |        |  | $               | 9,000,000  |                      |  | Sandler ONeill & Partners, L.P. |                            |  | Rule 144A, Section  4(2 | )
|HFC Capital Trust II   |  |                  | 11/28/01 |        |  |                 | 5,000,000  |                      |  | Sandler ONeill & Partners, L.P. |                            |  | Rule 144A, Section  4(2 | )
|HFC Capital Trust III  |  |                  | 4/10/02  |        |  |                 | 22,000,000 |                      |  | Sandler ONeill & Partners, L.P. |                            |  | Rule 144A, Section  4(2 | )
|HFC Capital Trust IV   |  |                  | 11/1/02  |        |  |                 | 15,000,000 |                      |  |                                  | Credit Suisse First Boston |  |                         |   | Rule 144A, Section  4(2 | )

During 2002 and 2003, the Company granted 621,350
options to purchase shares of the Companys common stock,
with exercise prices ranging from $13.24 to $26.70 to our
directors, officers and employees, in reliance upon an exemption
under the Securities Act pursuant to Rule 701.

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.

34



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##### Table of Contents



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 3 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 a 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.

The Company is prohibited, under the terms of the
Agreement and Plan of Merger dated as of January 27, 2004
with Commercial Capital, from paying any cash dividends. The
Companys ability to pay dividends is also limited by
certain covenants contained in the indentures governing trust
preferred securities that were issued, and the debentures
underlying the trust preferred securities. The indentures
provide that if an Event of Default (as defined in the
indentures) has occurred and is continuing, or if the Company is
in default with respect to any obligations under the guarantee
agreement, which covers payments of the obligations on the trust
preferred securities, or if the Company gives notice of any
intention to defer payments of interest on the debentures
underlying the trust preferred securities, then the Company may
not, among other restrictions, declare or pay any dividends
(other than a dividend payable by the Bank to the Company) with
respect to the Companys common stock. See
Note 1 of the Notes to Consolidated Financial
Statements contained in Item 8. Financial
Statements and Supplementary Data.

35



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##### Table of Contents








|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

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

|                                              |                                                           |                                       |       |           |   |      |       |           |   |      |        |           |   |   |        |           |   |   |        |           |  
|--------------------------------------------- | --------------------------------------------------------- | ------------------------------------- | ----- | --------- | - | ---- | ----- | --------- | - | ---- | ------ | --------- | - | - | ------ | --------- | - | - | ------ | --------- | -
|                                              |                                                           |                                      
|                                              |                                                           | At or for the Year Ended December 31,
|(Dollars in thousands, except per share data) |                                                           |                                      
|                                              |                                                           | 2003                                  |       | 2002      |   | 2001 |       | 2000      |   | 1999
|                                              |                                                           |                                       |       |           |   |      |       |           |   |     
|Consolidated statements of income:            |                                                           |                                       |       |           |   |      |       |           |   |      |        |           |   |   |        |           |   |   |        |          
|                                              | Interest revenue                                          |                                       | $     | 140,479   |   |      | $     | 137,194   |   |      | $      | 147,686   |   |   | $      | 148,988   |   |   | $      | 132,747   |  
|                                              | Interest cost                                             |                                       |       | (59,859   | ) |      |       | (64,087   | ) |      |        | (85,670   | ) |   |        | (88,682   | ) |   |        | (73,626   | )
|                                              |                                                           |                                       |       |           |   |      |       |           |   |      |        |           |   |   |        |           |   |   |        |          
|                                              | Net interest income                                       |                                       |       | 80,620    |   |      |       | 73,107    |   |      |        | 62,016    |   |   |        | 60,306    |   |   |        | 59,121    |  
|                                              | Provision for credit losses                               |                                       |       | (500      | ) |      |       | (870      | ) |      |        | (3,400    | ) |   |        | (6,000    | ) |   |        | (12,000   | )
|                                              |                                                           |                                       |       |           |   |      |       |           |   |      |        |           |   |   |        |           |   |   |        |          
|                                              | Net interest income after provision for credit
    losses |                                       |       | 80,120    |   |      |       | 72,237    |   |      |        | 58,616    |   |   |        | 54,306    |   |   |        | 47,121    |  
|                                              | Noninterest revenue                                       |                                       |       | 8,656     |   |      |       | 6,387     |   |      |        | 5,630     |   |   |        | 8,094     |   |   |        | 7,820     |  
|                                              | (Loss)/income from real estate owned, net                 |                                       |       | (51       | ) |      |       | 71        |   |      |        | 205       |   |   |        | (924      | ) |   |        | 324       |  
|                                              | Noninterest expense                                       |                                       |       | (42,354   | ) |      |       | (40,612   | ) |      |        | (35,348   | ) |   |        | (36,524   | ) |   |        | (37,035   | )
|                                              |                                                           |                                       |       |           |   |      |       |           |   |      |        |           |   |   |        |           |   |   |        |          
|                                              | Income before income taxes                                |                                       |       | 46,371    |   |      |       | 38,083    |   |      |        | 29,103    |   |   |        | 24,952    |   |   |        | 18,230    |  
|                                              | Income tax provision                                      |                                       |       | (17,863   | ) |      |       | (15,384   | ) |      |        | (12,270   | ) |   |        | (10,668   | ) |   |        | (8,030    | )
|                                              |                                                           |                                       |       |           |   |      |       |           |   |      |        |           |   |   |        |           |   |   |        |          
|                                              | Net income                                                |                                       | $     | 28,508    |   |      | $     | 22,699    |   |      | $      | 16,833    |   |   | $      | 14,284    |   |   | $      | 10,200    |  
|                                              |                                                           |                                       |       |           |   |      |       |           |   |      |        |           |   |   |        |           |   |   |        |          
|Per share amounts:                            |                                                           |                                       |       |           |   |      |       |           |   |      |        |           |   |   |        |           |   |   |        |          
|                                              | Basic earnings per share                                  |                                       | $     | 2.47      |   |      | $     | 2.37      |   |      | $      | 2.12      |   |   | $      | 1.79      |   |   | $      | 1.29      |  
|                                              |                                                           |                                       |       |           |   |      |       |           |   |      |        |           |   |   |        |           |   |   |        |          
|                                              | Diluted earnings per share                                |                                       | $     | 2.28      |   |      | $     | 1.92      |   |      | $      | 1.48      |   |   | $      | 1.29      |   |   | $      | 0.89      |  
|                                              |                                                           |                                       |       |           |   |      |       |           |   |      |        |           |   |   |        |           |   |   |        |          
|                                              | Tangible book value per share(1)                          |                                       | $     | 13.75     |   |      | $     | 12.52     |   |      | $      | 14.98     |   |   | $      | 13.42     |   |   | $      | 11.55     |  
|Balance sheet data at period end:             |                                                           |                                       |       |           |   |      |       |           |   |      |        |           |   |   |        |           |   |   |        |          
|                                              | Total assets                                              |                                       | $     | 2,674,003 |   |      | $     | 2,494,970 |   |      | $      | 1,856,197 |   |   | $      | 1,753,395 |   |   | $      | 1,581,153 |  
|                                              | Cash and cash equivalents                                 |                                       |       | 17,829    |   |      |       | 21,849    |   |      |        | 98,583    |   |   |        | 99,919    |   |   |        | 86,722    |  
|                                              | Investment securities                                     |                                       |       | 381,287   |   |      |       | 267,596   |   |      |        |          |   |   |        |          |   |   |        |          |  
|                                              | Loans receivable, net                                     |                                       |       | 2,154,114 |   |      |       | 2,114,255 |   |      |        | 1,709,283 |   |   |        | 1,608,067 |   |   |        | 1,444,968 |  
|                                              | Real estate owned, net                                    |                                       |       |          |   |      |       |          |   |      |        | 1,312     |   |   |        | 2,859     |   |   |        | 5,587     |  
|                                              | Deposits                                                  |                                       |       | 1,722,564 |   |      |       | 1,662,810 |   |      |        | 1,199,645 |   |   |        | 1,214,856 |   |   |        | 1,086,635 |  
|                                              | Senior notes                                              |                                       |       |          |   |      |       |          |   |      |        | 25,778    |   |   |        | 39,358    |   |   |        | 40,000    |  
|                                              | Capital securities                                        |                                       |       | 51,000    |   |      |       | 51,000    |   |      |        | 14,000    |   |   |        |          |   |   |        |          |  
|                                              | FHLB advances                                             |                                       |       | 697,155   |   |      |       | 600,190   |   |      |        | 484,000   |   |   |        | 384,000   |   |   |        | 349,000   |  
|                                              | Stockholders equity                                      |                                       |       | 185,274   |   |      |       | 163,066   |   |      |        | 120,449   |   |   |        | 104,161   |   |   |        | 92,304    |  
|                                              | Allowance for credit losses                               |                                       |       | 33,538    |   |      |       | 35,309    |   |      |        | 30,602    |   |   |        | 29,450    |   |   |        | 24,285    |  
|Asset quality at period end:                  |                                                           |                                       |       |           |   |      |       |           |   |      |        |           |   |   |        |           |   |   |        |          
|                                              | Nonaccrual loans                                          |                                       | $     | 8,885     |   |      | $     | 7,675     |   |      | $      | 20,666    |   |   | $      | 31,601    |   |   | $      | 44,031    |  
|                                              | Real estate owned, net                                    |                                       |       |          |   |      |       |          |   |      |        | 1,312     |   |   |        | 2,859     |   |   |        | 5,587     |  
|                                              |                                                           |                                       |       |           |   |      |       |           |   |      |        |           |   |   |        |           |   |   |        |          
|                                              |                                                           | $                                     | 8,885 |           |   | $    | 7,675 |           |   | $    | 21,978 |           |   | $ | 34,460 |           |   | $ | 49,618 |          
|                                              |                                                           |                                       |       |           |   |      |       |           |   |      |        |           |   |   |        |           |   |   |        |          
|Net charge-offs                               |                                                           | $                                     | 878   |           |   | $    | 3,352 |           |   | $    | 2,248  |           |   | $ | 835    |           |   | $ | 4,826  |          

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|                                              |                                                    |                                       |  |         |  |      |  |         |  |      |  |         |  |  |  |        |  |  |  |        | 
|--------------------------------------------- | -------------------------------------------------- | ------------------------------------- |  | ------- |  | ---- |  | ------- |  | ---- |  | ------- |  |  |  | ------ |  |  |  | ------ | 
|                                              |                                                    |                                      
|                                              |                                                    | At or for the Year Ended December 31,
|(Dollars in thousands, except per share data) |                                                    |                                      
|                                              |                                                    | 2003                                  |  | 2002    |  | 2001 |  | 2000    |  | 1999
|                                              |                                                    |                                       |  |         |  |      |  |         |  |     
|Yields and costs (for the period):            |                                                    |                                       |  |         |  |      |  |         |  |      |  |         |  |  |  |        |  |  |  |       
|                                              | Interest-earnings assets                           |                                       |  | 5.59%   |  |      |  | 6.69%   |  |      |  | 8.20%   |  |  |  | 8.94%  |  |  |  | 8.68%  | 
|                                              | Interest-bearing liabilities                       |                                       |  | 2.56%   |  |      |  | 3.41%   |  |      |  | 5.21%   |  |  |  | 5.81%  |  |  |  | 5.21%  | 
|                                              | Interest rate spread(2)                            |                                       |  | 3.03%   |  |      |  | 3.28%   |  |      |  | 2.99%   |  |  |  | 3.13%  |  |  |  | 3.47%  | 
|                                              | Net interest margin(3)                             |                                       |  | 3.21%   |  |      |  | 3.57%   |  |      |  | 3.45%   |  |  |  | 3.62%  |  |  |  | 3.87%  | 
|Performance ratios(4):                        |                                                    |                                       |  |         |  |      |  |         |  |      |  |         |  |  |  |        |  |  |  |       
|                                              | Return on average assets                           |                                       |  | 1.11%   |  |      |  | 1.09%   |  |      |  | 0.93%   |  |  |  | 0.85%  |  |  |  | 0.66%  | 
|                                              | Return on average common stockholders equity      |                                       |  | 16.62%  |  |      |  | 16.90%  |  |      |  | 15.13%  |  |  |  | 14.58% |  |  |  | 11.66% | 
|                                              | Average stockholders equity to average
    assets |                                       |  | 6.67%   |  |      |  | 6.48%   |  |      |  | 6.17%   |  |  |  | 5.85%  |  |  |  | 5.68%  | 
|                                              | Efficiency ratio(5)                                |                                       |  | 47.33%  |  |      |  | 50.68%  |  |      |  | 52.09%  |  |  |  | 50.19% |  |  |  | 48.35% | 
|Bank capital ratios at period end:            |                                                    |                                       |  |         |  |      |  |         |  |      |  |         |  |  |  |        |  |  |  |       
|                                              | Tangible                                           |                                       |  | 7.81%   |  |      |  | 7.46%   |  |      |  | 8.36%   |  |  |  | 8.01%  |  |  |  | 8.05%  | 
|                                              | Core                                               |                                       |  | 7.81%   |  |      |  | 7.46%   |  |      |  | 8.36%   |  |  |  | 8.01%  |  |  |  | 8.05%  | 
|                                              | Tier 1                                             |                                       |  | 11.16%  |  |      |  | 10.42%  |  |      |  | 11.63%  |  |  |  | 11.30% |  |  |  | 11.37% | 
|                                              | Risk-based                                         |                                       |  | 12.42%  |  |      |  | 11.68%  |  |      |  | 12.70%  |  |  |  | 12.23% |  |  |  | 12.50% | 
|Asset quality data at period end:             |                                                    |                                       |  |         |  |      |  |         |  |      |  |         |  |  |  |        |  |  |  |       
|                                              | Total nonaccrual loans to total assets             |                                       |  | 0.33%   |  |      |  | 0.31%   |  |      |  | 1.11%   |  |  |  | 1.80%  |  |  |  | 2.78%  | 
|                                              | Nonaccrual loans to total loans                    |                                       |  | 0.41%   |  |      |  | 0.36%   |  |      |  | 1.19%   |  |  |  | 1.93%  |  |  |  | 3.00%  | 
|                                              | Allowance for credit losses to loans               |                                       |  | 1.53%   |  |      |  | 1.64%   |  |      |  | 1.76%   |  |  |  | 1.80%  |  |  |  | 1.65%  | 
|                                              | Allowance for credit losses to nonaccrual loans    |                                       |  | 377.47% |  |      |  | 460.05% |  |      |  | 148.08% |  |  |  | 93.19% |  |  |  | 55.15% | 
|                                              | Net charge-offs to average loans                   |                                       |  | 0.04%   |  |      |  | 0.18%   |  |      |  | 0.13%   |  |  |  | 0.05%  |  |  |  | 0.34%  | 



---



|    |                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Excludes goodwill and intangible assets.                                                                                                                                                
|   
|(2) | Interest rate spread represents the difference
    between the weighted average yield on interest-earning assets
    and the weighted average cost of interest-bearing liabilities.     
|   
|(3) | Net interest income divided by average
    interest-earning assets.                                                                                                                     
|   
|(4) | With the exception of period end ratios, all
    ratios are based on average balances for the period.                                                                                   
|   
|(5) | Represents general and administrative expense
    (excluding other/legal settlements) divided by net interest
    income before provision for credit losses and noninterest
    revenue.

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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.

The Companys only operating segment is the
Bank, which is headquartered in El Segundo, California. The Bank
currently operates fifteen full service retail branches in the
coastal counties of Southern California, from Westlake Village
at the western edge of Los Angeles County to Mission Bay in San
Diego County. The Bank specializes in originating real estate
secured loans, predominantly 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. The Company funds its loans predominantly with
retail deposits generated through its fifteen full service
retail offices and FHLB advances.

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 policies 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 probable losses
inherent in the Banks loan portfolio as of the balance
sheet date. Management evaluates the adequacy of the allowance
on at least a quarterly basis by reviewing its loan portfolio to
estimate 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 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.

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

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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.


In determining the allocated GVA, 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, 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 3 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.                                                                                                                                                                                  
|
| |  | 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 a potential loss to the
    Bank if the deficiencies are not corrected. Occasionally a loan
    in this category might require an SVA. Each loan 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 the 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 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). As of December 31,
2003, there were no loans requiring an SVA.

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 may not be 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 an additional amount of up to
approximately 5% of the total GVA 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 identified by
management, it is possible that the GVA would be

39



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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.


Management believes that the provision for credit
losses of $0.5 million was appropriate during 2003, and
that the allowance for credit losses of $33.5 million at
December 31, 2003, is adequate to absorb the losses that,
in the opinion and judgment of management, are known and
inherent in the Banks loan portfolio.



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

The 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 3 to
6 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 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. The determination of a
propertys estimated fair value incorporates
1) revenue 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 REO properties are
reflected in Income from real estate owned, net in
the consolidated statements of income.



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

The Bank 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 is that the
investment portfolio provide and maintain liquidity, produce
favorable returns on investments without incurring unnecessary
interest rate or credit risk, while complementing the
Banks lending activities. Management monitors the
Banks investment activities to ensure that they are
consistent with the Bank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. Gains and losses on the sale of
securities are recorded on the trade date and are determined
using the specific identification method.

The Company and the Bank are prohibited, under
the terms of the Agreement and Plan of Merger dated as of
January 27, 2004 with Commercial Capital, from acquiring
investment securities with maturities greater than 1 year,
without prior approval of Commercial Capital.

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.

40



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##### Table of Contents



Under SFAS No. 115, Accounting
for Certain Investments in Debt and Equity 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.
Currently, all investment securities of the Bank are classified
as available-for-sale, with unrealized gains and losses 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. As of December 31, 2003, the Company had
no impaired investment securities, and there were no individual
investment securities in an unrealized loss position for more
than 1 year.



| |                  
| | -----------------
| | 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. There were no changes
in the carrying amount of goodwill during 2003. 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 the 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 Accounting Policies and Notes to Consolidated
Financial Statements  Note 10  Income
Taxes, of the Consolidated Financial Statements.



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

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 adopted this statement as of
January 1, 2003. Adoption of this statement did not have a
significant impact on the financial position, results of
operations, or cash flows of the Company, but it did have an
impact on the presentation of the results of operations.

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

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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 periods
ending after December 15, 2002. Adoption of such
interpretation did not have a material impact on the results of
operations, financial position or cash flows.


In May 2003, the FASB issued Statement of
Financial Accounting Standards (SFAS) No. 150,
Accounting for Certain Instruments with Characteristics of
Both Liabilities and Equity, which establishes standards
for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity.
SFAS No. 150 requires that an issuer classify a financial
instrument that is within its scope, which may have previously
been reported as equity, as a liability (or an asset in some
circumstances). This statement is effective for financial
instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatory
redeemable financial instruments of nonpublic companies. The
adoption of SFAS No. 150 did not have a significant impact
on the financial statements of the Company.

In December 2003, the FASB issued Statement of
Financial Accounting Standard No. 132 (Revised 2003),
Employers Disclosures about Pensions and Other
Postretirement Benefits (SFAS 132R), that
replaces existing FASB disclosure requirements for pensions and
other postretirement benefit plans. SFAS 132R requires
companies to provide more complete details about their plan
assets, benefit obligations, cash flows, benefit costs and other
relevant information. In addition to expanded annual
disclosures, the standard improves information available to
investors in interim financial statements. SFAS 132R is
effective for fiscal years ending after December 15, 2003,
and for quarters beginning after December 15, 2003. The
adoption of SFAS 132R did not have a material impact on the
Companys financial statements. See
Note 11  Stockholders
Equity  Employee Benefit Plans.

In January 2003, the Financial Accounting
Standards Board (FASB) issued FASB Interpretation
No. (FIN) 46, Consolidation of Variable
Interest Entities, an interpretation of Accounting
Research Bulletin (ARB) No. 51. In December
2003, the FASB revised FIN 46 and codified certain FASB Staff
Positions previously issued for FIN 46
(FIN 46R). The objective of FIN 46 as
originally issued, and as revised by FIN 46R, was to improve
financial reporting by companies involved with variable interest
entities. Prior to the effectiveness of FIN 46, a company
generally included another entity in its consolidated financial
statements only if it controlled the entity through voting
interests. FIN 46 changed that standard by requiring a
variable interest entity to be consolidated by a company if that
company was subject to a majority of the risk of loss from the
variable interest entitys activities or entitled to
receive a majority of the entitys residual returns or
both. The consolidation requirements of FIN 46 applied
immediately to variable interest entities created after
January 31, 2003. The consolidation requirements will apply
to entities established prior to January 31, 2003 in the
first fiscal year or interim period beginning after
December 15, 2003. The provisions of FIN 46R for the
Company are required to be adopted prior to the first reporting
period that ends after March 15, 2004. The adoption of
FIN 46 did not have, and the adoption of FIN 46R is not
expected to have, a significant impact on the financial
position, results of operations, or cash flows of the Company.

In December 2003, the Accounting Standards
Executive Committee of the AICPA issued Statement of Position
No. 03-3 (SOP 03-3), Accounting for
Certain Loans or Debt Securities Acquired in a Transfer. SOP
03-3 addresses the accounting for differences between the
contractual cash flows and the cash flows expected to be
collected from purchased loans or debt securities if those
differences are attributable, in part, to credit quality.
SOP 03-3 requires purchased loans and debt securities to be
recorded initially at fair value based on the present value of
the cash flows expected to be collected with no carryover of any
valuation allowance previously recognized by the seller.
Interest income should be recognized based on the effective
yield from the cash flows expected to be collected. To the
extent that the purchased loans or debt securities experience
subsequent deterioration in credit quality, a valuation
allowance would be established for any additional cash flows
that are not expected to be received. However, if more cash
flows subsequently are expected to be received than originally
estimated, the effective yield would be adjusted on a
prospective basis. SOP 03-3 will be effective for loans and
debt securities acquired after December 31, 2004. Although
the Company anticipates that the implementation of SOP 03-3
will require significant loan system and operational

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changes to track credit related losses on loans
purchased starting in 2005, it is not expected to have a
significant effect on the Consolidated Financial Statements.


Results of Operations



| |                        
| | -----------------------
| | 2003 Compared with 2002



| |                    
| | -------------------
| | Performance Summary

Net income for 2003 and 2002, included the
financial impact of the Companys acquisition of First
Fidelity on August 23, 2002, which is discussed in
Notes to Consolidated Financial Statements 
Note 7  Business Combinations, Goodwill and
Intangible Assets included herein.

Earnings per share computations in all periods
have been adjusted for the impact of the Companys 3-for-2
stock split in the form of a 50% stock dividend announced on
September 25, 2003. The stock dividend to shareholders of
record as of October 6, 2003 was distributed on
October 27, 2003. Cash was paid in lieu of fractional
shares based on the closing stock price on the record date.
Prior to the distribution of the stock dividend, there were
approximately 7.7 million shares of common stock
outstanding. Following distribution of the stock dividend, the
number of shares outstanding increased to approximately
11.6 million. In addition, shares reserved under the
Companys stock incentive plan and warrants outstanding on
the record date were adjusted to reflect the stock dividend.

|                            |                            |                          |         |               |  |   |         |        |  |      |        |       |  |   |        |      |   |   |         |        |  |   |         |        |  |   |        |       |  |  |       |      |  
|--------------------------- | -------------------------- | ------------------------ | ------- | ------------- |  | - | ------- | ------ |  | ---- | ------ | ----- |  | - | ------ | ---- | - | - | ------- | ------ |  | - | ------- | ------ |  | - | ------ | ----- |  |  | ----- | ---- | -
|                            |                            |                         
|                            |                            | Years Ended December 31,
|                            |                            |                         
|                            |                            |                          |         |              
|                            |                            | 2003 and 2002            |         | 2002 and 2001
|                            |                            |                          |         |              
|                            |                            |                          |         |               |  |   |         |       
|                            |                            |                          |         | Change        |  |   |         | Change
|                            |                            |                          |         |               |  |   |         |       
|(In thousands,              |                            | 2003                     |         | 2002          |  | $ |         | %      |  | 2002 |        | 2001  |  | $ |        | %   
|except per share data)      |                            |                          |         |               |  |   |         |        |  |      |        |       |  |   |        |     
|Net interest income         |                            | $                        | 80,620  |               |  | $ | 73,107  |        |  | $    | 7,513  |       |  |   | 10.3   | %    |   | $ | 73,107  |        |  | $ | 62,016  |        |  | $ | 11,091 |       |  |  | 17.9  | %   
|Provision for credit losses |                            |                          | (500    | )             |  |   | (870    | )      |  |      | 370    |       |  |   | 42.5   |      |   |   | (870    | )      |  |   | (3,400  | )      |  |   | 2,530  |       |  |  | 74.4  |     
|Noninterest revenue         |                            |                          | 8,656   |               |  |   | 6,387   |        |  |      | 2,269  |       |  |   | 35.5   |      |   |   | 6,387   |        |  |   | 5,630   |        |  |   | 757    |       |  |  | 13.4  |     
|Real estate owned, net      |                            |                          | (51     | )             |  |   | 71      |        |  |      | (122   | )     |  |   | (171.8 | )    |   |   | 71      |        |  |   | 205     |        |  |   | (134   | )     |  |  | (65.4 | )   
|Noninterest expense         |                            |                          | (42,354 | )             |  |   | (40,612 | )      |  |      | (1,742 | )     |  |   | (4.3   | )    |   |   | (40,612 | )      |  |   | (35,348 | )      |  |   | (5,264 | )     |  |  | (14.9 | )   
|                            |                            |                          |         |               |  |   |         |        |  |      |        |       |  |   |        |      |   |   |         |        |  |   |         |        |  |   |        |       |  |  |       |     
|                            | Income before income taxes |                          |         | 46,371        |  |   |         | 38,083 |  |      |        | 8,288 |  |   |        | 21.8 |   |   |         | 38,083 |  |   |         | 29,103 |  |   |        | 8,980 |  |  |       | 30.9 |  
|Income tax provision        |                            |                          | (17,863 | )             |  |   | (15,384 | )      |  |      | (2,479 | )     |  |   | (16.1  | )    |   |   | (15,384 | )      |  |   | (12,270 | )      |  |   | (3,114 | )     |  |  | (25.4 | )   
|                            |                            |                          |         |               |  |   |         |        |  |      |        |       |  |   |        |      |   |   |         |        |  |   |         |        |  |   |        |       |  |  |       |     
|                            | Net income                 |                          | $       | 28,508        |  |   | $       | 22,699 |  |      | $      | 5,809 |  |   |        | 25.6 | % |   | $       | 22,699 |  |   | $       | 16,833 |  |   | $      | 5,866 |  |  |       | 34.8 | %
|                            |                            |                          |         |               |  |   |         |        |  |      |        |       |  |   |        |      |   |   |         |        |  |   |         |        |  |   |        |       |  |  |       |     
|Diluted earnings per share  |                            | $                        | 2.28    |               |  | $ | 1.92    |        |  | $    | 0.36   |       |  |   | 18.8   | %    |   | $ | 1.92    |        |  | $ | 1.48    |        |  | $ | 0.44   |       |  |  | 29.7  | %   
|Net interest margin         |                            |                          | 3.21    | %             |  |   | 3.57    | %      |  |      |        |       |  |   | (10.1  | )%   |   |   | 3.57    | %      |  |   | 3.45    | %      |  |   |        |       |  |  | 3.5   | %   
|Return on average assets    |                            |                          | 1.11    | %             |  |   | 1.09    | %      |  |      |        |       |  |   | 1.8    | %    |   |   | 1.09    | %      |  |   | 0.93    | %      |  |   |        |       |  |  | 17.2  | %   
|Return on average equity    |                            |                          | 16.62   | %             |  |   | 16.90   | %      |  |      |        |       |  |   | (1.7   | )%   |   |   | 16.90   | %      |  |   | 15.13   | %      |  |   |        |       |  |  | 11.7  | %   
|Efficiency ratio(1)         |                            |                          | 47.33   | %             |  |   | 50.68   | %      |  |      |        |       |  |   | (6.6   | )%   |   |   | 50.68   | %      |  |   | 52.09   | %      |  |   |        |       |  |  | (2.7  | )%  
|G&A to average assets(2)    |                            |                          | 1.64    | %             |  |   | 1.94    | %      |  |      |        |       |  |   | (15.5  | )%   |   |   | 1.94    | %      |  |   | 1.95    | %      |  |   |        |       |  |  | (0.5  | )%  



---



|    |                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents total general and administrative
    expense (excluding other/legal settlements) divided by net
    interest income before provision for credit losses and
    noninterest revenue.
|   
|(2) | Represents total general and administrative
    expense (excluding other/legal settlements) divided by average
    assets.                                                                    

The Companys positive results were achieved
in an environment characterized by: unprecedented low and
unpredictable interest rate movements, significant volumes of
prepayments of loans, aggressive competition for loan
originations and a high demand for fixed rate loan products.
This environment poses challenges relative to growing assets
that provide acceptable yields. The following describes the
changes in the major components of income before income taxes
during 2003:



| |   |                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Net interest income in 2003 was impacted by:
    1) inclusion of the net assets from the acquisition of
    First Fidelity in August 2002, 2) continued strong loan
    origination volume of $1.1 billion, an increase of 44.0%
    over 2002 originations of $755.8 million, 3) a
    continued low interest rate environment, 4) the

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | majority of ARM loans ($1.4 billion)
    reaching their contractual floors, 5) income from the
    investment securities portfolio and 6) the reduction of
    interest expense resulting from the redemption of the higher
    coupon senior notes in 2002, offset by the increase in loan
    prepayments during 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Year-over-year provision for credit losses
    decreased by $0.4 million, reflecting managements
    evaluation of the allowance for credit losses and the risk
    inherent in the Companys portfolio. Asset quality
    measurements remain at historically strong levels. At
    December 31, 2003, nonaccrual loans totaled
    $8.9 million, or 0.33% of total Bank assets, compared to
    $7.7 million, or 0.31% of total Bank assets, a year
    earlier. Classified assets decreased $9.2 million, or
    39.0%, to $14.4 million at December 31, 2003, compared
    to $23.7 million at December 31, 2002. At
    December 31, 2003, the ratio of total allowance for credit
    losses to loans receivable, net of SVA, was 1.53%, compared with
    1.64% at December 31, 2002.
|
| |  | During 2003, noninterest revenue increased over
    the same period in 2002, primarily due to an 18.9% increase in
    prepayment fees ($3.8 million) because of the high level of
    refinancings. Fee income on deposits increased by 32.0% over
    2002, resulting from the growth in core transaction deposits and
    new fee generating initiatives such as the courtesy overdraft
    line. Also contributing to the year-over-year increase was
    $0.6 million in income earned on $25.0 million in Bank
    Owned Life Insurance included in other assets since April 2003.                                                                                                                                                                                                     
|
| |  | Year-over-year total general and administrative
    expense (G&A) increased by $1.7 million
    primarily due to additional expenses as a result of the
    acquisition of First Fidelity. At the same time, the ratio of
    G&A (excluding other/ legal settlements) to average assets
    improved to 1.64% for 2003, compared with 1.94% for 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | During 2003, 326,041 shares were repurchased
    at an average price of $21.85 under the Companys stock
    repurchase program.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             



| |                                     
| | ------------------------------------
| | Southern California Economic Factors

The Companys primary business activities
are conducted in the coastal counties of Southern California
including, Los Angeles, Orange, San Diego and Ventura
counties. While Southern California has experienced adverse
economic times, similar to the rest of the country, it continues
to lead the recovery for the state. Southern California
continues to experience a very strong real estate market, with
significant increases in property values. Additionally, the
imbalance in the supply of housing, compared to the current
demand for housing is a positive factor for both multi-family
and single-family lending operations. Demand is anticipated to
remain strong for the foreseeable future. With interest rates at
historically low levels coupled with the significant amount of
refinancings over the past few years, borrowers have been able
to lower their monthly payments. This coupled with the strong
demand for housing has resulted in a significant reduction in
problem assets, foreclosures and delinquent loans.

A significant decline in real estate values or a
rapid rise in interest rates or if the recovery from the
recession reverses, all or any combination of these events could
have a material adverse impact on the operations of the Company.
Furthermore, the effects, if any, that the current state deficit
will have on the economy remains uncertain. A slow down in
refinancings may cause, competitors to become more aggressive in
the rates offered to borrowers, a lowering of credit standards,
or a movement into new product lines or new geographic locations.

An economic slow down in Southern California, or
any of the negative events discussed may result in the following
adverse consequences: demand for products and services could
decrease; problem assets, delinquencies and foreclosures may
increase; interest margins could be compressed; loan origination
volumes might dramatically decline. These adverse consequences
would reduce the net income of the Company.



| |                                           
| | ------------------------------------------
| | Impact of Agreement and Plan of
    Merger

The Company is restricted, under the terms of the
Agreement and Plan of Merger dated as of January 27, 2004
with Commercial Capital, from entering into certain transactions
or activities without the prior consent

44



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##### Table of Contents



of the acquirer. This consent should not be
unreasonably withheld. Included in the restrictions are
forbearance from issuing or reacquiring stock, originating loans
above an agreed upon amount, employee compensation, security
purchases and borrowings with maturities greater than one year.
For a complete understanding of the forbearances, please see
Article IV in the Agreement and Plan of Merger filed on an
8K with the SEC dated January 28, 2004 and incorporated
herein by reference. Should events occur that management
determines warrants certain actions on the part of the Company,
no assurance can be given that the acquirer would consent to the
Companys requests and accordingly, the net interest
margin, the results of operations, and the financial condition
may be adversely impacted.




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

The following table reflects average balance
sheet data, related interest revenue and interest cost, and
effective weighted average yield and cost for each of the years
presented.

|                                          |                                                           |                                  |                                            |           |           |            |        |         |        |          |      |            |      |         |        |           |           |            |        |         |        |         |      |      |       |      |       |           |           |           |        |         |        |         |      |      |       |      | 
|----------------------------------------- | --------------------------------------------------------- | -------------------------------- | ------------------------------------------ | --------- | --------- | ---------- | ------ | ------- | ------ | -------- | ---- | ---------- | ---- | ------- | ------ | --------- | --------- | ---------- | ------ | ------- | ------ | ------- | ---- | ---- | ----- | ---- | ----- | --------- | --------- | --------- | ------ | ------- | ------ | ------- | ---- | ---- | ----- | ---- | 
|                                          |                                                           |                                 
|                                          |                                                           | Twelve Months Ended December 31,
|                                          |                                                           |                                 
|                                          |                                                           |                                  |                                            |           |           |           
|                                          |                                                           | 2003                             |                                            | 2002      |           | 2001      
|                                          |                                                           |                                  |                                            |           |           |           
|                                          |                                                           | Average                          |                                            |           |           | Average    |        | Average |        |          |      | Average    |      | Average |        |           |           | Average   
|                                          |                                                           | Balance                          |                                            | Interest  |           | Yield/Cost |        | Balance |        | Interest |      | Yield/Cost |      | Balance |        | Interest  |           | Yield/Cost
|(Dollars in thousands)                    |                                                           |                                  |                                            |           |           |            |        |         |        |          |      |            |      |         |        |           |           |           
|Assets:                                   |                                                           |                                  |                                            |           |           |            |        |         |        |          |      |            |      |         |        |           |           |            |        |         |        |         |      |      |       |      |       |           |           |           |        |         |        |         |      |     
|Interest-earning assets:                  |                                                           |                                  |                                            |           |           |            |        |         |        |          |      |            |      |         |        |           |           |            |        |         |        |         |      |      |       |      |       |           |           |           |        |         |        |         |      |     
|                                          | Loans receivable(1)(2)                                    |                                  | $                                          | 2,128,322 |           |            | $      | 127,424 |        |          |      | 5.99       | %    |         | $      | 1,833,856 |           |            | $      | 130,628 |        |         |      | 7.12 | %     |      | $     | 1,696,785 |           |           | $      | 143,249 |        |         |      | 8.44 | %    
|                                          | Investment securities                                     |                                  |                                            | 345,003   |           |            |        | 11,510  |        |          |      | 3.34       |      |         |        | 77,988    |           |            |        | 3,155   |        |         |      | 4.05 |       |      |       |          |           |           |        |        |        |         |      |     |      
|                                          | Investment in capital stock of Federal Home
    Loan Bank |                                  |                                            | 34,069    |           |            |        | 1,495   |        |          |      | 4.39       |      |         |        | 28,281    |           |            |        | 1,593   |        |         |      | 5.63 |       |      |       | 21,754    |           |           |        | 1,206   |        |         |      | 5.54 |      
|                                          | Cash, fed funds and other                                 |                                  |                                            | 4,008     |           |            |        | 50      |        |          |      | 1.25       |      |         |        | 109,178   |           |            |        | 1,818   |        |         |      | 1.67 |       |      |       | 81,446    |           |           |        | 3,231   |        |         |      | 3.97 |      
|                                          |                                                           |                                  |                                            |           |           |            |        |         |        |          |      |            |      |         |        |           |           |            |        |         |        |         |      |      |       |      |       |           |           |           |        |         |        |         |      |     
|                                          |                                                           |                                  | Total interest-earning assets              |           |           | 2,511,402  |        |         |        | 140,479  |      |            |      | 5.59    |        |           |           | 2,049,303  |        |         |        | 137,194 |      |      |       | 6.69 |       |           |           | 1,799,985 |        |         |        | 147,686 |      |      |       | 8.20 | 
|                                          |                                                           |                                  |                                            |           |           |            |        |         |        |          |      |            |      |         |        |           |           |            |        |         |        |         |      |      |       |      |       |           |           |           |        |         |        |         |      |     
|Noninterest-earning assets                |                                                           |                                  | 61,007                                     |           |           |            |        |         |        |          |      |            |      |         | 23,888 |           |           |            |        |         |        |         |      |      |       |      | 2,845 |           |           |           |        |         |        |         |      |     
|                                          |                                                           |                                  |                                            |           |           |            |        |         |        |          |      |            |      |         |        |           |           |            |        |         |        |         |      |      |       |      |       |           |           |           |        |         |        |         |      |     
|                                          |                                                           |                                  | Total assets                               |           | $         | 2,572,409  |        |         |        |          |      |            |      |         |        |           | $         | 2,073,191  |        |         |        |         |      |      |       |      |       |           | $         | 1,802,830 |        |         |        |         |      |      |       |      | 
|                                          |                                                           |                                  |                                            |           |           |            |        |         |        |          |      |            |      |         |        |           |           |            |        |         |        |         |      |      |       |      |       |           |           |           |        |         |        |         |      |     
|                                         
|Liabilities and Stockholders
    Equity: |                                                           |                                  |                                            |           |           |            |        |         |        |          |      |            |      |         |        |           |           |            |        |         |        |         |      |      |       |      |       |           |           |           |        |         |        |         |      |     
|                                          | Interest-bearing liabilities:                             |                                  |                                            |           |           |            |        |         |        |          |      |            |      |         |        |           |           |            |        |         |        |         |      |      |       |      |       |           |           |           |        |         |        |         |      |      |      
|                                          |                                                           | Deposits(3)                      |                                            | $         | 1,692,677 |            |        | $       | 35,552 |          |      |            | 2.10 | %       |        | $         | 1,300,177 |            |        | $       | 36,755 |         |      |      | 2.83  | %    |       | $         | 1,191,618 |           |        | $       | 60,022 |         |      |      | 5.04  | %   
|                                          |                                                           | FHLB advances                    |                                            |           | 579,960   |            |        |         | 21,286 |          |      |            | 3.62 |         |        |           | 511,614   |            |        |         | 21,931 |         |      |      | 4.23  |      |       |           | 407,836   |           |        |         | 20,956 |         |      |      | 5.07  |     
|                                          |                                                           | Senior notes                     |                                            |           |          |            |        |         |       |          |      |            |     |         |        |           | 24,819    |            |        |         | 3,120  |         |      |      | 12.50 |      |       |           | 31,714    |           |        |         | 3,970  |         |      |      | 12.52 |     
|                                          |                                                           | Capital securities               |                                            |           | 51,000    |            |        |         | 3,021  |          |      |            | 5.92 |         |        |           | 32,540    |            |        |         | 2,281  |         |      |      | 7.01  |      |       |           | 7,345     |           |        |         | 722    |         |      |      | 9.83  |     
|                                          |                                                           |                                  |                                            |           |           |            |        |         |        |          |      |            |      |         |        |           |           |            |        |         |        |         |      |      |       |      |       |           |           |           |        |         |        |         |      |     
|                                          |                                                           |                                  | Total interest-bearing liabilities         |           |           | 2,323,637  |        |         |        | 59,859   |      |            |      | 2.56    |        |           |           | 1,869,150  |        |         |        | 64,087  |      |      |       | 3.41 |       |           |           | 1,638,513 |        |         |        | 85,670  |      |      |       | 5.21 | 
|                                          |                                                           |                                  |                                            |           |           |            |        |         |        |          |      |            |      |         |        |           |           |            |        |         |        |         |      |      |       |      |       |           |           |           |        |         |        |         |      |     
|                                          | Noninterest-bearing checking                              |                                  |                                            | 45,312    |           |            |        |         |        |          |      |            |      |         |        | 37,258    |           |            |        |         |        |         |      |      |       |      |       | 32,956    |           |           |        |         |        |         |      |      |      
|                                          | Noninterest-bearing liabilities                           |                                  |                                            | 31,976    |           |            |        |         |        |          |      |            |      |         |        | 32,477    |           |            |        |         |        |         |      |      |       |      |       | 20,098    |           |           |        |         |        |         |      |      |      
|                                          | Stockholders equity                                      |                                  |                                            | 171,484   |           |            |        |         |        |          |      |            |      |         |        | 134,306   |           |            |        |         |        |         |      |      |       |      |       | 111,263   |           |           |        |         |        |         |      |      |      
|                                          |                                                           |                                  |                                            |           |           |            |        |         |        |          |      |            |      |         |        |           |           |            |        |         |        |         |      |      |       |      |       |           |           |           |        |         |        |         |      |     
|                                          |                                                           |                                  | Total liabilities and stockholders equity |           | $         | 2,572,409  |        |         |        |          |      |            |      |         |        |           | $         | 2,073,191  |        |         |        |         |      |      |       |      |       |           | $         | 1,802,830 |        |         |        |         |      |      |       |      | 
|                                          |                                                           |                                  |                                            |           |           |            |        |         |        |          |      |            |      |         |        |           |           |            |        |         |        |         |      |      |       |      |       |           |           |           |        |         |        |         |      |     
|Net interest income                       |                                                           |                                  |                                            |           |           | $          | 80,620 |         |        |          |      |            |      |         |        |           |           | $          | 73,107 |         |        |         |      |      |       |      |       |           |           | $         | 62,016 |         |        |         |      |     
|                                          |                                                           |                                  |                                            |           |           |            |        |         |        |          |      |            |      |         |        |           |           |            |        |         |        |         |      |      |       |      |       |           |           |           |        |         |        |         |      |     
|Interest rate spread                      |                                                           |                                  |                                            |           |           |            |        |         |        |          | 3.03 | %          |      |         |        |           |           |            |        |         |        |         | 3.28 | %    |       |      |       |           |           |           |        |         |        |         | 2.99 | %   
|                                          |                                                           |                                  |                                            |           |           |            |        |         |        |          |      |            |      |         |        |           |           |            |        |         |        |         |      |      |       |      |       |           |           |           |        |         |        |         |      |     
|Net interest margin                       |                                                           |                                  |                                            |           |           |            |        |         |        |          | 3.21 | %          |      |         |        |           |           |            |        |         |        |         | 3.57 | %    |       |      |       |           |           |           |        |         |        |         | 3.45 | %   
|                                          |                                                           |                                  |                                            |           |           |            |        |         |        |          |      |            |      |         |        |           |           |            |        |         |        |         |      |      |       |      |       |           |           |           |        |         |        |         |      |     



---



|    |                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------
|(1) | Includes the interest on nonaccrual loans only to
    the extent that it was paid and recognized as interest income.

45



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|    |                                                                                                                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Includes expense incurred on net deferred loan
    costs of $2.8 million and $0.5 million for the year
    ended December 31, 2003 and December 31, 2002,
    respectively. Includes income earned on net deferred loan fees
    of $2.4 million for the year ended December 31, 2001.
|   
|(3) | See page 28 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
for the periods shown. 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 or maturity of the Companys liabilities which
include deposits, FHLB advances and capital securities,
3) the speed at which loans and investment securities
prepay, 4) the impact of internal interest rate floors,
5) the magnitude of the Companys assets that do not
earn interest, including nonaccrual loans and REO or the
increases in cash surrender value earned on BOLI investments,
and 6) the acquisition of First Fidelity on August 23,
2002.

Overall the increase in net interest income of
$7.5 million, or 10.3%, during 2003, compared with 2002,
was primarily attributable to an increase of $8.4 million
earned on investment securities and $4.2 million in lower
cost of funds, primarily resulting from a $2.4 million
reduction in interest expense in 2003, due to the repurchase of
senior notes and the issuance of $15.0 million in lower
costing trust preferred securities. These contributions to net
interest income were offset by decreases of $3.2 million
earned on loans and $1.8 million on lower yielding cash and
fed funds. The decrease in interest on loans was primarily due
to the Companys yield on earning assets reducing faster
than the Companys cost of funds. This is a result of the
significant prepayments of higher yielding loans and due to the
fact that 66.1% of the Companys funding sources have rates
that are contractually fixed.

The Bank is a variable rate lender, however, the
current repricing behavior approximates a liability sensitive
balance sheet, as the majority of its adjustable-rate loans have
reached their contractual floors. As of December 31, 2003,
94.8% of the loans in the Banks loan portfolio were
adjustable rate, of which approximately 65.6%, or
$1.4 billion, have reached their internal interest rate
floors and thus have taken on fixed rate characteristics. The
variable rate loans are priced at a margin over various market
sensitive indices, including MTA (32.6% of the portfolio), LIBOR
(37.8% of the portfolio), CMT (11.2% of the portfolio), Prime
(7.6% of the portfolio) and COFI (5.4% of the portfolio).

The Company initiated treasury activities in June
2002 to manage and redirect liquidity into an investment
securities portfolio. As of December 31, 2003, the Company
had an investment portfolio of $382.9 million in book value
and earned $11.5 million, with a weighted average yield of
3.34%, during 2003. As of December 31, 2003 the weighted
average effective duration was 2.33. The Company classifies
these investments as available-for-sale investment securities
and has reflected $1.0 million in net unrealized losses,
net of deferred taxes, associated with the changes in the market
prices, in accumulated other comprehensive income as part of its
stockholders equity at December 31, 2003.

At December 31, 2003, 60.0% of the
Banks interest-bearing deposits were comprised of
certificates of deposit accounts (CDs), excluding
discounts attributable to valuations from the 2002 acquisition,
with a remaining weighted average term to maturity of
7.0 months, compared with 63.2% with a remaining weighted
average term to maturity of 7.7 months at December 31,
2002. Generally, the Banks offering rates for CDs move
directionally with the general level of short-term interest
rates, though the rates may vary due to competitive pressures
and other factors.

As of December 31, 2003, 100% of the
Banks borrowings from the FHLB were fixed rate, with
remaining terms ranging from 1 day to 8 years,
compared with 81.0% with remaining terms to maturity ranging
from 1 day to 8 years at December 31, 2002
(though certain advances are subject to early call provisions).
See Item 7. Managements Discussion and Analysis
of Financial Condition and Results of Operations, Critical
Accounting Policies  Interest Rate Risk
Management, for further discussion of market risk.

46



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##### Table of Contents



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

|                              |                                                           |                                        |                               |                                        |        |         |        |         |         |            |        |        |        |         |       |        |        |       |     |        |        |        |       |         |         |         |       |        |        |     |        |         |         |         |  
|----------------------------- | --------------------------------------------------------- | -------------------------------------- | ----------------------------- | -------------------------------------- | ------ | ------- | ------ | ------- | ------- | ---------- | ------ | ------ | ------ | ------- | ----- | ------ | ------ | ----- | --- | ------ | ------ | ------ | ----- | ------- | ------- | ------- | ----- | ------ | ------ | --- | ------ | ------- | ------- | ------- | -
|                              |                                                           |                                        |                               |                                       
|                              |                                                           | Years Ended December 31, 2003 and 2002 |                               | Years Ended December 31, 2002 and 2001
|                              |                                                           | 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)                                       |                                        | $                             | 20,975                                 |        |         | $      | (20,834 | )       |            | $      | (3,345 | )      |         | $     | (3,204 | )      |       | $   | 11,572 |        |        | $     | (22,384 | )       |         | $     | (1,809 | )      |     | $      | (12,621 | )      
|                              | Investment securities                                     |                                        |                               | 10,802                                 |        |         |        | (553    | )       |            |        | (1,894 | )      |         |       | 8,355  |        |       |     |       |        |        |       |        |         |         |       | 3,155  |        |     |        | 3,155   |        
|                              | Investment in capital stock of Federal Home
    Loan Bank |                                        |                               | 326                                    |        |         |        | (352    | )       |            |        | (72    | )      |         |       | (98    | )      |       |     | 362    |        |        |       | 19      |         |         |       | 6      |        |     |        | 387     |        
|                              | Cash, fed funds and other                                 |                                        |                               | (1,751                                 | )      |         |        | (456    | )       |            |        | 439    |        |         |       | (1,768 | )      |       |     | 1,100  |        |        |       | (1,875  | )       |         |       | (638   | )      |     |        | (1,413  | )      
|                              |                                                           |                                        |                               |                                        |        |         |        |         |         |            |        |        |        |         |       |        |        |       |     |        |        |        |       |         |         |         |       |        |        |     |        |        
|                              |                                                           |                                        | Total interest-earning assets |                                        |        | 30,352  |        |         |         | (22,195    | )      |        |        | (4,872  | )     |        |        | 3,285 |     |        |        | 13,034 |       |         |         | (24,240 | )     |        |        | 714 |        |         |         | (10,492 | )
|                              |                                                           |                                        |                               |                                        |        |         |        |         |         |            |        |        |        |         |       |        |        |       |     |        |        |        |       |         |         |         |       |        |        |     |        |        
|Interest-bearing liabilities: |                                                           |                                        |                               |                                        |        |         |        |         |         |            |        |        |        |         |       |        |        |       |     |        |        |        |       |         |         |         |       |        |        |     |        |        
|                              | Deposits                                                  |                                        |                               | 11,096                                 |        |         |        | (9,447  | )       |            |        | (2,852 | )      |         |       | (1,203 | )      |       |     | 5,468  |        |        |       | (26,336 | )       |         |       | (2,399 | )      |     |        | (23,267 | )      
|                              | FHLB advances                                             |                                        |                               | 2,929                                  |        |         |        | (3,153  | )       |            |        | (421   | )      |         |       | (645   | )      |       |     | 5,333  |        |        |       | (3,474  | )       |         |       | (884   | )      |     |        | 975     |        
|                              | Senior notes                                              |                                        |                               | (3,120                                 | )      |         |        |        |         |            |        |       |        |         |       | (3,120 | )      |       |     | (863   | )      |        |       | 17      |         |         |       | (4     | )      |     |        | (850    | )      
|                              | Capital securities                                        |                                        |                               | 1,294                                  |        |         |        | (354    | )       |            |        | (200   | )      |         |       | 740    |        |       |     | 2,476  |        |        |       | (207    | )       |         |       | (710   | )      |     |        | 1,559   |        
|                              |                                                           |                                        |                               |                                        |        |         |        |         |         |            |        |        |        |         |       |        |        |       |     |        |        |        |       |         |         |         |       |        |        |     |        |        
|                              |                                                           | Total interest-bearing liabilities     |                               |                                        | 12,199 |         |        |         | (12,954 | )          |        |        | (3,473 | )       |       |        | (4,228 | )     |     |        | 12,414 |        |       |         | (30,000 | )       |       |        | (3,997 | )   |        |         | (21,583 | )      
|                              |                                                           |                                        |                               |                                        |        |         |        |         |         |            |        |        |        |         |       |        |        |       |     |        |        |        |       |         |         |         |       |        |        |     |        |        
|Change in net interest income |                                                           | $                                      | 18,153                        |                                        |        | $       | (9,241 | )       |         | $          | (1,399 | )      |        | $       | 7,513 |        |        | $     | 620 |        |        | $      | 5,760 |         |         | $       | 4,711 |        |        | $   | 11,091 |        
|                              |                                                           |                                        |                               |                                        |        |         |        |         |         |            |        |        |        |         |       |        |        |       |     |        |        |        |       |         |         |         |       |        |        |     |        |        



---



|    |                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------
|(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.



| |                       
| | ----------------------
| | Total Interest Revenue

Overall the interest revenue growth of
$3.3 million, or 2.4%, during 2003, compared with 2002, was
primarily attributable to an increase of $8.4 million
earned on investment securities, offset by decreases of
$3.2 million earned on loans and $1.8 million earned
on lower yielding cash and fed funds.

Contributing to the $3.2 million decrease in
interest revenue was a 113 basis point decrease in the
yield on average loans receivable, partially offset by a
$294.5 million increase in average loans outstanding
principally due to a $332.5 million increase in loan
originations, primarily resulting from the 2002 acquisition.
Both net interest income and net interest margin continued to be
adversely impacted as borrowers refinanced loans. During 2003,
$808.9 million in loans prepaid with a weighted average
interest rate of 6.90%, while new loan originations had a
weighted average yield of 5.25% during the same period. The
prepayment of loans also resulted in an increase of
$0.7 million in net premium associated with the loans
acquired from First Fidelity. As a result, the yield on loans
receivable was 5.99% during the twelve months ended
December 31, 2003, compared to 7.12% during 2002.

The increase in average investment securities of
$267.0 million was primarily due to deployment of excess
liquidity, and a shift in earning assets from lower yielding
cash and fed funds to higher yielding investment securities.
This had a positive impact on net interest income but, as
expected, contributed to net interest margin compression. The
percentage of average investment securities to average total
interest-earning assets increased to 13.7% during the year ended
December 31, 2003 from 3.8% during 2002.

47



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| |                    
| | -------------------
| | Total Interest Cost

Overall, interest cost during 2003 decreased
$4.2 million, and the average cost of funds decreased by
85 basis points, compared to 2002. This reduction in the
cost of funds was due to the combination of the continued
downward pressure on interest rates, increasing FHLB overnight
advances and the redemption of the higher coupon senior notes in
2002.

Average interest-bearing deposits increased
$392.5 million principally due to the 2002 acquisition,
which were partially mitigated by a 73 basis point decrease
in the weighted average cost. The reduction in the cost of
deposits was the result of the combination of the continued
downward pressure on interest rates, maturing CDs with higher
than current market rates, and the planned shift in the deposit
mix to a higher ratio of transaction accounts to deposits. The
average balance of CDs increased $262.3 million, to
$1.1 billion with an average cost of funds of 2.26% during
2003, compared with $803.4 million and a 3.05% average cost
of funds during 2002. Additionally, during the fourth quarter of
2003, the Company rolled over $291.0 million of maturing
CDs at a 68 basis point reduction in the weighted average
cost. The average balance of money market accounts reflected an
increase of $93.9 million, to $472.7 million with an
average cost of funds of 2.04% during the year ended
December 31, 2003, compared with $378.7 million and a
2.66% average cost of funds during 2002.

The overall decrease in interest cost was
primarily attributable to a $3.1 million decrease in
interest as a result of a reduction in long-term borrowings, due
to the early payoff of the Companys balance of its
12.5% Senior Notes ($25.8 million), the majority of
which were redeemed on December 31, 2002 at the call
premium of 106.25%. The growth in average capital securities was
due to the Companys issuance of $22.0 million
(current rate of 4.92%) and $15.0 million (current rate of
4.62%) in capital securities in April and November of 2002,
respectively. This increase in the average balance of capital
securities outstanding, was offset by a 109 basis point
decrease in the weighted average cost; 82.4% of these capital
securities have adjustable rates priced at a margin over LIBOR.
See Note 8  Capital Securities
included herein.

The average balance of FHLB advances reflected an
increase of $68.3 million, which was mitigated by a
61 basis point decrease in the average cost of these
borrowings. During the fourth quarter of 2003, the Company
successfully completed the exchange of $130 million in FHLB
putable advances, extending the maturity of the notes to
60 months, at a weighted average fixed rate of 4.03%, and
are callable by the FHLB after 2-3 years. This exchange
resulted in a 117 basis point reduction in the cost of
funds for the notes, and will reduce interest expense by
$1.5 million in 2004 compared to 2003. Management believes
the extension will also reduce the adverse impact of rising
interest rates.

The combination of the putable advance exchange
and anticipated net portfolio growth in 2004 of 15% 
20% will contribute to increasing net interest income.



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

Although the Company maintains its allowance for
credit losses at a level which it considers to be adequate to
provide for probable losses, based on presently known
conditions, 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, 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.

Provision for credit losses were
$0.5 million and $0.9 million for 2003 and 2002,
respectively. The decrease in the provision for credit losses in
2003 was primarily due to the continued overall improvement in
asset quality. Although nonaccrual loans increased by
$1.2 million at December 31, 2003, classified assets
decreased by 39.0% to $14.4 million, or 0.54% of total Bank
assets, compared to $23.7 million, or 0.95% of total Bank
assets, a year earlier. During the fourth quarter, nonaccrual
loans increased primarily due to 1 single

48



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##### Table of Contents



family residential loan ($2.1 million). At
the same time, delinquent loans decreased to $6.6 million
at December 31, 2003 from $12.5 million at
December 31, 2002. At December 31, 2003, the ratio of
total allowance for credit losses to loans receivable, net of
specific valuation allowance ($0 and $0.2 million at
December 31, 2003 and 2002, respectively), decreased to
1.53%, compared with 1.64% at December 31, 2002.




| |                    
| | -------------------
| | Noninterest Revenue

Noninterest revenue was $8.7 million for
2003, a 35.5% increase, compared to $6.4 million earned for
2002. A significant contribution to the year-over-year increase
was $0.6 million in income earned on $25.0 million in
Bank Owned Life Insurance included in other assets since April
2003.

Loan related and other fees were
$4.9 million for the year ended December 31, 2003,
compared with $4.2 million during 2002, 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. As a result of the high level of refinancings,
prepayment fees increased 18.9% to $3.8 million in 2003,
compared with $3.2 million in 2002.

Noninterest revenue also includes deposit fee
income for service fees, nonsufficient fund fees and other
miscellaneous check and service charges. Fee income on deposits
increased by 32.0% over 2002, as a result of the growth in core
transaction deposits and new fee generating initiatives,
particularly the courtesy overdraft line. Fee income of
$1.0 million from overdrafts grew by 56.5% over 2002 and
accounted for 47.2% of total deposit fee income in 2003. The
ratio of products per household increased to 2.77 at
December 31, 2003, compared with 2.44 for the prior year as
the Company continues to expand its product array and household
penetration.



| |                  
| | -----------------
| | 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,
|                                          |                                            |             
|                                          |                                            | 2003         |     | 2002 |   | 2001
|(Dollars in thousands)                    |                                            |              |     |      |   |     
|(Loss)/income associated with REO:        |                                            |              |     |      |   |      |    |     |   |   |     |    
|                                          | Repairs, maintenance, renovation and other |              | $   | (51  | ) |      | $  | (21 | ) |   | $   | (32 | )
|                                          | Net (loss)/income from sales of REO        |              |     | (6   | ) |      |    | 87  |   |   |     | 106 |  
|                                          | Property operations, net                   |              |     | 6    |   |      |    | 5   |   |   |     | 131 |  
|                                          |                                            |              |     |      |   |      |    |     |   |   |     |    
|(Loss)/income from real estate owned, net |                                            | $            | (51 | )    |   | $    | 71 |     |   | $ | 205 |    
|                                          |                                            |              |     |      |   |      |    |     |   |   |     |    

Net (loss)/income 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 2003, the Bank sold 1 REO property generating
net cash proceeds of $2.2 million and a net loss of
$6 thousand, compared with the sale of 1 property
generating net cash proceeds of $1.4 million and net income
of $87 thousand during 2002.

49



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| |                    
| | -------------------
| | Noninterest Expense



| |                                   
| | ----------------------------------
| | General and Administrative Expense

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

|                                  |       |                          |        |               |  |        |        |        |  |      |       |        |  |   |        |        |  |   |        |        |  |   |       |       | 
|--------------------------------- | ----- | ------------------------ | ------ | ------------- |  | ------ | ------ | ------ |  | ---- | ----- | ------ |  | - | ------ | ------ |  | - | ------ | ------ |  | - | ----- | ----- | 
|                                  |       |                         
|                                  |       | Years Ended December 31,
|                                  |       |                         
|                                  |       |                          |        |              
|                                  |       | 2003 and 2002            |        | 2002 and 2001
|                                  |       |                          |        |              
|                                  |       | 2003                     |        | 2002          |  | Change |        | 2002   |  | 2001 |       | Change
|(Dollars in thousands)            |       |                          |        |               |  |        |        |        |  |      |       |       
|Employee                          |       | $                        | 22,923 |               |  | $      | 22,389 |        |  | $    | 534   |        |  | $ | 22,389 |        |  | $ | 18,320 |        |  | $ | 4,069 |      
|Operating                         |       |                          | 9,168  |               |  |        | 9,337  |        |  |      | (169  | )      |  |   | 9,337  |        |  |   | 7,220  |        |  |   | 2,117 |      
|Occupancy                         |       |                          | 5,337  |               |  |        | 4,109  |        |  |      | 1,228 |        |  |   | 4,109  |        |  |   | 4,015  |        |  |   | 94    |      
|Professional                      |       |                          | 2,110  |               |  |        | 2,132  |        |  |      | (22   | )      |  |   | 2,132  |        |  |   | 2,857  |        |  |   | (725  | )    
|Technology                        |       |                          | 2,041  |               |  |        | 1,734  |        |  |      | 307   |        |  |   | 1,734  |        |  |   | 1,897  |        |  |   | (163  | )    
|SAIF premiums and OTS assessments |       |                          | 673    |               |  |        | 588    |        |  |      | 85    |        |  |   | 588    |        |  |   | 929    |        |  |   | (341  | )    
|Other/legal settlements           |       |                          | 102    |               |  |        | 323    |        |  |      | (221  | )      |  |   | 323    |        |  |   | 110    |        |  |   | 213   |      
|                                  |       |                          |        |               |  |        |        |        |  |      |       |        |  |   |        |        |  |   |        |        |  |   |       |      
|                                  | Total |                          | $      | 42,354        |  |        | $      | 40,612 |  |      | $     | 1,742  |  |   | $      | 40,612 |  |   | $      | 35,348 |  |   | $     | 5,264 | 
|                                  |       |                          |        |               |  |        |        |        |  |      |       |        |  |   |        |        |  |   |        |        |  |   |       |      

The Company remains focused on reducing G&A
as a percentage of average assets while increasing productivity.
G&A to average assets has continued to improve for the fifth
consecutive year, even after the inclusion of a full year of
additional G&A expenses as a result of the acquisition in
August 2002. The Companys efficiency ratio was 47.33% for
the year ended December 31, 2003, which was better than the
50.68% during 2002. G&A for 2002 includes the previously
reported costs of $2.1 million associated with the early
retirement of senior notes.

Occupancy expense increased primarily due to rent
for the acquired First Fidelity locations, as well as expenses
associated with the Banks 2 newest branches. These
increases included $0.7 million in rent and common area
maintenance expenses, and $0.3 million in leasehold
amortization and depreciation of property and equipment.
Employee related expense increased primarily due to increased
headcount of 86 resulting from the inclusion of First Fidelity
employees. Accordingly, employee base salaries and related
payroll taxes increased by approximately $0.5 million, or
2.7%, in 2003, compared to 2002. Operating expense in 2003
decreased by $0.2 million, primarily due to the
aforementioned retirement of senior notes in 2002, offset by
increases of $1.7 million in appraisal,
advertising/promotion, insurance, higher donations and
amortization of the core deposit intangible, primarily resulting
from the 2002 acquisition, and additional amortization of debt
issuance costs associated with the additional trust preferred
securities issued in 2002.

In addition, the reduction in other/ legal
settlements reflects the reversal of a legal settlement accrual
that was no longer considered necessary.

The Companys ratio of G&A to average
assets of 1.64% for 2003 was generally in line with previously
announced guidance of 1.6%, reflecting Hawthornes
company-wide concentration on expense control. However,
primarily due to the compression of the net interest margin, the
efficiency ratio of 47.33% was slightly higher than the guidance
level of 46% for 2003. The Company continues to expect slight
improvement in both of these ratios in 2004.

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. For further discussion, see Item 1.
Business  Regulation of the Bank  Premiums
for Deposit Insurance, contained herein.



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

The effective tax rate was 38.5% for the year
ended 2003, compared with 40.4% for 2002. The Company
establishes reserves for income taxes principally related to
open, unexamined tax years. The Company evaluates its tax
reserves periodically, and adjusts its reserves as necessary,
based upon changes in tax laws and

50



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##### Table of Contents



other events that the Company, in consultation
with its tax advisors, determines are warranted. During 2003,
federal and state tax examiners audited the Company and the
acquired institutions final tax returns. The audit was
completed in the fourth quarter of 2003, and the examiners
concluded that no additional taxes would be assessed.
Accordingly, previously reserved amounts for open tax years of
$0.4 million were included in net income in the fourth
quarter of 2003. Additionally, the IRS concurred with a position
asserted by the Company during the examination that resulted in
an additional tax refund of $0.5 million. The
aforementioned tax credits caused the effective tax rate for the
year to be lower than the statutory tax rate.


The Company expects to record provision for
income taxes at an effective tax rate of between 40% and 42%
during 2004.



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



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

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

Earnings per share computations in all periods
have been adjusted for the impact of the Companys 3-for-2
stock split in the form of a 50% stock dividend announced on
September 25, 2003. The stock dividend to shareholders of
record as of October 6, 2003 was distributed on
October 27, 2003. Cash was paid in lieu of fractional
shares based on the closing stock price on the record date.

Net income for 2002 was $22.7 million, or
$1.92 per diluted share, an increase of 34.8% over net
earnings of $16.8 million, or $1.48 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.

Total G&A increased 14.9% to
$40.6 million, for the year ended December 31, 2002,
compared with $35.3 million for 2001. The increase in
G&A was primarily attributable to the additional employee
costs as a result of the acquisition of First Fidelity and the
costs associated with the repurchase of the Companys
Senior Notes. G&A for 2002 includes the previously reported
costs of $2.1 million associated with the early retirement
of senior notes.



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

The Companys net interest income before
provision for credit losses increased 17.9% 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 11 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 interest 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 approximated a liability sensitive balance sheet, as the
majority of its ARM loans reached their contractual floors. As
of December 31, 2002, 91.3% of the loans in the
Companys loan portfolio were adjustable rate, of which
approximately 62.8%, or $1.2 billion, have reached their
internal interest rate floors and thus had taken on fixed rate
characteristics. The substantial majority of such loans were
priced at a margin over various market sensitive indices,
including MTA (38.8% of the portfolio), LIBOR (28.9% of the
portfolio), Prime (13.3% of the portfolio), COFI (10.7% of the
portfolio) and CMT (7.4% 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s yield on loans continued to be negatively
impacted by prepayments

51



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##### Table of Contents



during 2002. The negative impact of
$668.0 million in prepayments of loans was partially
mitigated by a $70.4 million increase in new loan
production in 2002. The yield on interest-earning assets was
6.69% for the year ended December 31, 2002, compared with
8.20% for 2001.


At December 31, 2002, 63.2% of the
Companys interest-bearing deposits were comprised of
certificate accounts, with an original weighted average term of
14.5 months, compared with 71.9% 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, 81.0% of the
Companys borrowings from the FHLB were fixed rate, with
remaining terms ranging from 1 day to 8 years,
compared with 74.2% 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 19.0%
and 25.8% of the borrowings at December 31, 2002 and
December 31, 2001, respectively, carried adjustable
interest rates maturing in February 2003, with 88% and 80%,
respectively, of the adjustable borrowings tied to the Prime
Rate.



| |                       
| | ----------------------
| | Total Interest Revenue

The Companys interest revenue decreased by
$10.5 million, or 7.1%, during the year ended
December 31, 2002, compared with 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 8.1% 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 revenue was
partially offset by an increase of $3.2 million earned on
investment securities.



| |                    
| | -------------------
| | Total Interest Cost

Interest cost decreased by $21.6 million, or
25.2%, during the year ended December 31, 2002, compared
with 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-bearing deposits and FHLB
advances, respectively. Average interest-bearing deposits were
$1.3 billion with an average cost of funds of 2.83% during
the year ended December 31, 2002, compared with
$1.2 billion and a 5.04% average cost of funds during the
same period in 2001. The average balance of 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 deposit
balances, 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

52



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##### Table of Contents



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 revenue and interest
cost produced an increase of $11.1 million, or 17.9%, 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
continued to be adversely impacted by lower yields on new loan
production, continued runoff of existing loans, and repricing of
the respective indices.



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



| |                    
| | -------------------
| | Noninterest Revenue

Noninterest revenue was $6.4 million for the
year ended December 31, 2002, an increase of
$0.8 million, or 13.4%, from $5.6 million earned in
2001. Loan related and other fees constituted 65.4% of total
noninterest revenue and were comprised primarily of prepayment
fees resulting from the high level of refinancings. Fee income
on deposits increased 12.8% 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 $3.7 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 revenue also includes 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 12.8% from
$1.4 million earned in 2001.



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

During the year ended December 31, 2002, the
Bank sold 1 property generating net cash proceeds of
$1.4 million and net income of $0.1 million, compared
with sales of 5 properties generating net cash proceeds of
$3.0 million and net income of $0.1 million during
2001.

53



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##### Table of Contents





| |                    
| | -------------------
| | Noninterest Expense



| |                                   
| | ----------------------------------
| | General and Administrative Expense

Total G&A increased 14.9% to
$40.6 million for the year ended December 31, 2002,
compared with $35.3 million of G&A incurred during
2001. The increase in G&A was primarily attributable to
additional expense as a result of the acquisition of First
Fidelity, and the costs associated with the repurchase of the
Companys Senior Notes. G&A for 2002 and 2001 includes
the previously reported costs of $2.1 million and
$0.8 million, respectively, associated with the early
retirement of senior notes.

Employee related costs increased primarily due to
increased headcount of 86 as a result of the inclusion of First
Fidelity employees. Accordingly, employee base salaries and
related payroll taxes, as well as incentive/commission expenses
increased by approximately $3.2 million (23.8%) and
$0.6 million (31.9%), respectively, in 2002, compared to
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%. Operating expense included an increase of
$1.3 million in costs associated with the repurchase of the
remaining balance of the Companys Senior Notes. Other
increases in operating expense included $0.3 million in
additional advertising/ promotional expense for the First
Fidelity branches, $0.3 million in third party service fees
and $0.2 million in additional supplies due to the
acquisition.

Professional fees decreased, primarily due to
insurance company reimbursements totaling $0.7 million for
legal fees, offset by fewer outstanding legal issues and third
party service fees related to litigation.

During 2002, other non-operating expense totaled
$0.3 million, which primarily consisted 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 expense of
$0.4 million.

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.



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

The effective tax rate was 40.4% for the year
ended 2002, compared with 42.2% 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.

Stockholders Equity and Regulatory
Capital

The Companys capital consists of common
stockholders equity, which amounted to
$185.3 million, or 6.93%, of the Companys total
assets at December 31, 2003. 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,
2003, the Banks core and risk-based capital was
$206.8 million and $230.1 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,
2003, the Bank was categorized as well capitalized
under the regulatory framework for PCA Rules, with core and

54



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##### Table of Contents



risk-based capital ratios of 7.81% and 12.42%,
respectively. See Notes to Consolidated Financial
Statements  Note 13  Regulatory
Matters.


Capital Resources And Liquidity

On August 23, 2002 the Company issued
1,899,810 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.

Hawthorne Financial Corporation maintained cash
and cash equivalents of $3.1 million at December 31,
2003. Hawthorne Financial Corporation is a holding company with
no significant business operations outside of the Bank. The
Company is dependent upon the Bank for dividends in order to
cover semi-annual interest payments and operating expenses. The
ability of the Bank to provide dividends to Hawthorne Financial
Corporation is governed by applicable regulations of the OTS.
Based upon these applicable regulations, the Banks
supervisory rating, and the Banks current and projected
earnings, 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
capital securities, operating expenses and the acquisition of
treasury stock 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.

A primary alternate funding source for the Bank
is a line of credit through the FHLB, subject to sufficient
qualifying collateral. The FHLB system functions as a source of
credit to financial 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, 2003, the Bank had an approved line of credit
with the FHLB for a maximum advance of up to 45% of the
Banks total assets. At December 31, 2003, the Company
had 28 FHLB advances outstanding totaling
$697.7 million, which had a weighted averaged interest rate
of 2.75% and a weighted average remaining maturity of
2 years and 7 months. See Notes to the
Consolidated Financial Statements 
Note 9  FHLB Advances.

During the year ended December 31, 2003, the
Company repurchased 326,041 shares at an average price of
$21.85. As of December 31, 2003, cumulative repurchases
were 2,100,516 shares at an average price of $15.15.

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

55



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##### Table of Contents



The table below sets forth information concerning
the Companys capital securities as of December 31,
2003.

|                       |      |            |  |          |                        |      |  |         |          |          |  |      |          |      |  |               |        |  |  |  |       |   |  |  |              |   |  |  |       |   |  |  |          | 
|---------------------- | ---- | ---------- |  | -------- | ---------------------- | ---- |  | ------- | -------- | -------- |  | ---- | -------- | ---- |  | ------------- | ------ |  |  |  | ----- | - |  |  | ------------ | - |  |  | ----- | - |  |  | -------- | 
|                       |      |           
|(Dollars in thousands) |      |           
|                       |      | Date of    |  | Maturity |                        |      |  | Current |          |         
|Ownership              |      | Subsidiary |  | Issuance |                        | Date |  | Amount  |          | Rate Cap |  | Rate |          | Rate |  | Call Date (1)
|                       |      |            |  |          |                        |      |  |         |          |          |  |      |          |      |  |              
|                       | 100% |            |  |          | HFC Capital Trust I    |      |  |         | 3/28/01  |          |  |      | 6/8/31   |      |  | $             | 9,000  |  |  |  | N/A   |   |  |  | Fixed        |   |  |  | 10.18 | % |  |  | 10 Years | 
|                       | 100% |            |  |          | HFC Capital Trust II   |      |  |         | 11/28/01 |          |  |      | 12/8/31  |      |  |               | 5,000  |  |  |  | 11.00 | % |  |  | LIBOR + 3.75 | % |  |  | 4.98  | % |  |  | 5 Years  | 
|                       | 100% |            |  |          | HFC Capital Trust  III |      |  |         | 4/10/02  |          |  |      | 4/22/32  |      |  |               | 22,000 |  |  |  | 11.00 | % |  |  | LIBOR + 3.70 | % |  |  | 4.92  | % |  |  | 5 Years  | 
|                       | 100% |            |  |          | HFC Capital Trust IV   |      |  |         | 11/1/02  |          |  |      | 11/15/32 |      |  |               | 15,000 |  |  |  | 12.00 | % |  |  | LIBOR + 3.35 | % |  |  | 4.62  | % |  |  | 5 Years  | 
|                       |      |            |  |          |                        |      |  |         |          |          |  |      |          |      |  |               |        |  |  |  |       |   |  |  |              |   |  |  |       |   |  |  |          | 
|                       |      |            |  |          |                        |      |  |         |          |          |  |      |          |      |  | $             | 51,000 |  |  |  |       |   |  |  |              |   |  |  |       |   |  |  |          | 
|                       |      |            |  |          |                        |      |  |         |          |          |  |      |          |      |  |               |        |  |  |  |       |   |  |  |              |   |  |  |       |   |  |  |          | 



---



|    |                                                                            
|--- | ---------------------------------------------------------------------------
|(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.

Contractual Obligations

The following table shows the Companys
contractual obligations as of December 31, 2003.

|                                   |                    |           |       |           |  |           |       |           |  |       |       |         |  |  |       |        |  |  |       |         | 
|---------------------------------- | ------------------ | --------- | ----- | --------- |  | --------- | ----- | --------- |  | ----- | ----- | ------- |  |  | ----- | ------ |  |  | ----- | ------- | 
|                                   |                    | Less than |       |           |  |           |       | More than |  |      
|Contractual Obligations            |                    | 1 Year    |       | 2-3 Years |  | 4-5 Years |       | 5 Years   |  | Total
|                                   |                    |           |       |           |  |           |       |           |  |      
|                                   |                    |          
|(Dollars in thousands)             |                    |          
|Long-Term Debt Obligations:        |                    |           |       |           |  |           |       |           |  |       |       |         |  |  |       |        |  |  |       |        
|                                   | FHLB Advances      |           | $     | 285,700   |  |           | $     | 117,000   |  |       | $     | 224,000 |  |  | $     | 71,000 |  |  | $     | 697,700 | 
|                                   | Capital Securities |           |       |          |  |           |       |          |  |       |       |        |  |  |       | 51,000 |  |  |       | 51,000  | 
|Operating Lease Obligations        |                    |           | 2,586 |           |  |           | 3,613 |           |  |       | 2,028 |         |  |  | 1,718 |        |  |  | 9,945 |        
|Vendor, Service, Other Obligations |                    |           | 591   |           |  |           | 762   |           |  |       | 557   |         |  |  | 279   |        |  |  | 2,189 |        

Off-Balance Sheet Arrangements

Lending
Commitments At
December 31, 2003, the Company had commitments to fund the
undisbursed portion of existing construction and land loans of
$129.5 million and income property and estate loans of
$1.3 million. The commitments to fund the undisbursed
portion of existing lines of credit, excluding construction and
land lines of credit, totaled $12.0 million.

In addition, as of December 31, 2003, the
Company had commitments to fund $66.1 million in loans
approved by the bank.

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

56



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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, 2003, the FHLB issued
5 LCs for a total of $203.5 million. The purpose of the LCs
is to fulfill the collateral requirements for 5 deposits
totaling $185.0 million placed by the State of California
with the Bank. The LCs are issued in favor of the Treasurer of
the State of California and mature over the next 6 months.
The maturities coincide with the maturities of the States
deposits. There are no issuance fees associated with these LCs;
however, the Bank pays a monthly maintenance fee of
15 basis points per annum. See Notes to Consolidated
Financial Statements  Note 15 
Off-Balance Sheet Activity.

Related Party Transactions  The
Company does not currently have any related party transactions
other than the extension of credit to certain executives in the
form of overdraft protection lines, as disclosed herein. See
Notes to Consolidated Financial Statements 
Note 17  Related Parties.

Interest Rate Risk Management

IRR and credit risk constitute the 2 primary
sources of financial exposure for insured financial
institutions. Please refer to Item 1 
Business, Loan Portfolio, of this Annual Report on
Form 10-K for a thorough discussion of the Banks
lending activities. The Bank realizes income principally from
the differential or spread between the interest earned on loans,
investments, and other interest-earning assets and the interest
expensed on deposits and borrowings. IRR represents the impact
that changes in the levels of market interest rates may have
upon the Bank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 indices (basis risk),
and changes in the shape of the yield curve. Changes in the
market level of interest rates directly and immediately affect
the Bank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, and the changes in the volume of loan
prepayments.

As of December 31, 2003, 94.8% of the
Banks loan portfolio was tied to adjustable rate indices,
such as MTA, LIBOR, CMT, Prime and COFI. As of December 31,
2003, $1.4 billion, or 65.6%, of the Banks adjustable
rate loan portfolio had reached their internal interest rate
floors. These loans have taken on fixed rate repricing
characteristics until sufficient upward interest rate movements
bring the fully indexed rate above the internal interest rate
floors. Currently, $435.8 million of the loans at floors
are hybrid products that will not reprice for at least
1 year.

As of December 31, 2003, 56.8% of the
Banks investment securities portfolio was fixed rate and
the remainder were hybrid, substantially all of which have fixed
rates for 5 years. Fluctuations in interest rates may cause
actual prepayments to vary from the original estimated
prepayments over the life of the security, therefore, the net
yield is subject to change. This is the result of adjustments to
the amortization of premiums or accretion of discounts related
to these instruments. 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, 2003, 60.0% of the
Banks interest-bearing deposits were comprised of CDs,
with an original weighted average term of 14 months. The
remaining weighted average term to maturity for the Banks
CDs approximated 7 months at December 31, 2003.
Generally, the Banks offering rates for CDs move
directionally with the general level of short-term interest
rates, though the rates may vary due to competitive pressures
and other factors.

As of December 31, 2003, 100% of the
Banks borrowings from the FHLB were fixed rate, with
remaining terms ranging from 1 day to 8 years.
However, 49.4% of the Banks FHLB advances contain options,
which

57



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##### Table of Contents



allow the FHLB to call the advances prior to
maturity, subject to an initial non-callable period. At
December 31, 2003, the callable periods ranged from
4 months to 3 years.


The Banks Asset/ Liability Committee
(ALCO) is responsible for managing the Bank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 Banks NII and
NPV through the matching of its rate-sensitive assets and
liabilities by maintaining the maturity and repricing of these
assets and liabilities at appropriate levels given the interest
rate environment. The speed and velocity of the repricing of
assets and liabilities, as well as the presence or absence of
periodic and lifetime internal interest rate caps and floors all
affect the Banks NII and NPV in varying interest rate
environments. When the amount of rate-sensitive liabilities
exceeds rate-sensitive assets within specified time periods
(liability sensitive), 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 (asset sensitive), net interest income
will generally be positively impacted by increasing rates and
negatively impacted by decreasing rates.

The Bank utilizes internal interest rate floors
and caps on individual loans to mitigate the risk of interest
margin compression. A risk to the Bank associated with the
internal interest rate floors in a declining interest rate
environment is that, while the margin is being protected, the
borrower may choose to refinance the loan, resulting in the Bank
having to replace the higher-yielding asset at a lower rate.
Prepayment speeds remained at high levels throughout 2003. If
this trend continues, it could negatively impact growth in
interest earning assets, which in turn could negatively impact
net income and NPV calculations. The assumptions being used for
the December 31st IRR analysis include a decrease in the
prepayments during 2004.

The Bank utilizes 2 methods for measuring IRR,
first static gap analysis and second interest rate simulations.
Gap analysis focuses on measuring absolute dollar amounts
subject to repricing within certain periods of time,
specifically the 1 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 Bank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 NPV. 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 Risk.

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. The static gap is slightly liability-sensitive.
The current repricing behavior will increase the liability
sensitivity of the balance sheet as a result of the majority of
its adjustable rate loans reaching floor interest rates. In a
rising rate environment, the Bank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 until such
time as the rates exceed the floors. Conversely, in a declining
rate environment, the Banks liabilities will continue to
reprice downward, while its loan portfolio remains at its floor
rates, thereby creating an increase in net interest income,
which may be reduced by the impact resulting from accelerated
prepayments. Furthermore, a portion of the Banks interest
sensitive assets and liabilities are tied to indices that may
lag changes in market interest rates by 3 months or more.

58



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The following table sets forth information
concerning sensitivity of the Companys interest-earning
assets and interest-bearing liabilities as of December 31,
2003. The amount of assets and liabilities shown within a
particular period were determined in accordance with their
contractual maturities, except that adjustable rate products,
including those loans that have reached their internal interest
rate floors are reflected in the earlier period of when they are
first scheduled to adjust or mature.

|                              |                                                  |                                    |   |            |           |          |   |            |         |           |   |          |         |  |   |         |         |  |   |         |         |  |   |           |           | 
|----------------------------- | ------------------------------------------------ | ---------------------------------- | - | ---------- | --------- | -------- | - | ---------- | ------- | --------- | - | -------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- |  | - | --------- | --------- | 
|                              |                                                  |                                   
|                              |                                                  | December 31, 2003                 
|                              |                                                  |                                   
|                              |                                                  |                                    |   | Over Three |           | Over Six |   | Over One   |         |          
|                              |                                                  | Three                              |   | Through    |           | Through  |   | Year       |         |          
|                              |                                                  | Months or                          |   | Six        |           | Twelve   |   | Through    |         | Over Five |   |         
|                              |                                                  | Less                               |   | Months     |           | Months   |   | Five Years |         | Years     |   | Total   
|(Dollars in thousands)        |                                                  |                                    |   |            |           |          |   |            |         |           |   |         
|Interest-earning assets:      |                                                  |                                    |   |            |           |          |   |            |         |           |   |          |         |  |   |         |         |  |   |         |         |  |   |          
|                              | Cash, fed funds and other(1)                     |                                    | $ | 2,924      |           |          | $ |           |         |           | $ |         |         |  | $ |        |         |  | $ |        |         |  | $ | 2,924     |          
|                              | Investments and FHLB stock(2)                    |                                    |   | 38,189     |           |          |   |           |         |           |   |         |         |  |   | 124,336 |         |  |   | 251,802 |         |  |   | 414,327   |          
|                              | Loans(3)                                         |                                    |   | 1,144,571  |           |          |   | 415,976    |         |           |   | 70,548   |         |  |   | 450,930 |         |  |   | 92,025  |         |  |   | 2,174,050 |          
|                              |                                                  |                                    |   |            |           |          |   |            |         |           |   |          |         |  |   |         |         |  |   |         |         |  |   |          
|                              |                                                  | Total interest-earning assets      |   | $          | 1,185,684 |          |   | $          | 415,976 |           |   | $        | 70,548  |  |   | $       | 575,266 |  |   | $       | 343,827 |  |   | $         | 2,591,301 | 
|                              |                                                  |                                    |   |            |           |          |   |            |         |           |   |          |         |  |   |         |         |  |   |         |         |  |   |          
|Interest-bearing liabilities: |                                                  |                                    |   |            |           |          |   |            |         |           |   |          |         |  |   |         |         |  |   |         |         |  |   |          
|                              | Deposits:                                        |                                    |   |            |           |          |   |            |         |           |   |          |         |  |   |         |         |  |   |         |         |  |   |           |          
|                              |                                                  | Demand                             |   | $          | 668,134   |          |   | $          |        |           |   | $        |        |  |   | $       |        |  |   | $       |        |  |   | $         | 668,134   | 
|                              |                                                  | Certificates of deposit(4)         |   |            | 403,123   |          |   |            | 234,389 |           |   |          | 224,729 |  |   |         | 139,362 |  |   |         |        |  |   |           | 1,001,603 | 
|                              | FHLB advances (5)(6)                             |                                    |   | 280,700    |           |          |   | 50,000     |         |           |   | 5,000    |         |  |   | 291,000 |         |  |   | 71,000  |         |  |   | 697,700   |          
|                              | Capital securities                               |                                    |   |           |           |          |   | 42,000     |         |           |   |         |         |  |   |        |         |  |   | 9,000   |         |  |   | 51,000    |          
|                              |                                                  |                                    |   |            |           |          |   |            |         |           |   |          |         |  |   |         |         |  |   |         |         |  |   |          
|                              |                                                  | Total interest-bearing liabilities |   | $          | 1,351,957 |          |   | $          | 326,389 |           |   | $        | 229,729 |  |   | $       | 430,362 |  |   | $       | 80,000  |  |   | $         | 2,418,437 | 
|                              |                                                  |                                    |   |            |           |          |   |            |         |           |   |          |         |  |   |         |         |  |   |         |         |  |   |          
|                              | Interest rate sensitivity gap                    |                                    | $ | (166,273   | )         |          | $ | 89,587     |         |           | $ | (159,181 | )       |  | $ | 144,904 |         |  | $ | 263,827 |         |  | $ | 172,864   |          
|                              | Cumulative interest rate sensitivity gap         |                                    |   | (166,273   | )         |          |   | (76,686    | )       |           |   | (235,867 | )       |  |   | (90,963 | )       |  |   | 172,864 |         |  |   | 172,864   |          
|                              | As a percentage of total interest-earning assets |                                    |   | (6.42      | )%        |          |   | (2.96      | )%      |           |   | (9.10    | )%      |  |   | (3.51   | )%      |  |   | 6.67    | %       |  |   | 6.67      | %        



---



|    |                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------
|(1) | Excludes noninterest-earning cash balances.                                                                                      
|   
|(2) | Excludes investments mark-to-market
    adjustments and (discounts)/premiums.                                                   
|   
|(3) | Balances include $8.9 million of nonaccrual
    loans, and exclude deferred (fees) and costs and allowance
    for credit losses.
|   
|(4) | Excludes discounts on CDs acquired in connection
    with the acquisition of First Fidelity.                                     
|   
|(5) | Excludes discounts on FHLB advances acquired in
    connection with the acquisition of First Fidelity.                           
|   
|(6) | If borrowing rate is more than 50 bps above
    market rate as of 12/31/03, maturity date will be used for
    repricing model.  




Item 7A.     Quantitative
and Qualitative Disclosure about Market Risks

A sudden and substantial increase or decrease in
interest rates may adversely impact the Bank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 Banks primary objective in
managing IRR is to minimize the adverse impact of changes in
interest rates on the Banks net interest income and
capital, while structuring the Banks asset-liability mix
to obtain the maximum yield-cost spread on that structure. The
Bank has adopted formal policies and practices to monitor its
IRR exposure. As a part of this effort, the Bank uses the NPV
methodology to gauge IRR exposure.

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

59



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##### Table of Contents



incoming cashflows on interest-earning assets and
other assets, and the outgoing cashflows on interest-bearing
liabilities and other liabilities. The NPV ratio is defined as
the NPV for a given rate scenario divided by the market value of
the assets in the same scenario. The Sensitivity Measure is the
change 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 interest
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, 2003, based on the
Banks internally generated model, it was estimated that
the Banks NPV ratio was 9.45% in the event of a
200 basis point increase in rates, a decrease of
82 basis points from basecase of 10.27%. If rates were to
decrease by 100 basis points, the Banks NPV ratio was
estimated at 10.44%, an increase of 17 basis points from
basecase.

Presented below, as of December 31, 2003, is
an analysis of the Banks IRR as measured by NPV for
instantaneous and sustained parallel shifts of 100, 200, 300 and
-100 basis point increments in market interest rates.

|                       |  |                 |  |                     |  |               |         |       |  |             |         |   |  |  |       |   |  |  |      |    
|---------------------- |  | --------------- |  | ------------------- |  | ------------- | ------- | ----- |  | ----------- | ------- | - |  |  | ----- | - |  |  | ---- | ---
|                       |  |                 |  |                     |  |               |         |      
|                       |  |                 |  | Net Portfolio Value |  |               |         |      
|                       |  |                 |  |                     |  |               |         |      
|                       |  |                 |  |                     |  | $ Change from |         |       |  | Change from
|                       |  | Change in Rates |  | $ Amount            |  | Basecase      |         | Ratio |  | Basecase   
|(Dollars in thousands) |  |                 |  |                     |  |               |         |       |  |            
|                       |  |                 |  | +300 bp             |  | $             | 241,186 |       |  | $           | (39,946 | ) |  |  | 9.10  | % |  |  | (117 | )bp
|                       |  |                 |  | +200 bp             |  |               | 252,776 |       |  |             | (28,356 | ) |  |  | 9.45  | % |  |  | (82  | )bp
|                       |  |                 |  | +100 bp             |  |               | 264,806 |       |  |             | (16,326 | ) |  |  | 9.81  | % |  |  | (46  | )bp
|                       |  |                 |  | 0 bp                |  |               | 281,132 |       |  |             |         |   |  |  | 10.27 | % |  |  |      |    
|                       |  |                 |  | -100 bp             |  |               | 288,950 |       |  |             | 7,818   |   |  |  | 10.44 | % |  |  | 17   | bp 

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.
Fourth, prepayment behavior can be changed in response to
changes in market interest rates. In addition, NPV takes into
account the caps and floors on loans. In the table shown above,
this is reflected in the losses of value in the up 100 bp,
200 bp and 300 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 internal rate floor
is exceeded.

On a quarterly basis, the results of the
internally generated model are reconciled to the results of the
OTS model. In the first quarter of 2003, the OTS changed its
methodology for establishing discount rates for the
adjustable-rate multi-family and commercial loans by assuming
that these loans are carried at market rates, with little
premium over face value. This reduced the NPV for the Bank,
however, the OTS model does not take into account floors
on loans. The Banks model accounts for the existing floors
by increasing the fair market value in the basecase, resulting
in an increase to the NPV. This results in analyses that are
directionally inconsistent. However, based on both the
Banks model and the regulatory model, in accordance with
the OTS Thrift Bulletin 13a, Management of Interest Rate
Risk, the Bank 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-39 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.

60



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

None.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

Under the supervision and with the participation
of our management, including the Chief Executive Officer and
Chief Financial Officer, we have evaluated the effectiveness of
the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14(c) as of
the end of the period covered by this report. Based on that
evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that these disclosure controls and
procedures are effective. There were no changes in our internal
control over financial reporting during the quarter ended
December 31, 2003 that have materially affected, or are
reasonably likely to materially affect, our internal controls
over financial reporting.




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. 99.0 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.

The information in the Proxy Statement set forth
under the caption Section 16(a) Beneficial Ownership
Reporting Compliance is incorporated herein by reference.

The Company has adopted the Hawthorne Financial
Corporation Code of Conduct, a code of ethics that applies to
our employees and officers. The code of conduct is publicly
available as Exhibit 99.3 to our Annual Report on
Form 10-K for the year ended December 31, 2002, which
is available at our website at www.hawthornesavings.com. If we
make any substantive amendments to the code of conduct or grant
any waiver, including any implicit waiver, from a provision of
the code to our Chief Executive Officer, Chief Financial Officer
or Corporate Controller, we will disclose the nature of such
amendment or waiver on that website or in a report on
Form 8-K.






|         |                       
|-------- | ----------------------
|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. 99.0 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, 2003 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, 2003, the Company had no
equity compensation plans that were not approved by security
holders.

|                                                           |  |                      |         |                     |  |                                |       |  |  |  |         | 
|---------------------------------------------------------- |  | -------------------- | ------- | ------------------- |  | ------------------------------ | ----- |  |  |  | ------- | 
|                                                           |  |                      |         |                     |  | Number of Securities Remaining
|                                                           |  | Number of Securities |         |                     |  | Available for Future Issuance 
|                                                           |  | to be Issued upon    |         | Weighted-Average    |  | Under Equity Compensation     
|                                                           |  | Exercise of          |         | Exercise Price of   |  | Plans (Excluding Securities   
|Plan Category                                              |  | Outstanding Options  |         | Outstanding Options |  | Reflected in the First Column)
|                                                           |  |                      |         |                     |  |                               
|Equity compensation plans approved by security
    holders |  |                      | 911,125 |                     |  | $                              | 14.25 |  |  |  | 169,386 | 

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

61



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##### Table of Contents



Election of Directors of the
Companys Proxy Statement, which is filed as
Exhibit No. 99.0 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. 99.0 to this Annual Report on
Form 10-K.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

Information concerning principal accountant fees
and services incorporated herein by reference from the Proxy
Statement under the heading Fees Paid to
Deloitte & Touche LLP, which is filed as
Exhibit 99.0 to this Annual Report on Form 10-K.




PART IV






|         |                                                                    
|-------- | -------------------------------------------------------------------
|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, 2003 and 2002.                     
|
| | Consolidated Statements of Income for the years
    ended December 31, 2003, 2002 and 2001.              
|
| | Consolidated Statements of Stockholders
    Equity for the years ended December 31, 2003, 2002 and 2001.
|
| | Consolidated Statements of Cash Flows for the
    years ended December 31, 2003, 2002 and 2001.          
|
| | Notes to Consolidated Financial Statements for
    the years ended December 31, 2003, 2002 and 2001.     

(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 2003, registrant
filed the following Current Reports on Form 8-K:

|           |  |      |     |           |  |  |         | 
|---------- |  | ---- | --- | --------- |  |  | ------- | 
|Date Filed |  | Form |     | Item Nos.
|           |  |      |     |          
|09/25/03   |  |      | 8-K |           |  |  | 5, 7, 9 | 
|10/24/03   |  |      | 8-K |           |  |  | 12      | 
|10/30/03   |  |      | 8-K |           |  |  | 7, 9    | 

62



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##### Table of Contents



(C) Exhibits

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

|        |      |                         |  |                                                                                                                                                                                                                            
|------- | ---- | ----------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |                        
|Number  |      | Description of Document
|        |      |                        
|        | 3.1  |                         |  | Certificate of Incorporation of the Company and
    Amendment of Certificate of Incorporation of the Company(1)                                                                                                            
|        | 3.2  |                         |  | Bylaws of the Company(1)                                                                                                                                                                                                   
|        | 4.1  |                         |  | Specimen certificate of the Companys Common
    Stock(2)                                                                                                                                                                  
|        | 4.2  |                         |  | Form of Warrants to purchase 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)                                                                                                                                           
|        | 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(7)                                                                                                                                                                       
|        | 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(7)
|        | 4.23 |                         |  | Capital Securities Certificate of HFC Capital
    Trust III(7)                                                                                                                                                             
|        | 4.24 |                         |  | Common Securities Certificate of HFC Capital
    Trust III(7)                                                                                                                                                              
|        | 4.25 |                         |  | Capital Securities Guarantee Agreement between
    Hawthorne Financial Corporation and Wilmington Trust Company,
    dated as of April 10, 2002(7)                                                                         
|        | 4.26 |                         |  | Floating Rate Junior Subordinated Debt Security
    due 2032(7)                                                                                                                                                            
|        | 4.27 |                         |  | Indenture dated as of April 10, 2002,
    between Hawthorne Financial Corporation and Wilmington Trust
    Company, as Trustee(7)                                                                                          
|        | 4.28 |                         |  | Certificate of Trust of HFC Capital Trust IV
    (7)                                                                                                                                                                       

63



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##### Table of Contents



|        |       |                         |  |                                                                                                                                                                                                                                                                                                                                                                              
|------- | ----- | ----------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |                        
|Number  |       | Description of Document
|        |       |                        
|        | 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(7)                                                                                                                                                          
|        | 4.30  |                         |  | Preferred Security Certificate of HFC Capital
    Trust IV(7)                                                                                                                                                                                                                                                                                                                
|        | 4.31  |                         |  | Common Security Certificate of HFC Capital
    Trust IV(7)                                                                                                                                                                                                                                                                                                                   
|        | 4.32  |                         |  | Guarantee Agreement between Hawthorne Financial
    Corporation and The Bank of New York, dated as of
    November 1, 2002(7)                                                                                                                                                                                                                                                
|        | 4.33  |                         |  | Floating Rate Junior Subordinated Note due 2032(7)                                                                                                                                                                                                                                                                                                                           
|        | 4.34  |                         |  | Junior Subordinated Indenture dated as of
    November 1, 2002 between Hawthorne Financial Corporation
    and The Bank of New York, as Trustee(7)                                                                                                                                                                                                                           
|        | 9.0   |                         |  | Form of Shareholders Agreement between Commercial
    Capital Bancorp, Inc. and each of the directors of
    Hawthorne Financial Corporation, dated January 27, 2004
    (filed as Annex A to the Agreement and Plan of Merger dated
    as of January 27, 2004 among Commercial Capital
    Bancorp, Inc., CCBI Acquisition Corp. and Hawthorne
    Financial Corporation(8)
|        | 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  |                         |  | Amended and Restated Deferred Compensation Plan *                                                                                                                                                                                                                                                                                                                            
|        | 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  |                         |  | Agreement and Plan of Merger dated as of
    January 27, 2004 among Commercial Capital
    Bancorp, Inc., CCBI Acquisition Corp. and Hawthorne
    Financial Corporation(8)                                                                                                                                                                                                  
|        | 10.7  |                         |  | Change in Control Employment Agreement between
    the Company and JoLene Wryn dated as of September 23, 2003*                                                                                                                                                                                                                                                               
|        | 10.8  |                         |  | Form of Director Benefits Continuation Agreements
    between the Company and each of the directors of Hawthorne
    Financial Corporation*                                                                                                                                                                                                                                  
|        | 10.9  |                         |  | Engagement letter between Sandler
    ONeill & Partners, L.P. and the Company dated
    January 26, 2004                                                                                                                                                                                                                                                                    
|        | 10.10 |                         |  | Termination Agreement between Fort Pitt
    Fund, L.P. and Hawthorne Financial Corporation                                                                                                                                                                                                                                                                                   
|        | 11.1  |                         |  | Statement on computation of per share earnings(6)                                                                                                                                                                                                                                                                                                                            
|        | 14.0  |                         |  | Hawthorne Financial Corporation Code of Conduct(7)                                                                                                                                                                                                                                                                                                                           
|        | 21.1  |                         |  | Subsidiaries of the Registrant(7)                                                                                                                                                                                                                                                                                                                                            
|        | 23.1  |                         |  | Consent of Deloitte & Touche LLP                                                                                                                                                                                                                                                                                                                                             
|        | 31.0  |                         |  | Rule 13a-14(a)/15(d)-14(a) Certifications                                                                                                                                                                                                                                                                                                                                    
|        | 32.0  |                         |  | Section 1350 Certifications                                                                                                                                                                                                                                                                                                                                                  
|        | 99.0  |                         |  | Proxy Statement for Annual Meeting of
    Shareholders(9)                                                                                                                                                                                                                                                                                                                    



---



|    |                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------
|*   | 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             

64



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##### Table of Contents





|    |                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------
|(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) | Incorporated by reference from the Companys
    Annual Report on Form 10-K for the year ended
    December 31, 2002.                                
|   
|(8) | Incorporated by reference from the Companys
    Current Report on Form 8-K filed on January 28, 2004.                                               
|   
|(9) | To be filed within 120 days after the end of
    the fiscal year ended December 31, 2003.                                                            

65



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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

|                      |  |     |  |                                                                                                                                            
|--------------------- |  | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------
|DATED: March 12, 2004 |  | By: |  | /s/ SIMONE LAGOMARSINO
    ----------------------------------------------------
    Simone LagomarsinoPresident and Chief Executive Officer

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 12, 2004
|                                          
|/s/ DAVID ROSENTHALDavid Rosenthal         |  | Executive Vice President and
    Chief Financial Officer (Principal
    Financial and Accounting Officer) |  | March 12, 2004
|                                          
|/s/ TIMOTHY R. CHRISMANTimothy R. Chrisman |  | Chairman of the Board                                                                                     |  | March 12, 2004
|                                          
|/s/ GARY W. BRUMMETTGary W. Brummett       |  | Director                                                                                                  |  | March 12, 2004
|                                          
|/s/ CARLTON JENKINSCarlton Jenkins         |  | Director                                                                                                  |  | March 12, 2004
|                                          
|/s/ ANTHONY W. LIBERATIAnthony W. Liberati |  | Director                                                                                                  |  | March 12, 2004
|                                          
|/s/ HARRY F. RADCLIFFEHarry F. Radcliffe   |  | Director                                                                                                  |  | March 12, 2004
|                                          
|/s/ HOWARD E. RITTHoward E. Ritt           |  | Director                                                                                                  |  | March 12, 2004

66



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##### Table of Contents



Exhibit 31.1

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
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
officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:



| |                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) Designed such disclosure controls and
    procedures, or caused such disclosure controls and procedures to
    be designed under our supervision, 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) Designed such internal control over
    financial reporting, or caused such internal control over
    financial reporting to be designed under our supervision, to
    provide reasonable assurance regarding the reliability of
    financial reporting and the preparation of financial statements
    for external purposes in accordance with generally accepted
    accounting principles;                       
|
| | c) Evaluated the effectiveness of the
    registrants disclosure controls and procedures and
    presented in this annual report our conclusions about the
    effectiveness of the disclosure controls and procedures, as of
    the end of the period covered by this annual report based on
    such evaluation; and                                                                                                 
|
| | d) Disclosed in this annual report any
    change in the registrants internal control over financial
    reporting that occurred during the registrants most recent
    fiscal quarter (the registrants fourth fiscal quarter in
    the case of an annual report) that has materially affected, or
    is reasonably likely to materially affect, the registrants
    internal control over financial reporting; and

5. The registrants other certifying
officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the
registrants auditors and the audit committee of the
registrants board of directors (or persons performing the
equivalent functions):



| |                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) All significant deficiencies and material
    weaknesses in the design or operation of internal control over
    financial reporting which are reasonably likely to adversely
    affect the registrants ability to record, process,
    summarize and report financial information; and
|
| | b) Any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal control over financial
    reporting.                                                                                                   

|                     |  |                                                                                   
|-------------------- |  | ----------------------------------------------------------------------------------
|Date: March 12, 2004 |  | By: /s/ SIMONE LAGOMARSINO Simone LagomarsinoPresident and Chief Executive Officer

67



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##### Table of Contents



Exhibit 31.2

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
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
officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:



| |                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) Designed such disclosure controls and
    procedures, or caused such disclosure controls and procedures to
    be designed under our supervision, 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) Designed such internal control over
    financial reporting, or caused such internal control over
    financial reporting to be designed under our supervision, to
    provide reasonable assurance regarding the reliability of
    financial reporting and the preparation of financial statements
    for external purposes in accordance with generally accepted
    accounting principles;                       
|
| | c) Evaluated the effectiveness of the
    registrants disclosure controls and procedures and
    presented in this annual report our conclusions about the
    effectiveness of the disclosure controls and procedures, as of
    the end of the period covered by this annual report based on
    such evaluation; and                                                                                                 
|
| | d) Disclosed in this annual report any
    change in the registrants internal control over financial
    reporting that occurred during the registrants most recent
    fiscal quarter (the registrants fourth fiscal quarter in
    the case of an annual report) that has materially affected, or
    is reasonably likely to materially affect, the registrants
    internal control over financial reporting; and

5. The registrants other certifying
officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the
registrants auditors and the audit committee of the
registrants board of directors (or persons performing the
equivalent functions):



| |                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) All significant deficiencies and material
    weaknesses in the design or operation of internal control over
    financial reporting which are reasonably likely to adversely
    affect the registrants ability to record, process,
    summarize and report financial information; and
|
| | b) Any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal control over financial
    reporting.                                                                                                   

|                     |  |                                                                                                
|-------------------- |  | -----------------------------------------------------------------------------------------------
|Date: March 12, 2004 |  | By: /s/ DAVID ROSENTHAL David RosenthalExecutive Vice President
    and Chief Financial Officer

68



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##### Table of Contents



Exhibit 32.0

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,


AS ADOPTED PURSUANT TO
SECTION 906


OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Annual Report on
Form 10-K of Hawthorne Financial Corporation for the year
ended December 31, 2003 as filed with the Securities and
Exchange Commission on March 12, 2004, I, Simone
Lagomarsino, President and Chief Executive Officer of Hawthorne
Financial Corporation, and I, David Rosenthal, Executive Vice
President and Chief Financial Officer of Hawthorne Financial
Corporation, certify, pursuant to 18 U.S.C. §1350, as
adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002,
that:



| |                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) The Report fully complies with the
    requirements of Section 13(a) or 15(d) of the Securities
    Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and     
|
| | (2) The information contained in the Report
    fairly presents, in all material respects, the financial
    condition and results of operations of the Company.

|                     |  |                                                                                   
|-------------------- |  | ----------------------------------------------------------------------------------
|Date: March 12, 2004 |  | By: /s/ SIMONE LAGOMARSINO Simone LagomarsinoPresident and Chief Executive Officer

|                     |  |                                                                                                
|-------------------- |  | -----------------------------------------------------------------------------------------------
|Date: March 12, 2004 |  | By: /s/ DAVID ROSENTHAL David RosenthalExecutive Vice President and
    Chief Financial Officer

69



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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

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, 2003 and 2002 and the related consolidated
statements of income, stockholders equity, and cash flows
for each of the three years in the period ended
December 31, 2003. 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, 2003 and 2002, and the
results of their operations and their 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   | 
|MARCH 5, 2004             | 

A-2



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION

|                                                                                                 |                                                                                                                                            |                                                                                          |                                            |              |         |           |           |         |         |           | 
|------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------- | ------------------------------------------ | ------------ | ------- | --------- | --------- | ------- | ------- | --------- | 
|                                                                                                 |                                                                                                                                            | December 31,                                                                             |                                            | December 31,
|                                                                                                 |                                                                                                                                            | 2003                                                                                     |                                            | 2002        
|(Dollars in thousands)                                                                           |                                                                                                                                            |                                                                                          |                                            |             
|Assets:                                                                                          |                                                                                                                                            |                                                                                          |                                            |              |         |           |           |        
|Cash and cash equivalents                                                                        |                                                                                                                                            | $                                                                                        | 17,829                                     |              |         | $         | 21,849    |        
|Investment securities available-for-sale, at fair
    value                                      |                                                                                                                                            |                                                                                          | 381,287                                    |              |         |           | 267,596   |        
|Loans receivable (net of allowance for credit
    losses of $33,538 in 2003 and $35,309 in 2002) |                                                                                                                                            |                                                                                          | 2,154,114                                  |              |         |           | 2,114,255 |        
|Accrued interest receivable                                                                      |                                                                                                                                            |                                                                                          | 9,859                                      |              |         |           | 11,512    |        
|Investment in capital stock of Federal Home
    Loan Bank, at cost                               |                                                                                                                                            |                                                                                          | 38,189                                     |              |         |           | 34,705    |        
|Office property and equipment at cost, net                                                       |                                                                                                                                            |                                                                                          | 5,295                                      |              |         |           | 5,106     |        
|Deferred tax asset, net                                                                          |                                                                                                                                            |                                                                                          | 10,630                                     |              |         |           | 10,068    |        
|Goodwill                                                                                         |                                                                                                                                            |                                                                                          | 22,970                                     |              |         |           | 22,970    |        
|Intangible assets                                                                                |                                                                                                                                            |                                                                                          | 976                                        |              |         |           | 1,388     |        
|Other assets                                                                                     |                                                                                                                                            |                                                                                          | 32,854                                     |              |         |           | 5,521     |        
|                                                                                                 |                                                                                                                                            |                                                                                          |                                            |              |         |           |           |        
|                                                                                                 |                                                                                                                                            |                                                                                          | Total assets                               |              | $       | 2,674,003 |           |         | $       | 2,494,970 | 
|                                                                                                 |                                                                                                                                            |                                                                                          |                                            |              |         |           |           |        
|                                                                                                
|Liabilities and Stockholders
    Equity:                                                        |                                                                                                                                            |                                                                                          |                                            |              |         |           |           |        
|Liabilities:                                                                                     |                                                                                                                                            |                                                                                          |                                            |              |         |           |           |        
|                                                                                                 | Deposits:                                                                                                                                  |                                                                                          |                                            |              |         |           |           |         |        
|                                                                                                 |                                                                                                                                            | Noninterest-bearing                                                                      |                                            | $            | 51,670  |           |           | $       | 39,818  |          
|                                                                                                 |                                                                                                                                            | Interest-bearing:                                                                        |                                            |              |         |           |           |         |         |          
|                                                                                                 |                                                                                                                                            |                                                                                          | Transaction accounts                       |              |         | 668,135   |           |         |         | 597,528   | 
|                                                                                                 |                                                                                                                                            |                                                                                          | Certificates of deposit                    |              |         | 1,002,759 |           |         |         | 1,025,464 | 
|                                                                                                 |                                                                                                                                            |                                                                                          |                                            |              |         |           |           |        
|                                                                                                 |                                                                                                                                            |                                                                                          | Total deposits                             |              |         | 1,722,564 |           |         |         | 1,662,810 | 
|                                                                                                 | FHLB advances                                                                                                                              |                                                                                          |                                            | 697,155      |         |           |           | 600,190 |        
|                                                                                                 | Capital securities                                                                                                                         |                                                                                          |                                            | 51,000       |         |           |           | 51,000  |        
|                                                                                                 | Accounts payable and other liabilities                                                                                                     |                                                                                          |                                            | 18,010       |         |           |           | 17,904  |        
|                                                                                                 |                                                                                                                                            |                                                                                          |                                            |              |         |           |           |        
|                                                                                                 |                                                                                                                                            |                                                                                          | Total liabilities                          |              |         | 2,488,729 |           |         |         | 2,331,904 | 
|                                                                                                 |                                                                                                                                            |                                                                                          |                                            |              |         |           |           |        
|Commitments and Contingencies (Note 14)                                                          |                                                                                                                                            |                                                                                          |                                           |              |         |           |          |        
|Stockholders Equity:                                                                            |                                                                                                                                            |                                                                                          |                                            |              |         |           |           |        
|                                                                                                 | Common stock  $0.01 par value;
    authorized 20,000,000 shares; issued,
    13,837,958 shares (2003) and 12,864,072 shares
    (2002)(1) |                                                                                          |                                            | 138          |         |           |           | 86      |        
|                                                                                                 | Capital in excess of par value  common
    stock                                                                                          |                                                                                          |                                            | 84,360       |         |           |           | 81,087  |        
|                                                                                                 | Retained earnings                                                                                                                          |                                                                                          |                                            | 133,597      |         |           |           | 105,134 |        
|                                                                                                 | Accumulated other comprehensive (loss)/income                                                                                              |                                                                                          |                                            | (950         | )       |           |           | 1,504   |        
|                                                                                                 | Less:                                                                                                                                      |                                                                                          |                                            |              |         |           |           |         |        
|                                                                                                 |                                                                                                                                            | Treasury stock, at cost 
    2,108,616 shares (2003) and 1,782,575 shares
    (2002)(1) |                                            |              | (31,871 | )         |           |         | (24,745 | )        
|                                                                                                 |                                                                                                                                            |                                                                                          |                                            |              |         |           |           |        
|                                                                                                 |                                                                                                                                            |                                                                                          | Total stockholders equity                 |              |         | 185,274   |           |         |         | 163,066   | 
|                                                                                                 |                                                                                                                                            |                                                                                          |                                            |              |         |           |           |        
|                                                                                                 |                                                                                                                                            |                                                                                          | Total liabilities and stockholders equity |              | $       | 2,674,003 |           |         | $       | 2,494,970 | 
|                                                                                                 |                                                                                                                                            |                                                                                          |                                            |              |         |           |           |        



---



|    |                                                                        
|--- | -----------------------------------------------------------------------
|(1) | Reflects a 3-for-2 stock split in the form of a
    50% stock dividend.

See accompanying Notes to Consolidated Financial
Statements

A-3



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

|                                               |                                                              |                                   |                                                           |         |        |         |        |         |        |         |        |         |        |         | 
|---------------------------------------------- | ------------------------------------------------------------ | --------------------------------- | --------------------------------------------------------- | ------- | ------ | ------- | ------ | ------- | ------ | ------- | ------ | ------- | ------ | ------- | 
|                                               |                                                              |                                  
|                                               |                                                              | Years Ended December 31,         
|                                               |                                                              |                                  
|                                               |                                                              | 2003                              |                                                           | 2002    |        | 2001   
|(In thousands, except per share data)          |                                                              |                                   |                                                           |         |        |        
|Interest revenue:                              |                                                              |                                   |                                                           |         |        |         |        |         |        |         |        |        
|                                               | Loans                                                        |                                   | $                                                         | 127,424 |        |         | $      | 130,628 |        |         | $      | 143,249 |       
|                                               | Investments securities                                       |                                   |                                                           | 11,510  |        |         |        | 3,155   |        |         |        |        |       
|                                               | Investment in capital stock of FHLB, fed funds
    and other |                                   |                                                           | 1,545   |        |         |        | 3,411   |        |         |        | 4,437   |       
|                                               |                                                              |                                   |                                                           |         |        |         |        |         |        |         |        |        
|                                               |                                                              |                                   | Total interest revenue                                    |         |        | 140,479 |        |         |        | 137,194 |        |         |        | 147,686 | 
|                                               |                                                              |                                   |                                                           |         |        |         |        |         |        |         |        |        
|Interest cost:                                 |                                                              |                                   |                                                           |         |        |         |        |         |        |         |        |        
|                                               | Deposits                                                     |                                   |                                                           | 35,552  |        |         |        | 36,755  |        |         |        | 60,022  |       
|                                               | FHLB advances                                                |                                   |                                                           | 21,286  |        |         |        | 21,931  |        |         |        | 20,956  |       
|                                               | Senior notes                                                 |                                   |                                                           |        |        |         |        | 3,120   |        |         |        | 3,970   |       
|                                               | Capital securities                                           |                                   |                                                           | 3,021   |        |         |        | 2,281   |        |         |        | 722     |       
|                                               |                                                              |                                   |                                                           |         |        |         |        |         |        |         |        |        
|                                               |                                                              |                                   | Total interest cost                                       |         |        | 59,859  |        |         |        | 64,087  |        |         |        | 85,670  | 
|                                               |                                                              |                                   |                                                           |         |        |         |        |         |        |         |        |        
|Net interest income                            |                                                              |                                   | 80,620                                                    |         |        |         | 73,107 |         |        |         | 62,016 |        
|Provision for credit losses                    |                                                              |                                   | 500                                                       |         |        |         | 870    |         |        |         | 3,400  |        
|                                               |                                                              |                                   |                                                           |         |        |         |        |         |        |         |        |        
|                                               |                                                              |                                   | Net interest income after provision for credit
    losses |         |        | 80,120  |        |         |        | 72,237  |        |         |        | 58,616  | 
|Noninterest revenue:                           |                                                              |                                   |                                                           |         |        |         |        |         |        |         |        |        
|                                               | Loan related and other fees                                  |                                   |                                                           | 4,926   |        |         |        | 4,179   |        |         |        | 3,709   |       
|                                               | Deposit fees                                                 |                                   |                                                           | 2,027   |        |         |        | 1,536   |        |         |        | 1,362   |       
|                                               | Other                                                        |                                   |                                                           | 1,703   |        |         |        | 672     |        |         |        | 559     |       
|                                               |                                                              |                                   |                                                           |         |        |         |        |         |        |         |        |        
|                                               |                                                              |                                   | Total noninterest revenue                                 |         |        | 8,656   |        |         |        | 6,387   |        |         |        | 5,630   | 
|(Loss)/income from real estate owned, net      |                                                              |                                   | (51                                                       | )       |        |         | 71     |         |        |         | 205    |        
|Noninterest expense:                           |                                                              |                                   |                                                           |         |        |         |        |         |        |         |        |        
|                                               | General and administrative expense:                          |                                   |                                                           |         |        |         |        |         |        |         |        |         |       
|                                               |                                                              | Employee                          |                                                           |         | 22,923 |         |        |         | 22,389 |         |        |         | 18,320 |        
|                                               |                                                              | Operating                         |                                                           |         | 9,168  |         |        |         | 9,337  |         |        |         | 7,220  |        
|                                               |                                                              | Occupancy                         |                                                           |         | 5,337  |         |        |         | 4,109  |         |        |         | 4,015  |        
|                                               |                                                              | Professional                      |                                                           |         | 2,110  |         |        |         | 2,132  |         |        |         | 2,857  |        
|                                               |                                                              | Technology                        |                                                           |         | 2,041  |         |        |         | 1,734  |         |        |         | 1,897  |        
|                                               |                                                              | SAIF premiums and OTS assessments |                                                           |         | 673    |         |        |         | 588    |         |        |         | 929    |        
|                                               |                                                              | Other/legal settlements           |                                                           |         | 102    |         |        |         | 323    |         |        |         | 110    |        
|                                               |                                                              |                                   |                                                           |         |        |         |        |         |        |         |        |        
|                                               |                                                              |                                   | Total general and administrative expense                  |         |        | 42,354  |        |         |        | 40,612  |        |         |        | 35,348  | 
|                                               |                                                              |                                   |                                                           |         |        |         |        |         |        |         |        |        
|Income before income taxes                     |                                                              |                                   | 46,371                                                    |         |        |         | 38,083 |         |        |         | 29,103 |        
|Income tax provision                           |                                                              |                                   | 17,863                                                    |         |        |         | 15,384 |         |        |         | 12,270 |        
|                                               |                                                              |                                   |                                                           |         |        |         |        |         |        |         |        |        
|Net income                                     |                                                              | $                                 | 28,508                                                    |         |        | $       | 22,699 |         |        | $       | 16,833 |        
|                                               |                                                              |                                   |                                                           |         |        |         |        |         |        |         |        |        
|Basic earnings per share(1)                    |                                                              | $                                 | 2.47                                                      |         |        | $       | 2.37   |         |        | $       | 2.12   |        
|                                               |                                                              |                                   |                                                           |         |        |         |        |         |        |         |        |        
|Diluted earnings per share(1)                  |                                                              | $                                 | 2.28                                                      |         |        | $       | 1.92   |         |        | $       | 1.48   |        
|                                               |                                                              |                                   |                                                           |         |        |         |        |         |        |         |        |        
|Weighted average basic shares outstanding(1)   |                                                              |                                   | 11,527                                                    |         |        |         | 9,573  |         |        |         | 7,937  |        
|                                               |                                                              |                                   |                                                           |         |        |         |        |         |        |         |        |        
|Weighted average diluted shares outstanding(1) |                                                              |                                   | 12,518                                                    |         |        |         | 11,837 |         |        |         | 11,348 |        
|                                               |                                                              |                                   |                                                           |         |        |         |        |         |        |         |        |        



---



|    |                                                                        
|--- | -----------------------------------------------------------------------
|(1) | Reflects a 3-for-2 stock split in the form of a
    50% stock dividend.

See accompanying Notes to Consolidated Financial
Statements

A-4



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                                                                                                                              |  |           |        |        |  |             |     |          |  |               |        |          |  |               |         |               |  |   |        |      |  |   |         |   |  |   |         |   |  |   |        |  
|----------------------------------------------------------------------------------------------------------------------------- |  | --------- | ------ | ------ |  | ----------- | --- | -------- |  | ------------- | ------ | -------- |  | ------------- | ------- | ------------- |  | - | ------ | ---- |  | - | ------- | - |  | - | ------- | - |  | - | ------ | -
|                                                                                                                              |  |           |        |        |  | Capital in  |     |          |  | Accumulated   |        |          |  |               |         |              
|                                                                                                                              |  |           |        |        |  | Excess of   |     |          |  | Other         |        |          |  |               |         |              
|                                                                                                                              |  | Number of |        |        |  | Par Value  |     |          |  | Comprehensive |        |          |  | Total         |         |              
|                                                                                                                              |  | Common    |        | Common |  | Common      |     | Retained |  | Income/(Loss) |        | Treasury |  | Stockholders |         | Comprehensive
|                                                                                                                              |  | Shares(1) |        | Stock  |  | Stock       |     | Earnings |  | Plan          |        | Stock    |  | Equity        |         | Income       
|(In thousands)                                                                                                                |  |           |        |        |  |             |     |          |  |               |        |          |  |               |         |              
|Balance at January 1, 2001                                                                                                    |  |           | 7,763  |        |  |             | 56  |          |  |               | 42,095 |          |  |               | 65,602  |               |  |   |       |      |  |   | (3,592  | ) |  |   | 104,161 |   |  |   |        |  
|Exercised stock options                                                                                                       |  |           | 126    |        |  |             |    |          |  |               | 443    |          |  |               |        |               |  |   |       |      |  |   |        |   |  |   | 443     |   |  |   |        |  
|Exercised warrants                                                                                                            |  |           | 403    |        |  |             | 3   |          |  |               | 15     |          |  |               |        |               |  |   |       |      |  |   |        |   |  |   | 18      |   |  |   |        |  
|Tax benefit for stock options exercised                                                                                       |  |           |       |        |  |             |     |          |  |               | 1,971  |          |  |               |        |               |  |   |       |      |  |   |        |   |  |   | 1,971   |   |  |   |        |  
|Treasury stock                                                                                                                |  |           | (252   | )      |  |             |     |          |  |               |       |          |  |               |        |               |  |   |       |      |  |   | (2,977  | ) |  |   | (2,977  | ) |  |   |        |  
|Net income                                                                                                                    |  |           |       |        |  |             |    |          |  |               |       |          |  |               | 16,833  |               |  |   |       |      |  |   |        |   |  |   | 16,833  |   |  | $ | 16,833 |  
|                                                                                                                              |  |           |        |        |  |             |     |          |  |               |        |          |  |               |         |               |  |   |        |      |  |   |         |   |  |   |         |   |  |   |        |  
|Comprehensive income                                                                                                          |  |           |       |        |  |             |    |          |  |               |       |          |  |               |        |               |  |   |       |      |  |   |        |   |  |   |        |   |  | $ | 16,833 |  
|                                                                                                                              |  |           |        |        |  |             |     |          |  |               |        |          |  |               |         |               |  |   |        |      |  |   |         |   |  |   |         |   |  |   |        |  
|Balance at December 31, 2001                                                                                                  |  |           | 8,040  |        |  |             | 59  |          |  |               | 44,524 |          |  |               | 82,435  |               |  |   |       |      |  |   | (6,569  | ) |  |   | 120,449 |   |  |   |        |  
|Exercised stock options                                                                                                       |  |           | 159    |        |  |             | 2   |          |  |               | 1,121  |          |  |               |        |               |  |   |       |      |  |   |        |   |  |   | 1,123   |   |  |   |        |  
|Exercised warrants                                                                                                            |  |           | 1,926  |        |  |             | 13  |          |  |               | 2,720  |          |  |               |        |               |  |   |       |      |  |   |        |   |  |   | 2,733   |   |  |   |        |  
|Tax benefit for stock options exercised                                                                                       |  |           |       |        |  |             |    |          |  |               | 729    |          |  |               |        |               |  |   |       |      |  |   |        |   |  |   | 729     |   |  |   |        |  
|Treasury stock                                                                                                                |  |           | (942   | )      |  |             |    |          |  |               |       |          |  |               |        |               |  |   |       |      |  |   | (18,176 | ) |  |   | (18,176 | ) |  |   |        |  
|Stock issued for acquisition of First Fidelity                                                                                |  |           | 1,899  |        |  |             | 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                                                                                                  |  |           | 11,082 |        |  | $           | 86  |          |  | $             | 81,087 |          |  | $             | 105,134 |               |  | $ | 1,504  |      |  | $ | (24,745 | ) |  | $ | 163,066 |   |  |   |        |  
|                                                                                                                              |  |           |        |        |  |             |     |          |  |               |        |          |  |               |         |               |  |   |        |      |  |   |         |   |  |   |         |   |  |   |        |  
|Exercised stock options                                                                                                       |  |           | 221    |        |  |             | 1   |          |  |               | 1,591  |          |  |               |        |               |  |   |       |      |  |   |        |   |  |   | 1,592   |   |  |   |        |  
|Exercised warrants                                                                                                            |  |           | 752    |        |  |             | 6   |          |  |               | 252    |          |  |               |        |               |  |   |       |      |  |   |        |   |  |   | 258     |   |  |   |        |  
|Tax benefit for stock options exercised                                                                                       |  |           |       |        |  |             |    |          |  |               | 1,430  |          |  |               |        |               |  |   |       |      |  |   |        |   |  |   | 1,430   |   |  |   |        |  
|Treasury stock                                                                                                                |  |           | (326   | )      |  |             |    |          |  |               |       |          |  |               |        |               |  |   |       |      |  |   | (7,126  | ) |  |   | (7,126  | ) |  |   |        |  
|Net income                                                                                                                    |  |           |       |        |  |             |    |          |  |               |       |          |  |               | 28,508  |               |  |   |       |      |  |   |        |   |  |   | 28,508  |   |  | $ | 28,508 |  
|Stock dividend                                                                                                                |  |           |       |        |  |             | 45  |          |  |               |       |          |  |               | (45     | )             |  |   |       |      |  |   |        |   |  |   |        |   |  |   |        |  
|Other comprehensive (loss)/income, net Unrealized
    (loss)/gain on investment securities available-for-sale, net of
    tax |  |           |       |        |  |             |    |          |  |               |       |          |  |               |        |               |  |   | (2,454 | )(2) |  |   |        |   |  |   | (2,454  | ) |  |   | (2,454 | )
|                                                                                                                              |  |           |        |        |  |             |     |          |  |               |        |          |  |               |         |               |  |   |        |      |  |   |         |   |  |   |         |   |  |   |        |  
|Comprehensive (loss)/income                                                                                                   |  |           |       |        |  |             |    |          |  |               |       |          |  |               |        |               |  |   |       |      |  |   |        |   |  |   |        |   |  | $ | 26,054 |  
|                                                                                                                              |  |           |        |        |  |             |     |          |  |               |        |          |  |               |         |               |  |   |        |      |  |   |         |   |  |   |         |   |  |   |        |  
|Balance at December 31, 2003                                                                                                  |  |           | 11,729 |        |  | $           | 138 |          |  | $             | 84,360 |          |  | $             | 133,597 |               |  | $ | (950   | )    |  | $ | (31,871 | ) |  | $ | 185,274 |   |  |   |        |  
|                                                                                                                              |  |           |        |        |  |             |     |          |  |               |        |          |  |               |         |               |  |   |        |      |  |   |         |   |  |   |         |   |  |   |        |  



---



|    |                                                                                         
|--- | ----------------------------------------------------------------------------------------
|(1) | Number of common shares reflects a 3-for-2 stock
    split in the form of a 50% dividend



|    |  |                                                                                             |  |                   |        |                   |  |   |        |  
|--- |  | ------------------------------------------------------------------------------------------- |  | ----------------- | ------ | ----------------- |  | - | ------ | -
|    |  |                                                                                             |  | December 31, 2003 |        | December 31, 2002
|    |  |                                                                                             |  |                   |        |                  
|(2) |  | Other comprehensive loss, before tax:                                                       |  |                   |        |                   |  |   |        |  
|    |  | Unrealized net holding (loss)/gain on
    available-for-sale
         investment securities |  | $                 | (4,125 | )                 |  | $ | 2,639  |  
|    |  | Reclassification adjustment of net
    gains included in income                             |  |                   | (102   | )                 |  |   |       |  
|    |  |                                                                                             |  |                   |        |                   |  |   |        |  
|    |  | Other comprehensive (loss)/gain, before tax                                                 |  |                   | (4,227 | )                 |  |   | 2,639  |  
|    |  | Tax effect                                                                                  |  |                   | 1,773  |                   |  |   | (1,135 | )
|    |  |                                                                                             |  |                   |        |                   |  |   |        |  
|    |  | Other comprehensive (loss)/gain, net of tax                                                 |  | $                 | (2,454 | )                 |  | $ | 1,504  |  
|    |  |                                                                                             |  |                   |        |                   |  |   |        |  

See Accompanying Notes to Consolidated Financial
Statements

A-5



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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                      |                                                           |                                |                                                |                                           |            |         |          |         |          |        |          |        |          |        |          |  
|------------------------------------- | --------------------------------------------------------- | ------------------------------ | ---------------------------------------------- | ----------------------------------------- | ---------- | ------- | -------- | ------- | -------- | ------ | -------- | ------ | -------- | ------ | -------- | -
|                                      |                                                           |                               
|                                      |                                                           | Years Ended December 31,      
|                                      |                                                           |                               
|                                      |                                                           | 2003                           |                                                | 2002                                      |            | 2001   
|(Dollars in thousands)                |                                                           |                                |                                                |                                           |            |        
|Cash Flows from Operating Activities: |                                                           |                                |                                                |                                           |            |         |          |         |          |        |          |       
|                                      | Net income                                                |                                | $                                              | 28,508                                    |            |         | $        | 22,699  |          |        | $        | 16,833 |         
|                                      | Adjustments to reconcile net income to cash
    provided  |                                |                                                |                                           |            |         |          |         |          |        |          |        |         
|                                      |                                                           | by operating activities:       |                                                |                                           |            |         |          |         |          |        |          |        |          |       
|                                      |                                                           |                                | Deferred income tax                            |                                           |            | 1,211   |          |         |          | (3,124 | )        |        |          | (1,838 | )       
|                                      |                                                           |                                | Provision for credit losses on loans           |                                           |            | 500     |          |         |          | 870    |          |        |          | 3,400  |         
|                                      |                                                           |                                | Net gain on sale of investments                |                                           |            | (102    | )        |         |          | (136   | )        |        |          |       |         
|                                      |                                                           |                                | Net (gain)/loss from sale of loans             |                                           |            | (95     | )        |         |          | (24    | )        |        |          | 110    |         
|                                      |                                                           |                                | Net loss/(gain) from sale of real estate owned |                                           |            | 6       |          |         |          | (87    | )        |        |          | (106   | )       
|                                      |                                                           |                                | Net loss on extinguishment of debt             |                                           |            |        |          |         |          | 1,203  |          |        |          |       |         
|                                      |                                                           |                                | Loan fee and discount amortization (accretion) |                                           |            | 2,070   |          |         |          | 1,377  |          |        |          | (2,341 | )       
|                                      |                                                           |                                | Depreciation and amortization                  |                                           |            | 5,845   |          |         |          | 3,519  |          |        |          | 2,750  |         
|                                      |                                                           |                                | Retirement of fixed assets                     |                                           |            | 156     |          |         |          |       |          |        |          |       |         
|                                      |                                                           |                                | FHLB dividends                                 |                                           |            | (1,495  | )        |         |          | (1,646 | )        |        |          | (1,206 | )       
|                                      |                                                           |                                | Decrease in accrued interest receivable        |                                           |            | 1,653   |          |         |          | 648    |          |        |          | 1,363  |         
|                                      |                                                           |                                | (Increase)/decrease in other assets            |                                           |            | (26,189 | )        |         |          | 51,447 |          |        |          | 798    |         
|                                      |                                                           |                                | (Decrease)/increase in other liabilities       |                                           |            | (1,214  | )        |         |          | 67     |          |        |          | 1,647  |         
|                                      |                                                           |                                |                                                |                                           |            |         |          |         |          |        |          |       
|                                      |                                                           |                                |                                                | Net cash provided by operating activities |            |         | 10,854   |         |          |        | 76,813   |        |          |        | 21,410   |  
|                                      |                                                           |                                |                                                |                                           |            |         |          |         |          |        |          |       
|Cash Flows from Investing Activities: |                                                           |                                |                                                |                                           |            |         |          |         |          |        |          |       
|                                      | Loans:                                                    |                                |                                                |                                           |            |         |          |         |          |        |          |        |         
|                                      |                                                           | New loans funded               |                                                |                                           | (1,055,722 | )       |          |         | (688,283 | )      |          |        | (666,368 | )     
|                                      |                                                           | Payoffs and principal payments |                                                |                                           | 1,039,196  |         |          |         | 878,725  |        |          |        | 592,617  |       
|                                      |                                                           | Sales proceeds                 |                                                |                                           | 14,696     |         |          |         | 10,891   |        |          |        | 27,765   |       
|                                      |                                                           | Purchases                      |                                                |                                           | (43,083    | )       |          |         | (78,947  | )      |          |        | (55,458  | )     
|                                      |                                                           | Other, net                     |                                                |                                           | 1,648      |         |          |         | (877     | )      |          |        | (3,018   | )     
|                                      | Activity in available-for-sale investment
    securities: |                                |                                                |                                           |            |         |          |         |          |        |          |        |         
|                                      |                                                           | Purchases                      |                                                |                                           | (365,806   | )       |          |         | (258,749 | )      |          |        |         |       
|                                      |                                                           | Sales proceeds                 |                                                |                                           | 123,985    |         |          |         | 39,373   |        |          |        |         |       
|                                      |                                                           | Principal payments             |                                                |                                           | 120,014    |         |          |         | 18,215   |        |          |        |         |       
|                                      | Purchases of FHLB stock                                   |                                |                                                | (8,023                                    | )          |         |          |        |          |        |          | (2,528 | )       
|                                      | Redemption of FHLB stock                                  |                                |                                                | 6,034                                     |            |         |          |        |          |        |          |       |         
|                                      | Real estate owned:                                        |                                |                                                |                                           |            |         |          |         |          |        |          |        |         
|                                      |                                                           | Sales proceeds                 |                                                |                                           | 2,242      |         |          |         | 1,399    |        |          |        | 2,969    |       
|                                      |                                                           | Capitalized costs              |                                                |                                           |           |         |          |         |         |        |          |        | (4       | )     
|                                      | Office property and equipment:                            |                                |                                                |                                           |            |         |          |         |          |        |          |        |         
|                                      |                                                           | Additions                      |                                                |                                           | (2,211     | )       |          |         | (2,126   | )      |          |        | (1,414   | )     
|                                      | Acquisition of First Fidelity, net of cash
    acquired   |                                |                                                |                                          |            |         |          | (24,836 | )        |        |          |       |         
|                                      |                                                           |                                |                                                |                                           |            |         |          |         |          |        |          |       
|                                      |                                                           |                                |                                                | Net cash used in investing activities     |            |         | (167,030 | )       |          |        | (105,215 | )      |          |        | (105,439 | )
|                                      |                                                           |                                |                                                |                                           |            |         |          |         |          |        |          |       

A-6



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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH
FLOWS  (Continued)

|                                               |                                                                                                                                                                                         |                                                                                |                                                         |        |        |         |         |         |          |         |        |         |         |        | 
|---------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | ------------------------------------------------------- | ------ | ------ | ------- | ------- | ------- | -------- | ------- | ------ | ------- | ------- | ------ | 
|                                               |                                                                                                                                                                                         |                                                                               
|                                               |                                                                                                                                                                                         | Years Ended December 31,                                                      
|                                               |                                                                                                                                                                                         |                                                                               
|                                               |                                                                                                                                                                                         | 2003                                                                           |                                                         | 2002   |        | 2001   
|(Dollars in thousands)                         |                                                                                                                                                                                         |                                                                                |                                                         |        |        |        
|Cash Flows from Financing Activities:          |                                                                                                                                                                                         |                                                                                |                                                         |        |        |         |         |         |          |         |        |        
|                                               | Deposit activity, net                                                                                                                                                                   |                                                                                | $                                                       | 59,754 |        |         | $       | 13,272  |          |         | $      | (15,211 | )      
|                                               | FHLB advances:                                                                                                                                                                          |                                                                                |                                                         |        |        |         |         |         |          |         |        |         |        
|                                               |                                                                                                                                                                                         | Net increase /(decrease) in FHLB advances                                      |                                                         |        | 98,700 |         |         |         | (56,903  | )       |        |         | 100,000 |       
|                                               |                                                                                                                                                                                         | Prepayment fees                                                                |                                                         |        | (1,022 | )       |         |         |         |         |        |         |        |       
|                                               | Net proceeds from exercise of stock options and
    warrants                                                                                                                            |                                                                                |                                                         | 1,850  |        |         |         | 3,856   |          |         |        | 461     |        
|                                               | Reduction in Senior Notes                                                                                                                                                               |                                                                                |                                                         |       |        |         |         | (27,381 | )        |         |        | (13,580 | )      
|                                               | Proceeds from Capital Securities                                                                                                                                                        |                                                                                |                                                         |       |        |         |         | 37,000  |          |         |        | 14,000  |        
|                                               | Purchases of Treasury Stock                                                                                                                                                             |                                                                                |                                                         | (7,126 | )      |         |         | (18,176 | )        |         |        | (2,977  | )      
|                                               |                                                                                                                                                                                         |                                                                                |                                                         |        |        |         |         |         |          |         |        |        
|                                               |                                                                                                                                                                                         |                                                                                | Net cash provided by/(used in) financing
    activities |        |        | 152,156 |         |         |          | (48,332 | )      |         |         | 82,693 | 
|                                               |                                                                                                                                                                                         |                                                                                |                                                         |        |        |         |         |         |          |         |        |        
|Net decrease in cash and cash equivalents      |                                                                                                                                                                                         |                                                                                | (4,020                                                  | )      |        |         | (76,734 | )       |          |         | (1,336 | )      
|Cash and cash equivalents, beginning of period |                                                                                                                                                                                         |                                                                                | 21,849                                                  |        |        |         | 98,583  |         |          |         | 99,919 |        
|                                               |                                                                                                                                                                                         |                                                                                |                                                         |        |        |         |         |         |          |         |        |        
|Cash and cash equivalents, end of period       |                                                                                                                                                                                         | $                                                                              | 17,829                                                  |        |        | $       | 21,849  |         |          | $       | 98,583 |        
|                                               |                                                                                                                                                                                         |                                                                                |                                                         |        |        |         |         |         |          |         |        |        
|Supplemental Cash Flow Information:            |                                                                                                                                                                                         |                                                                                |                                                         |        |        |         |         |         |          |         |        |        
|                                               | Cash paid during the period for:                                                                                                                                                        |                                                                                |                                                         |        |        |         |         |         |          |         |        |         |        
|                                               |                                                                                                                                                                                         | Interest                                                                       |                                                         | $      | 60,360 |         |         | $       | 63,089   |         |        | $       | 85,241  |       
|                                               |                                                                                                                                                                                         | Income taxes, net                                                              |                                                         |        | 16,050 |         |         |         | 14,900   |         |        |         | 10,500  |       
|                                               | Non-cash investing and financing activities:                                                                                                                                            |                                                                                |                                                         |        |        |         |         |         |          |         |        |         |        
|                                               |                                                                                                                                                                                         | Tax benefit for exercised stock options                                        |                                                         |        | 1,430  |         |         |         | 729      |         |        |         | 1,971   |       
|                                               |                                                                                                                                                                                         | Retirement of assets                                                           |                                                         |        | 156    |         |         |         |          |         |        |         |         |       
|                                               |                                                                                                                                                                                         | Transfer of loan to REO                                                        |                                                         |        | 2,248  |         |         |         |          |         |        |         |         |       
|                                               |                                                                                                                                                                                         | Reclassification of reserves for unfunded
    commitments to other liabilities |                                                         |        | 1,393  |         |         |         |          |         |        |         |         |       
|                                               | 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  |          |         |        |         |        

See accompanying Notes to Consolidated Financial
Statements

A-7



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##### 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 with 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, as well as
loans for the construction of such properties. 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
the fair value of investment securities, impairment of
intangibles, if required, and contingent liabilities related to
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,
net of tax, in other comprehensive income, as part of
stockholders equity.

The Bank 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

A-8



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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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. Management
monitors the Banks investment activities to ensure that
they are consistent with the Bank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 3 to 6 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, 2003, 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 Statements 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

A-9



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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 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 (TDR) are
typically impaired and analyzed individually for SVAs. For
collateral dependent loans, impairment is typically 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 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 our key
lending areas, the effects of which may not be 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 an additional amount of up to
approximately 5% of the total GVA 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 identified 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 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) revenue 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

A-10



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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.



| |                              
| | -----------------------------
| | 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                        |  | 10 - 20 years                      
|Computers and related software   |  | 3 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 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. There were no changes
in the carrying amount of goodwill during 2003. The
Companys intangible assets, other than goodwill, are
amortized over their estimated useful lives.

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.



| |               
| | --------------
| | 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 recognition of the call premium and
unamortized prepaid offering costs of $1.9 million, or
$0.09 per diluted share during the fourth quarter, and
$2.1 million, or $0.10 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

A-11



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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 stock as a deduction from 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 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 adopted this
statement as of January 1, 2003. Adoption of this statement
did not have a significant impact on the financial position,
results of operations, or cash flows of the Company, but it did
have an impact on the presentation of the results of operations.

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

A-12



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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 periods ending after
December 15, 2002. Adoption of such interpretation did not
have a material impact on the results of operations, financial
position or cash flows.

In May 2003, the FASB issued Statement of
Financial Accounting Standards (SFAS) No. 150,
Accounting for Certain Instruments with Characteristics of
Both Liabilities and Equity, which establishes standards
for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity.
SFAS No. 150 requires that an issuer classify a
financial instrument that is within its scope, which may have
previously been reported as equity, as a liability (or an asset
in some circumstances). This statement is effective for
financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003,
except for mandatory redeemable financial instruments of
nonpublic companies. The adoption of SFAS No. 150 did
not have a significant impact on the financial statements of the
Company.

In December 2003, the FASB issued Statement of
Financial Accounting Standard No. 132 (Revised 2003),
Employers Disclosures about Pensions and Other
Postretirement Benefits (SFAS 132R), that
replaces existing FASB disclosure requirements for pensions and
other postretirement benefit plans. SFAS 132R requires
companies to provide more complete details about their plan
assets, benefit obligations, cash flows, benefit costs and other
relevant information. In addition to expanded annual
disclosures, the standard improves information available to
investors in interim financial statements. SFAS 132R is
effective for fiscal years ending after December 15, 2003,
and for quarters beginning after December 15, 2003. The
adoption of SFAS 132R did not have a material impact on the
Companys financial statements. See
Note 11  Stockholders
Equity  Employee Benefit Plans.

In January 2003, the Financial Accounting
Standards Board (FASB) issued FASB Interpretation
No. (FIN) 46, Consolidation of
Variable Interest Entities, an interpretation of
Accounting Research Bulletin (ARB) No. 51. In
December 2003, the FASB revised FIN 46 and codified certain
FASB Staff Positions previously issued for FIN 46
(FIN 46R). The objective of FIN 46 as
originally issued, and as revised by FIN 46R, was to
improve financial reporting by companies involved with variable
interest entities. Prior to the effectiveness of FIN 46, a
company generally included another entity in its consolidated
financial statements only if it controlled the entity through
voting interests. FIN 46 changed that standard by requiring
a variable interest entity to be consolidated by a company if
that company was subject to a majority of the risk of loss from
the variable interest entitys activities or entitled to
receive a majority of the entitys residual returns or
both. The consolidation requirements of FIN 46 applied
immediately to variable interest entities created after
January 31, 2003. The consolidation requirements will apply
to entities established prior to January 31, 2003 in the
first fiscal year or interim period beginning after
December 15, 2003. The provisions of FIN 46R are
required to be adopted by the Company prior to the first
reporting period that ends after

A-13



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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

March 15, 2004. The adoption of FIN 46
did not have, and the adoption of FIN 46R is not expected
to have, a significant impact on the financial position, results
of operations, or cash flows of the Company.

In December 2003, the Accounting Standards
Executive Committee of the AICPA issued Statement of Position
No. 03-3 (SOP 03-3), Accounting for Certain
Loans or Debt Securities Acquired in a Transfer. SOP 03-3
addresses the accounting for differences between the contractual
cash flows and the cash flows expected to be collected from
purchased loans or debt securities if those differences are
attributable, in part, to credit quality. SOP 03-3 requires
purchased loans and debt securities to be recorded initially at
fair value based on the present value of the cash flows expected
to be collected with no carryover of any valuation allowance
previously recognized by the seller. Interest income should be
recognized based on the effective yield from the cash flows
expected to be collected. To the extent that the purchased loans
or debt securities experience subsequent deterioration in credit
quality, a valuation allowance would be established for any
additional cash flows that are not expected to be received.
However, if more cash flows subsequently are expected to be
received than originally estimated, the effective yield would be
adjusted on a prospective basis. SOP 03-3 will be effective for
loans and debt securities acquired after December 31, 2004.
Although the Company anticipates that the implementation of SOP
03-3 will require significant loan system and operational
changes to track credit related losses on loans purchased
starting in 2005, it is not expected to have a significant
effect on the Consolidated Financial Statements.



| |                          
| | -------------------------
| | Three-For-Two Stock Split

On September 25, 2003, the Company announced
that its Board of Directors approved a 3-for-2 stock split to be
effected in the form of a 50% stock dividend. The additional
shares were distributed to shareholders of record as of
October 6, 2003 on October 27, 2003.

The effect of the stock split has been recognized
and reflected in all share and per share amounts for all periods
presented.



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

The Company presents earnings per share
(EPS) under 2 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, 2003, 2002 and 2001. 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

A-14



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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

outstanding at each measurement date. See
Note 11  Stockholders Equity
and Note 12  Capital and Debt
Offerings.

|                                      |                         |                          |        |        |   |      |        |        |   |   |        |        |  
|------------------------------------- | ----------------------- | ------------------------ | ------ | ------ | - | ---- | ------ | ------ | - | - | ------ | ------ | -
|                                      |                         |                         
|                                      |                         | Years Ended December 31,
|                                      |                         |                         
|                                      |                         | 2003                     |        | 2002   |   | 2001
|(In thousands, except per share data) |                         |                          |        |        |   |     
|Weighted average shares outstanding:  |                         |                          |        |        |   |      |        |        |   |   |        |       
|                                      | Basic                   |                          |        | 11,527 |   |      |        | 9,573  |   |   |        | 7,937  |  
|                                      | Warrants                |                          |        | 754    |   |      |        | 2,142  |   |   |        | 3,513  |  
|                                      | Options(1)              |                          |        | 955    |   |      |        | 959    |   |   |        | 881    |  
|                                      | Less: Treasury stock(2) |                          |        | (718   | ) |      |        | (837   | ) |   |        | (983   | )
|                                      |                         |                          |        |        |   |      |        |        |   |   |        |       
|                                      | Diluted                 |                          |        | 12,518 |   |      |        | 11,837 |   |   |        | 11,348 |  
|                                      |                         |                          |        |        |   |      |        |        |   |   |        |       
|Net income                            |                         | $                        | 28,508 |        |   | $    | 22,699 |        |   | $ | 16,833 |       
|                                      |                         |                          |        |        |   |      |        |        |   |   |        |       
|Basic earnings per share              |                         | $                        | 2.47   |        |   | $    | 2.37   |        |   | $ | 2.12   |       
|Diluted earnings per share            |                         | $                        | 2.28   |        |   | $    | 1.92   |        |   | $ | 1.48   |       



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Excludes 56,958, 98,781 and 18,125 options
    outstanding for the year ended December 31, 2003, 2002 and
    2001, 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, including the amount of tax benefits associated
    with the exercise of nonqualified options, thus increasing
    treasury stock. In this calculation, treasury stock was assumed
    repurchased at the average closing stock price for the
    respective period.



| |                        
| | -----------------------
| | Book Value Calculations

|                                      |                         |                 |       |        |   |      |       |        |   |   |       |        |  
|------------------------------------- | ----------------------- | --------------- | ----- | ------ | - | ---- | ----- | ------ | - | - | ----- | ------ | -
|                                      |                         |                
|                                      |                         | At December 31,
|                                      |                         |                
|                                      |                         | 2003            |       | 2002   |   | 2001
|(In thousands, except per share data) |                         |                 |       |        |   |     
|Period-end shares outstanding:        |                         |                 |       |        |   |      |       |        |   |   |       |       
|                                      | Basic                   |                 |       | 11,729 |   |      |       | 11,082 |   |   |       | 8,040  |  
|                                      | Warrants                |                 |       | 547    |   |      |       | 1,343  |   |   |       | 3,269  |  
|                                      | Options(1)              |                 |       | 911    |   |      |       | 899    |   |   |       | 954    |  
|                                      | Less: Treasury Stock(2) |                 |       | (630   | ) |      |       | (719   | ) |   |       | (969   | )
|                                      |                         |                 |       |        |   |      |       |        |   |   |       |       
|                                      | Diluted                 |                 |       | 12,557 |   |      |       | 12,605 |   |   |       | 11,294 |  
|                                      |                         |                 |       |        |   |      |       |        |   |   |       |       
|Basic book value per share            |                         | $               | 15.80 |        |   | $    | 14.71 |        |   | $ | 14.98 |       
|                                      |                         |                 |       |        |   |      |       |        |   |   |       |       



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | There were no options outstanding at
    December 31, 2003 that exceeded the average market price at
    period-end. There were 247,875 and 22,500 options outstanding at
    December 31, 2002 and 2001, 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, including the amount of tax benefits associated
    with the exercise of nonqualified options, thus increasing
    treasury stock. In this calculation, treasury stock was assumed
    repurchased at the average closing stock price for the
    respective period.

A-15



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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                   
| | ------------------
| | 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 proforma 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 proforma disclosure requirements.

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 2003, 2002 and 2001,
consistent with the provisions of SFAS No. 123, the
Companys net income and net earnings per share would have
been reduced to the proforma amounts as follows.

|                                                                                     |                                                                                                                                     |                          |       |        |   |      |      |        |   |   |      |        |  
|------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------- | ------------------------ | ----- | ------ | - | ---- | ---- | ------ | - | - | ---- | ------ | -
|                                                                                     |                                                                                                                                     |                         
|                                                                                     |                                                                                                                                     | Years Ended December 31,
|                                                                                     |                                                                                                                                     |                         
|                                                                                     |                                                                                                                                     | 2003                     |       | 2002   |   | 2001
|(Dollars in thousands, except per share data)                                        |                                                                                                                                     |                          |       |        |   |     
|Net income:                                                                          |                                                                                                                                     |                          |       |        |   |      |      |        |   |   |      |       
|                                                                                     | As reported                                                                                                                         |                          | $     | 28,508 |   |      | $    | 22,699 |   |   | $    | 16,833 |  
|                                                                                     | Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of tax |                          |       | (1,126 | ) |      |      | (2,037 | ) |   |      | (246   | )
|                                                                                     |                                                                                                                                     |                          |       |        |   |      |      |        |   |   |      |       
|                                                                                     | Proforma                                                                                                                            |                          | $     | 27,382 |   |      | $    | 20,662 |   |   | $    | 16,587 |  
|Basic earnings per share:                                                            |                                                                                                                                     |                          |       |        |   |      |      |        |   |   |      |       
|                                                                                     | As reported                                                                                                                         |                          | $     | 2.47   |   |      | $    | 2.37   |   |   | $    | 2.12   |  
|                                                                                     | Proforma                                                                                                                            |                          | $     | 2.38   |   |      | $    | 2.16   |   |   | $    | 2.09   |  
|Diluted earnings per share:                                                          |                                                                                                                                     |                          |       |        |   |      |      |        |   |   |      |       
|                                                                                     | As reported                                                                                                                         |                          | $     | 2.28   |   |      | $    | 1.92   |   |   | $    | 1.48   |  
|                                                                                     | Proforma                                                                                                                            |                          | $     | 2.19   |   |      | $    | 1.75   |   |   | $    | 1.46   |  
|Weighted average fair value of options granted
    during the year, at date of grant |                                                                                                                                     | $                        | 12.81 |        |   | $    | 8.69 |        |   | $ | 4.23 |       

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,
|                        |  |                         
|                        |  | 2003                     |  | 2002                |  | 2001               
|                        |  |                          |  |                     |  |                    
|Dividend yield          |  | n/a                      |  | n/a                 |  | n/a                
|Expected life           |  | 6 months to 5 years      |  | 6 months to 5 years |  | 6 months to 5 years
|Expected volatility     |  | 60.48%                   |  | 68.00%              |  | 61.12%             
|Risk-free interest rate |  | 3.13%                    |  | 1.76%               |  | 3.38%              

Note 2  Cash and Cash
Equivalents

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

|                        |  |              |        |      |  |   |        | 
|----------------------- |  | ------------ | ------ | ---- |  | - | ------ | 
|                        |  |             
|                        |  | December 31,
|                        |  |             
|                        |  | 2003         |        | 2002
|(Dollars in thousands)  |  |              |        |     
|Cash and due from banks |  | $            | 17,829 |      |  | $ | 21,849 | 

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.

|                        |                                           |             |   |            |         |            |   |       |       |  |   |       |       |  |   |         |         | 
|----------------------- | ----------------------------------------- | ----------- | - | ---------- | ------- | ---------- | - | ----- | ----- |  | - | ----- | ----- |  | - | ------- | ------- | 
|                        |                                           |             |   | Gross      |         | Gross      |   |      
|                        |                                           | Net Balance |   | Unrealized |         | Unrealized |   | Fair 
|                        |                                           | at Cost     |   | Gains      |         | Losses     |   | Value
|(Dollars in thousands)  |                                           |             |   |            |         |            |   |      
|As of December 31, 2003 |                                           |             |   |            |         |            |   |       |       |  |   |       |       |  |   |        
|                        | Investment securities available-for-sale: |             |   |            |         |            |   |       |       |  |   |       |       |  |   |         |        
|                        | Mortgage-backed securities                |             | $ | 305,491    |         |            | $ | 1,169 |       |  | $ | 2,354 |       |  | $ | 304,306 |        
|                        | Collateralized mortgage obligations (CMO) |             |   | 77,384     |         |            |   | 389   |       |  |   | 792   |       |  |   | 76,981  |        
|                        |                                           |             |   |            |         |            |   |       |       |  |   |       |       |  |   |        
|                        |                                           | Total       |   | $          | 382,875 |            |   | $     | 1,558 |  |   | $     | 3,146 |  |   | $       | 381,287 | 
|                        |                                           |             |   |            |         |            |   |       |       |  |   |       |       |  |   |        
|As of December 31, 2002 |                                           |             |   |            |         |            |   |       |       |  |   |       |       |  |   |        
|                        | Investment securities available-for-sale: |             |   |            |         |            |   |       |       |  |   |       |       |  |   |         |        
|                        | 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 following table reflects the Companys
gross unrealized losses and fair value of available-for-sale
investment securities, aggregated by investment category and the
length of time that individual securities have been in a
continuous unrealized loss position, at December 31, 2003.

|                                          |                                           |                     |   |                   |         |       |   |            |       |       |   |            |   |  |   |   |   |  |   |         |         |  |   |       |       | 
|----------------------------------------- | ----------------------------------------- | ------------------- | - | ----------------- | ------- | ----- | - | ---------- | ----- | ----- | - | ---------- | - |  | - | - | - |  | - | ------- | ------- |  | - | ----- | ----- | 
|                                          |                                           |                     |   |                   |         |      
|                                          |                                           | Less Than 12 Months |   | 12 Months or More |         | Total
|                                          |                                           |                     |   |                   |         |      
|                                          |                                           | Fair                |   | Unrealized        |         | Fair  |   | Unrealized |       | Fair  |   | Unrealized
|                                          |                                           | Value               |   | Losses            |         | Value |   | Losses     |       | Value |   | Losses    
|(Dollars in thousands)                    |                                           |                     |   |                   |         |       |   |            |       |       |   |           
|Investment securities available-for-sale: |                                           |                     |   |                   |         |       |   |            |       |       |   |            |   |  |   |   |   |  |   |         |         |  |   |      
|                                          | Mortgage-backed securities                |                     | $ | 196,475           |         |       | $ | 2,354      |       |       | $ |           |   |  | $ |  |   |  | $ | 196,475 |         |  | $ | 2,354 |      
|                                          | Collateralized mortgage obligations (CMO) |                     |   | 39,729            |         |       |   | 792        |       |       |   |           |   |  |   |  |   |  |   | 39,729  |         |  |   | 792   |      
|                                          |                                           |                     |   |                   |         |       |   |            |       |       |   |            |   |  |   |   |   |  |   |         |         |  |   |      
|                                          |                                           | Total               |   | $                 | 236,204 |       |   | $          | 3,146 |       |   | $          |  |  |   | $ |  |  |   | $       | 236,204 |  |   | $     | 3,146 | 
|                                          |                                           |                     |   |                   |         |       |   |            |       |       |   |            |   |  |   |   |   |  |   |         |         |  |   |      

The unrealized positions on our mortgage-backed
securities and collateralized mortgage obligations are purely a
function of the volatility with interest rates in 2003, as they
have no credit risk in that they are all rated AAA by
Standard & Poors, redeem at maturity or when called at
par and have the implicit guarantee of the United States
Treasury.

A-17



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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, 2003.

|                                          |                                |                    |   |         |         |                  |   |         |         |  |  |      |      |  
|----------------------------------------- | ------------------------------ | ------------------ | - | ------- | ------- | ---------------- | - | ------- | ------- |  |  | ---- | ---- | -
|                                          |                                |                   
|                                          |                                | Available-for-Sale
|                                          |                                |                   
|                                          |                                | Net Balance        |   | Fair    |         | Weighted Average
|                                          |                                | at Cost            |   | Value   |         | Yield(1)        
|(Dollars in thousands)                    |                                |                    |   |         |         |                 
|Investment securities                     |                                |                    |   |         |         |                  |   |         |         |  |  |     
|Investment securities available-for-sale: |                                |                    |   |         |         |                  |   |         |         |  |  |     
|                                          | After 5 years through 10 years |                    | $ | 107,533 |         |                  | $ | 107,687 |         |  |  | 3.73 | %   
|                                          | Over 10 years                  |                    |   | 275,342 |         |                  |   | 273,600 |         |  |  | 3.78 | %   
|                                          |                                |                    |   |         |         |                  |   |         |         |  |  |     
|                                          |                                | Total              |   | $       | 382,875 |                  |   | $       | 381,287 |  |  |      | 3.77 | %
|                                          |                                |                    |   |         |         |                  |   |         |         |  |  |     



---



|    |                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Weighted average yield at December 31, 2003
    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
investment securities during 2003 and 2002 were
$124.0 million and $39.4 million, respectively. The
Company realized a net gain of $101.7 thousand on the sale of
various investment securities ($419.3 thousand in gains and
$317.6 thousand in realized losses) for 2003, compared with a
net gain of $135.5 thousand ($13 thousand in realized
losses) for 2002. The Company held no investment securities
during 2001.

Fifty-one securities with net balances at cost
and fair value of $277.6 million and $275.9 million,
respectively, at December 31, 2003 were pledged to secure
FHLB advances of $274.3 million. At December 31, 2002,
2 securities with net balances at cost and fair value of
$4.9 million were pledged to secure a FHLB advance of
$5.0 million.

A-18



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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 4  Loans
Receivable

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

|                            |                              |              |                           |          |         |           |           |         |        |           | 
|--------------------------- | ---------------------------- | ------------ | ------------------------- | -------- | ------- | --------- | --------- | ------- | ------ | --------- | 
|                            |                              |             
|                            |                              | December 31,
|                            |                              |             
|                            |                              | 2003         |                           | 2002    
|(Dollars in thousands)      |                              |              |                           |         
|Single family residential   |                              | $            | 867,489                   |          |         | $         | 854,220   |        
|Income property:            |                              |              |                           |          |         |           |           |        
|                            | Multi-family                 |              |                           | 764,421  |         |           |           | 690,137 |       
|                            | Commercial                   |              |                           | 315,951  |         |           |           | 391,538 |       
|                            | Development:(1)              |              |                           |          |         |           |           |         |       
|                            |                              | Multi-family |                           |          | 140,143 |           |           |         | 85,655 |          
|                            |                              | Commercial   |                           |          | 20,442  |           |           |         | 49,314 |          
|Single family construction: |                              |              |                           |          |         |           |           |        
|                            | Single family residential(2) |              |                           | 153,080  |         |           |           | 114,637 |       
|Land(3)                     |                              |              | 44,356                    |          |         |           | 32,612    |        
|Other                       |                              |              | 11,009                    |          |         |           | 10,978    |        
|                            |                              |              |                           |          |         |           |           |        
|                            |                              |              | Gross loans receivable(4) |          |         | 2,316,891 |           |         |        | 2,229,091 | 
|Less:                       |                              |              |                           |          |         |           |           |        
|                            | Undisbursed funds            |              |                           | (142,841 | )       |           |           | (90,596 | )     
|                            | Deferred costs, net          |              |                           | 13,602   |         |           |           | 11,069  |       
|                            | Allowance for credit losses  |              |                           | (33,538  | )       |           |           | (35,309 | )     
|                            |                              |              |                           |          |         |           |           |        
|Net loans receivable        |                              | $            | 2,154,114                 |          |         | $         | 2,114,255 |        
|                            |                              |              |                           |          |         |           |           |        



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 $1.5 million and
    $0.8 million of the net premium associated with the loans
    acquired from First Fidelity for the years ended
    December 31, 2003 and December 31, 2002, respectively.

A-19



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##### 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, 2003.

|                       |                    |                        |   |                 |         |       |   |           |           |  |   |           |           | 
|---------------------- | ------------------ | ---------------------- | - | --------------- | ------- | ----- | - | --------- | --------- |  | - | --------- | --------- | 
|                       |                    |                       
|                       |                    | Principal Balance     
|                       |                    |                       
|                       |                    | Fixed Rate             |   | Adjustable Rate |         | Total
|(Dollars in thousands) |                    |                        |   |                 |         |      
|Interval               |                    |                        |   |                 |         |       |   |           |           |  |   |          
|                       | <3 months          |                        | $ | 3,603           |         |       | $ | 1,152,896 |           |  | $ | 1,156,499 |          
|                       | >3 to 6 months     |                        |   | 8,065           |         |       |   | 524,274   |           |  |   | 532,339   |          
|                       | >6 to 12 months    |                        |   | 13,405          |         |       |   | 62,805    |           |  |   | 76,210    |          
|                       | >1 to 2 years      |                        |   | 9,844           |         |       |   | 62,701    |           |  |   | 72,545    |          
|                       | >2 to 5 years      |                        |   | 24,690          |         |       |   | 359,761   |           |  |   | 384,451   |          
|                       | >5 to 10 years     |                        |   | 28,816          |         |       |   | 12,468    |           |  |   | 41,284    |          
|                       | >10 to 20 years    |                        |   | 12,713          |         |       |   | 8,377     |           |  |   | 21,090    |          
|                       | More than 20 years |                        |   | 32,473          |         |       |   |          |           |  |   | 32,473    |          
|                       |                    |                        |   |                 |         |       |   |           |           |  |   |          
|                       |                    | Gross loans receivable |   | $               | 133,609 |       |   | $         | 2,183,282 |  |   | $         | 2,316,891 | 
|                       |                    |                        |   |                 |         |       |   |           |           |  |   |          

The contractual weighted average interest rate on
loans at December 31, 2003 and 2002 was 5.74% and 6.82%,
respectively.

The table below summarizes nonaccrual loans for
the dates indicated.

|                          |              |              |       |      |       |   |       |       |       | 
|------------------------- | ------------ | ------------ | ----- | ---- | ----- | - | ----- | ----- | ----- | 
|                          |              |             
|                          |              | December 31,
|                          |              |             
|                          |              | 2003         |       | 2002
|(Dollars in thousands)    |              |              |       |     
|Single family residential |              | $            | 8,879 |      |       | $ | 2,262 |      
|Income property:          |              |              |       |      |       |   |       |      
|                          | Multi-family |              |       |     |       |   |       | 798   |      
|                          | Commercial   |              |       |     |       |   |       | 2,761 |      
|                          | Development  |              |       |     |       |   |       | 1,697 |      
|Land                      |              |              |      |      |       |   | 153   |      
|Other                     |              |              | 6     |      |       |   | 4     |      
|                          |              |              |       |      |       |   |       |      
|                          |              | Total(1)     |       | $    | 8,885 |   |       | $     | 7,675 | 
|                          |              |              |       |      |       |   |       |      



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | At December 31, 2003 and 2002, nonaccrual
    loans included 3 loans totaling $3.6 million, and 3 loans
    totaling $0.6 million, respectively, in bankruptcy. There
    were no troubled debt restructured loans (TDRs) on
    nonaccrual status at December 31, 2003 and
    December 31, 2002. Excludes $2.3 million and
    $2.5 million of TDRs that were paying in accordance with
    their modified terms at December 31, 2003 and 2002,
    respectively.

The interest income recognized on loans that were
on nonaccrual status at December 31, 2003, 2002 and 2001,
was $0.2 million, $0.1 million and $0.2 million,
respectively. If these loans had been performing for the entire
year, the income recognized would have been $0.7 million,
$0.4 million and $1.8 million for 2003, 2002 and 2001,
respectively.

The table below summarizes the amounts of
interest income that would have been recognized on TDRs had
borrowers paid at the original loan interest rate throughout
each of the years below, the interest income that would have
been recognized based upon the modified interest rate, and the
interest income that was included in the consolidated statements
of 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

A-20



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, 2003: |                 |           |   |          |  |          |   |            |  |  |   |     |  |  |   |    
|                              | Permanent loans |           | $ | 2,310    |  |          | $ | 250        |  |  | $ | 148 |  |  | $ | 148 | 
|                              |                 |           |   |          |  |          |   |            |  |  |   |     |  |  |   |    
|Year ended December 31, 2002: |                 |           |   |          |  |          |   |            |  |  |   |     |  |  |   |    
|                              | Permanent loans |           | $ | 2,468    |  |          | $ | 239        |  |  | $ | 153 |  |  | $ | 153 | 
|                              |                 |           |   |          |  |          |   |            |  |  |   |     |  |  |   |    
|Year ended December 31, 2001: |                 |           |   |          |  |          |   |            |  |  |   |     |  |  |   |    
|                              | Permanent loans |           | $ | 4,702    |  |          | $ | 469        |  |  | $ | 381 |  |  | $ | 381 | 
|                              |                 |           |   |          |  |          |   |            |  |  |   |     |  |  |   |    

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

|                           |                                 |                         |        |        |   |      |        |        |   |   |        |        |  
|-------------------------- | ------------------------------- | ----------------------- | ------ | ------ | - | ---- | ------ | ------ | - | - | ------ | ------ | -
|                           |                                 |                        
|                           |                                 | Year Ended December 31,
|                           |                                 |                        
|                           |                                 | 2003                    |        | 2002   |   | 2001
|(Dollars in thousands)     |                                 |                         |        |        |   |     
|Balance, beginning of year |                                 | $                       | 35,309 |        |   | $    | 30,602 |        |   | $ | 29,450 |       
|                           | Acquisition of FFIL Reserve     |                         |        |       |   |      |        | 7,189  |   |   |        |       |  
|                           | Provision for credit losses     |                         |        | 500    |   |      |        | 870    |   |   |        | 3,400  |  
|                           | Reserve for loan commitments(1) |                         |        | (1,393 | ) |      |        |       |   |   |        |       |  
|                           | Charge-offs                     |                         |        | (934   | ) |      |        | (3,387 | ) |   |        | (2,358 | )
|                           | Recoveries                      |                         |        | 56     |   |      |        | 35     |   |   |        | 110    |  
|                           |                                 |                         |        |        |   |      |        |        |   |   |        |       
|Balance, end of year       |                                 | $                       | 33,538 |        |   | $    | 35,309 |        |   | $ | 30,602 |       
|                           |                                 |                         |        |        |   |      |        |        |   |   |        |       



---



|    |                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------
|(1) | During 2003 $1.4 million in reserves for
    unfunded commitments were reclassified to other liabilities.

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, 2003.

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,
|                                                         |                                        |                                  
|                                                         |                                        | 2003                              |        | 2002  |  | 2001
|(Dollars in thousands)                                   |                                        |                                   |        |       |  |     
|Impaired loans with specific valuation allowances        |                                        | $                                 |       |       |  | $    | 2,165  |       |  | $ | 18,554 |       
|Impaired loans without specific valuation
    allowances |                                        |                                   | 11,195 |       |  |      | 7,814  |       |  |   | 5,679  |       
|Total allowance allocated to impaired loans              |                                        |                                   | (1,551 | )     |  |      | (1,720 | )     |  |   | (3,870 | )     
|                                                         |                                        |                                   |        |       |  |      |        |       |  |   |        |       
|                                                         | Total impaired loans, net of allowance |                                   | $      | 9,644 |  |      | $      | 8,259 |  |   | $      | 20,363 | 
|                                                         |                                        |                                   |        |       |  |      |        |       |  |   |        |       
|Average investment in impaired loans                     |                                        | $                                 | 9,424  |       |  | $    | 12,452 |       |  | $ | 31,300 |       
|Interest income recognized on impaired loans(1)          |                                        | $                                 | 313    |       |  | $    | 384    |       |  | $ | 1,030  |       



---



|    |                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------
|(1) | Income recorded utilizing the cash basis method
    of accounting was zero for 2003, 2002 and 2001.

There were 9 loans amounting to
$8.4 million that were deemed impaired in 2003, which
consisted primarily of 4 single family residential loans
totaling $7.5 million or 89.7% of impaired loans. In
January 2004,

A-21



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the Bank foreclosed on 1 of these SFR loans,
resulting in an REO in the amount of $1.9 million and a
charge-off of $0.1 million which was previously reserved as
a specific allowance.

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

|                                          |               |              |        |       |  |   |        |       | 
|----------------------------------------- | ------------- | ------------ | ------ | ----- |  | - | ------ | ----- | 
|                                          |               |             
|                                          |               | December 31,
|                                          |               |             
|                                          |               | 2003         |        | 2002 
|(Dollars in thousands)                    |               |              |        |      
|Total impaired loans                      |               | $            | 11,195 |       |  | $ | 9,979  |      
|Impaired loans 90 days or more delinquent |               |              | (4,892 | )     |  |   | (5,052 | )    
|                                          |               |              |        |       |  |   |        |      
|                                          |               |              | 6,303  |       |  |   | 4,927  |      
|Impaired loans which are not TDRs         |               |              | (3,993 | )     |  |   | (2,459 | )    
|                                          |               |              |        |       |  |   |        |      
|                                          | Total TDRs(1) |              | $      | 2,310 |  |   | $      | 2,468 | 
|                                          |               |              |        |       |  |   |        |      



---



|    |                                                                              
|--- | -----------------------------------------------------------------------------
|(1) | There were no classified TDRs at
    December 31, 2003 and December 31, 2002.



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

At December 31, 2003, the Banks
loans-to-one-borrower limit was $36.0 million based upon
the 15% of unimpaired capital and surplus measurement. At
December 31, 2003, the Banks 2 largest lending
relationships had outstanding commitments of $20.9 million,
which consisted of 10 loans secured by multi-family real estate,
and $21.7 million, which consisted of 6 loans with
$20.9 million and $0.8 million secured by income
property development and multi-family real estate, respectively.
These loans were performing in accordance with their terms.

Approximately 97.2% and 96.7% of the Banks
loan portfolio were concentrated in Southern California at
December 31, 2003 and 2002, respectively.

Note 5  Real Estate
Owned

Real estate acquired in satisfaction of loans is
transferred to REO at the lower of the carrying value or the
estimated fair value, less the estimated costs to sell the
property. The difference between the fair value of the real
estate collateral and the loan balance at the time of transfer
is recorded as a charge-off, if fair value is lower. Any
subsequent declines in the fair value of the REO after the date
of transfer are recorded through a write-down of the asset. The
Company held no REO properties at December 31, 2003 and
2002.

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

|                                          |                                            |              |     |      |   |      |    |     |   |   |     |     |  
|----------------------------------------- | ------------------------------------------ | ------------ | --- | ---- | - | ---- | -- | --- | - | - | --- | --- | -
|                                          |                                            |             
|                                          |                                            | Years Ended 
|                                          |                                            | December 31,
|                                          |                                            |             
|                                          |                                            | 2003         |     | 2002 |   | 2001
|(Dollars in thousands)                    |                                            |              |     |      |   |     
|(Loss)/income associated with REO:        |                                            |              |     |      |   |      |    |     |   |   |     |    
|                                          | Repairs, maintenance, renovation and other |              | $   | (51  | ) |      | $  | (21 | ) |   | $   | (32 | )
|                                          | Net (loss)/income from sales of REO        |              |     | (6   | ) |      |    | 87  |   |   |     | 106 |  
|                                          | Property operations, net                   |              |     | 6    |   |      |    | 5   |   |   |     | 131 |  
|                                          |                                            |              |     |      |   |      |    |     |   |   |     |    
|(Loss)/income from real estate owned, net |                                            | $            | (51 | )    |   | $    | 71 |     |   | $ | 205 |    
|                                          |                                            |              |     |      |   |      |    |     |   |   |     |    

A-22



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|         |                                            
|-------- | -------------------------------------------
|Note 6  | Office Property and Equipment  At
    Cost

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

|                            |                                           |              |       |         |        |   |       |         |        | 
|--------------------------- | ----------------------------------------- | ------------ | ----- | ------- | ------ | - | ----- | ------- | ------ | 
|                            |                                           |             
|                            |                                           | December 31,
|                            |                                           |             
|                            |                                           | 2003         |       | 2002   
|(Dollars in thousands)      |                                           |              |       |        
|Office buildings            |                                           | $            | 1,210 |         |        | $ | 1,188 |        
|Furniture and equipment     |                                           |              | 8,461 |         |        |   | 7,507 |        
|Computer hardware/ software |                                           |              | 5,089 |         |        |   | 5,273 |        
|Leasehold improvements      |                                           |              | 4,740 |         |        |   | 4,573 |        
|                            |                                           |              |       |         |        |   |       |        
|                            |                                           | Total        |       |         | 19,500 |   |       |         | 18,541 | 
|Less:                       |                                           |              |       |         |        |   |       |        
|                            | Accumulated depreciation and amortization |              |       | (14,395 | )      |   |       | (13,625 | )     
|                            |                                           |              |       |         |        |   |       |        
|                            |                                           |              | 5,105 |         |        |   | 4,916 |        
|Land                        |                                           |              | 190   |         |        |   | 190   |        
|                            |                                           |              |       |         |        |   |       |        
|                            |                                           | Net          |       | $       | 5,295  |   |       | $       | 5,106  | 
|                            |                                           |              |       |         |        |   |       |        

The Company recognized $1.9 million,
$1.4 million and $2.0 million of depreciation and
amortization expense related to office property and equipment
for the years ended December 31, 2003, 2002, and 2001,
respectively.



|         |                                                                   
|-------- | ------------------------------------------------------------------
|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 4 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. There were no changes
in the carrying amount of goodwill during 2003. The
Companys intangible assets, other than goodwill, are
amortized over their estimated useful lives.

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.

A-23



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes the Companys
intangible assets as of December 31, 2003.

|                                   |                         |                    |     |                          |  |   |     |     | 
|---------------------------------- | ----------------------- | ------------------ | --- | ------------------------ |  | - | --- | --- | 
|                                   |                         |                    |     | Accumulated Amortization
|                                   |                         | Gross              |     | for the Year            
|                                   |                         | Carrying Amount(1) |     | Ended December 31, 2003 
|(In thousands)                     |                         |                    |     |                         
|Intangible Assets:                 |                         |                    |     |                          |  |   |     |    
|Core deposit intangible  checking |                         | $                  | 876 |                          |  | $ | 268 |    
|Core deposit intangible  savings  |                         |                    | 648 |                          |  |   | 280 |    
|                                   |                         |                    |     |                          |  |   |     |    
|                                   | Total intangible assets |                    | $   | 1,524                    |  |   | $   | 548 | 
|                                   |                         |                    |     |                          |  |   |     |    



---



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

The Companys only intangible assets that
are currently being amortized are core deposit intangibles, with
$412 thousand and $136 thousand in amortization expense charged
to operating expense for the twelve months ended
December 31, 2003 and 2002, respectively.

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

|                    |  |              |     | 
|------------------- |  | ------------ | --- | 
|                    |  | Future      
|For the Years       |  | Amortization
|Ended December 31,  |  | Expense     
|                    |  |             
|                   
|(In thousands)     
|2004                |  | $            | 355 | 
|2005                |  |              | 216 | 
|2006                |  |              | 156 | 
|2007                |  |              | 72  | 
|2008 and thereafter |  |              | 177 | 

A-24



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|         |         
|-------- | --------
|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, 2003             |       | December 31, 2002
|                         |                              |                               |       |                  
|                         |                              | Balance(1)                    |       | Percent           |           | WAIR      |  | WARM  |       | Balance(1) |   | Percent |   | WAIR |   | WARM
|(Dollars in thousands)   |                              |                               |       |                   |           |           |  |       |       |            |   |         |   |      |   |     
|Transaction accounts:    |                              |                               |       |                   |           |           |  |       |       |            |   |         |   |      |   |      |  |   |   |         |           |           |  |       |       |        |   |      |   |      |   |   
|                         | Noninterest-bearing checking |                               | $     | 51,670            |           |           |  | 3.00  | %     |            |   |        |   |      |   |     |  |   | $ | 39,818  |           |           |  | 2.39  | %     |        |   |     |   |      |   |   | 
|                         | Check/ NOW                   |                               |       | 86,579            |           |           |  | 5.03  | %     |            |   | 0.65    | % |      |   |     |  |   |   | 77,648  |           |           |  | 4.67  | %     |        |   | 1.69 | % |      |   |   | 
|                         | Passbook                     |                               |       | 75,374            |           |           |  | 4.38  | %     |            |   | 1.07    | % |      |   |     |  |   |   | 64,662  |           |           |  | 3.89  | %     |        |   | 1.60 | % |      |   |   | 
|                         | Money Market                 |                               |       | 506,182           |           |           |  | 29.38 | %     |            |   | 1.88    | % |      |   |     |  |   |   | 455,218 |           |           |  | 27.38 | %     |        |   | 2.33 | % |      |   |   | 
|                         |                              |                               |       |                   |           |           |  |       |       |            |   |         |   |      |   |      |  |   |   |         |           |           |  |       |       |        |   |      |   |      |   |   
|                         |                              | Total transaction accounts    |       |                   | 719,805   |           |  |       | 41.79 | %          |   |         |   |      |   |      |  |   |   |         | 637,346   |           |  |       | 38.33 | %      |   |      |   |      |   |    |  |  
|                         |                              |                               |       |                   |           |           |  |       |       |            |   |         |   |      |   |      |  |   |   |         |           |           |  |       |       |        |   |      |   |      |   |   
|Certificates of deposit: |                              |                               |       |                   |           |           |  |       |       |            |   |         |   |      |   |      |  |   |   |         |           |           |  |       |       |        |   |      |   |      |   |   
|                         | 7 day maturities             |                               |       | 31,754            |           |           |  | 1.84  | %     |            |   | 1.10    | % |      |   |     |  |   |   | 30,793  |           |           |  | 1.85  | %     |        |   | 1.40 | % |      |   |   | 
|                         | Less than 6 months(2)        |                               |       | 144,208           |           |           |  | 8.37  | %     |            |   | 1.13    | % |      |   | 1    |  |   |   | 116,857 |           |           |  | 7.03  | %     |        |   | 1.45 | % |      |   | 2  | 
|                         | 6 months to 1 year(3)        |                               |       | 268,634           |           |           |  | 15.60 | %     |            |   | 1.51    | % |      |   | 3    |  |   |   | 240,570 |           |           |  | 14.47 | %     |        |   | 2.11 | % |      |   | 3  | 
|                         | 1 to 2 years                 |                               |       | 362,536           |           |           |  | 21.04 | %     |            |   | 2.06    | % |      |   | 8    |  |   |   | 426,270 |           |           |  | 25.63 | %     |        |   | 2.95 | % |      |   | 7  | 
|                         | More than 2 years            |                               |       | 195,627           |           |           |  | 11.36 | %     |            |   | 3.49    | % |      |   | 17   |  |   |   | 210,974 |           |           |  | 12.69 | %     |        |   | 4.29 | % |      |   | 19 | 
|                         |                              |                               |       |                   |           |           |  |       |       |            |   |         |   |      |   |      |  |   |   |         |           |           |  |       |       |        |   |      |   |      |   |   
|                         |                              | Total certificates of deposit |       |                   | 1,002,759 |           |  |       | 58.21 | %          |   |         |   |      |   |      |  |   |   |         | 1,025,464 |           |  |       | 61.67 | %      |   |      |   |      |   |    |  |  
|                         |                              |                               |       |                   |           |           |  |       |       |            |   |         |   |      |   |      |  |   |   |         |           |           |  |       |       |        |   |      |   |      |   |   
|                         |                              |                               | Total |                   | $         | 1,722,564 |  |       |       | 100.00     | % |         |   | 1.29 | % |      |  | 7 |   |         | $         | 1,662,810 |  |       |       | 100.00 | % |      |   | 2.51 | % |    |  | 8 | 
|                         |                              |                               |       |                   |           |           |  |       |       |            |   |         |   |      |   |      |  |   |   |         |           |           |  |       |       |        |   |      |   |      |   |   



---



|    |                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Deposits in excess of $100,000, excluding public
    funds, were 36.8% of total deposits at December 31, 2003,
    compared to 29.9% of total deposits at December 31, 2002.            
|   
|(2) | Includes 2 deposits, placed by the State of
    California with the Bank, totaling $110 million and 3 deposits
    totaling $95 million at December 31, 2003 and 2002,
    respectively.
|   
|(3) | Includes 3 deposits, placed by the State of
    California with the Bank, totaling $75 million and 2
    deposits totaling $55 million at December 31, 2003 and
    2002, respectively. 

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

|                           |       |                          |        |        |  |      |        |        |  |   |        |        | 
|-------------------------- | ----- | ------------------------ | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                           |       |                         
|                           |       | Years Ended December 31,
|                           |       |                         
|                           |       | 2003                     |        | 2002   |  | 2001
|(Dollars in thousands)     |       |                          |        |        |  |     
|Checking/NOW               |       | $                        | 851    |        |  | $    | 1,267  |        |  | $ | 1,246  |       
|Passbook                   |       |                          | 1,004  |        |  |      | 905    |        |  |   | 892    |       
|Money market               |       |                          | 9,629  |        |  |      | 10,077 |        |  |   | 8,442  |       
|Certificates of deposit(1) |       |                          | 24,068 |        |  |      | 24,506 |        |  |   | 49,442 |       
|                           |       |                          |        |        |  |      |        |        |  |   |        |       
|                           | Total |                          | $      | 35,552 |  |      | $      | 36,755 |  |   | $      | 60,022 | 
|                           |       |                          |        |        |  |      |        |        |  |   |        |       



---



|    |                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes accretion for the discount associated
    with the deposits assumed from First Fidelity of
    $1.6 million and $1.2 million for the years ended
    December 31, 2003 and 2002, respectively.

A-24



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, 2003
|                       |               |                                                         
|                       |               | Three                                                    |         | Over Three  |         | Over Six       |         |         
|                       |               | Months or                                                |         | through Six |         | through Twelve |         | Over One |         |      
|                       |               | Less                                                     |         | Months      |         | Months         |         | Year     |         | Total
|(Dollars in thousands) |               |                                                          |         |             |         |                |         |          |         |      
|Balances< $100,000     |               |                                                          |         |             |         |                |         |          |         |       |         |         |         |  |        |        |         |  |         |        
|                       | 4.00% or less |                                                          | $       | 193,124     |         |                | $       | 124,633  |         |       | $       | 157,682 |         |  | $      | 69,350 |         |  | $       | 544,789 |          
|                       | 4.01% - 5.00% |                                                          |         | 2,407       |         |                |         | 1,880    |         |       |         | 4,089   |         |  |        | 17,181 |         |  |         | 25,557  |          
|                       | 5.01% - 6.00% |                                                          |         | 826         |         |                |         | 2,072    |         |       |         | 445     |         |  |        | 550    |         |  |         | 3,893   |          
|                       | 6.01% - 7.00% |                                                          |         | 246         |         |                |         |          |         |       |         | 499     |         |  |        | 1,091  |         |  |         | 1,836   |          
|                       | 7.01% or more |                                                          |         |            |         |                |         |         |         |       |         |        |         |  |        |       |         |  |         |        |          
|                       |               |                                                          |         |             |         |                |         |          |         |       |         |         |         |  |        |        |         |  |         |        
|                       |               |                                                          | 196,603 |             |         |                | 128,585 |          |         |       | 162,715 |         |         |  | 88,172 |        |         |  | 576,075 |        
|Balances> $100,000     |               |                                                          |         |             |         |                |         |          |         |       |         |         |         |  |        |        |         |  |         |        
|                       | 4.00% or less |                                                          |         | 202,852     |         |                |         | 103,882  |         |       |         | 58,787  |         |  |        | 31,010 |         |  |         | 396,531 |          
|                       | 4.01% - 5.00% |                                                          |         | 3,064       |         |                |         | 1,030    |         |       |         | 3,002   |         |  |        | 18,952 |         |  |         | 26,048  |          
|                       | 5.01% - 6.00% |                                                          |         | 100         |         |                |         | 1,033    |         |       |         | 223     |         |  |        | 1,001  |         |  |         | 2,357   |          
|                       | 6.01% - 7.00% |                                                          |         | 696         |         |                |         |         |         |       |         | 229     |         |  |        | 823    |         |  |         | 1,748   |          
|                       | 7.01% or more |                                                          |         |            |         |                |         |         |         |       |         |        |         |  |        |       |         |  |         |        |          
|                       |               |                                                          |         |             |         |                |         |          |         |       |         |         |         |  |        |        |         |  |         |        
|                       |               |                                                          | 206,712 |             |         |                | 105,945 |          |         |       | 62,241  |         |         |  | 51,786 |        |         |  | 426,684 |        
|                       |               |                                                          |         |             |         |                |         |          |         |       |         |         |         |  |        |        |         |  |         |        
|                       |               | Total                                                    |         | $           | 403,315 |                |         | $        | 234,530 |       |         | $       | 224,956 |  |        | $      | 139,958 |  |         | $       | 1,002,759 | 
|                       |               |                                                          |         |             |         |                |         |          |         |       |         |         |         |  |        |        |         |  |         |        

|                       |               |                                                          |         |         |         |      |        |        |        |      |        |        |        |  |        |        |        |  |     |     |     |  |         |         |           | 
|---------------------- | ------------- | -------------------------------------------------------- | ------- | ------- | ------- | ---- | ------ | ------ | ------ | ---- | ------ | ------ | ------ |  | ------ | ------ | ------ |  | --- | --- | --- |  | ------- | ------- | --------- | 
|                       |               |                                                         
|                       |               | Certificates of Deposit Outstanding at December 31, 2003
|                       |               |                                                         
|                       |               | 2004                                                     |         | 2005    |         | 2006 |        | 2007   |        | 2008 |        | Total 
|(Dollars in thousands) |               |                                                          |         |         |         |      |        |        |        |      |        |       
|Balances< $100,000     |               |                                                          |         |         |         |      |        |        |        |      |        |        |        |  |        |        |        |  |     |     |     |  |         |        
|                       | 4.00% or less |                                                          | $       | 475,438 |         |      | $      | 43,851 |        |      | $      | 24,083 |        |  | $      | 1,251  |        |  | $   | 166 |     |  | $       | 544,789 |          
|                       | 4.01% - 5.00% |                                                          |         | 8,376   |         |      |        | 5,934  |        |      |        | 2,246  |        |  |        | 8,891  |        |  |     | 110 |     |  |         | 25,557  |          
|                       | 5.01% - 6.00% |                                                          |         | 3,344   |         |      |        | 232    |        |      |        | 291    |        |  |        | 26     |        |  |     |    |     |  |         | 3,893   |          
|                       | 6.01% - 7.00% |                                                          |         | 745     |         |      |        | 1,000  |        |      |        | 91     |        |  |        |       |        |  |     |    |     |  |         | 1,836   |          
|                       | 7.01% or more |                                                          |         |        |         |      |        |       |        |      |        |       |        |  |        |       |        |  |     |    |     |  |         |        |          
|                       |               |                                                          |         |         |         |      |        |        |        |      |        |        |        |  |        |        |        |  |     |     |     |  |         |        
|                       |               |                                                          | 487,903 |         |         |      | 51,017 |        |        |      | 26,711 |        |        |  | 10,168 |        |        |  | 276 |     |     |  | 576,075 |        
|Balances> $100,000     |               |                                                          |         |         |         |      |        |        |        |      |        |        |        |  |        |        |        |  |     |     |     |  |         |        
|                       | 4.00% or less |                                                          |         | 365,521 |         |      |        | 21,176 |        |      |        | 9,412  |        |  |        | 308    |        |  |     | 114 |     |  |         | 396,531 |          
|                       | 4.01% - 5.00% |                                                          |         | 7,096   |         |      |        | 4,610  |        |      |        | 1,357  |        |  |        | 12,985 |        |  |     |    |     |  |         | 26,048  |          
|                       | 5.01% - 6.00% |                                                          |         | 1,356   |         |      |        |       |        |      |        | 437    |        |  |        | 564    |        |  |     |    |     |  |         | 2,357   |          
|                       | 6.01% - 7.00% |                                                          |         | 925     |         |      |        | 823    |        |      |        |       |        |  |        |       |        |  |     |    |     |  |         | 1,748   |          
|                       | 7.01% or more |                                                          |         |        |         |      |        |       |        |      |        |       |        |  |        |       |        |  |     |    |     |  |         |        |          
|                       |               |                                                          |         |         |         |      |        |        |        |      |        |        |        |  |        |        |        |  |     |     |     |  |         |        
|                       |               |                                                          | 374,898 |         |         |      | 26,609 |        |        |      | 11,206 |        |        |  | 13,857 |        |        |  | 114 |     |     |  | 426,684 |        
|                       |               |                                                          |         |         |         |      |        |        |        |      |        |        |        |  |        |        |        |  |     |     |     |  |         |        
|                       |               | Total                                                    |         | $       | 862,801 |      |        | $      | 77,626 |      |        | $      | 37,917 |  |        | $      | 24,025 |  |     | $   | 390 |  |         | $       | 1,002,759 | 
|                       |               |                                                          |         |         |         |      |        |        |        |      |        |        |        |  |        |        |        |  |     |     |     |  |         |        

A-25



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|         |              
|-------- | -------------
|Note 9  | FHLB Advances

A primary alternate funding source for the Bank
is a credit line through the FHLB, with a maximum advance of up
to 45% 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. As of
December 31, 2003, the net funds available to the Company
pursuant to the FHLB borrowing arrangement totaled
$254.9 million ($1.16 billion, less the advances
outstanding of $697.7 million and the outstanding letters
of credit used as collateral for state deposits of
$203.5 million). At December 31, 2003, the Banks
outstanding advances of $697.7 million had a weighted
averaged interest rate of 2.75% and a weighted average remaining
maturity of 2 years and 7 months.

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,
|                       |             |             
|                       |             |              |   |         
|                       |             | 2003         |   | 2002    
|                       |             |              |   |         
|                       |             |              |   | Average  |         |           |  | Average 
|                       |             |              |   | Rate at  |         |           |  | Rate at 
|                       |             | Principal    |   | Year End |         | Principal |  | Year End
|(Dollars in thousands) |             |              |   |          |         |           |  |         
|Original Term:         |             |              |   |          |         |           |  |          |      |   |   |         |         |  |  |     
|                       | Overnight   |              | $ | 100,700  |         |           |  | 0.77     | %    |   | $ | 40,000  |         |  |  | 1.30 | %   
|                       | <12 Months  |              |   | 180,000  |         |           |  | 1.09     | %    |   |   |        |         |  |  | 0.00 | %   
|                       | <24 Months  |              |   |         |         |           |  | 0.00     | %    |   |   | 23,000  |         |  |  | 4.51 | %   
|                       | <36 Months  |              |   | 122,000  |         |           |  | 2.36     | %    |   |   | 236,000 |         |  |  | 2.89 | %   
|                       | <60 Months  |              |   | 130,000  |         |           |  | 4.03     | %    |   |   | 135,000 |         |  |  | 5.92 | %   
|                       | <84 Months  |              |   | 25,000   |         |           |  | 4.18     | %    |   |   | 25,000  |         |  |  | 4.18 | %   
|                       | <120 Months |              |   | 140,000  |         |           |  | 5.18     | %    |   |   | 140,000 |         |  |  | 5.18 | %   
|                       |             |              |   |          |         |           |  |          |      |   |   |         |         |  |  |     
|                       |             | Total(1)     |   | $        | 697,700 |           |  |          | 2.75 | % |   | $       | 599,000 |  |  |      | 4.12 | %
|                       |             |              |   |          |         |           |  |          |      |   |   |         |         |  |  |     



---



|    |                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Excludes discount associated with the First
    Fidelity acquisition of $0.5 million and $1.2 million
    at December 31, 2003 and 2002, respectively.

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, 2003.

|                       |      |       |         |            |  |       |   |   |  |   |         |         | 
|---------------------- | ---- | ----- | ------- | ---------- |  | ----- | - | - |  | - | ------- | ------- | 
|                       |      | Fixed |         | Adjustable |  |      
|                       |      | Rate  |         | Rate       |  | Total
|(Dollars in thousands) |      |       |         |            |  |      
|Year                   |      |       |         |            |  |       |   |   |  |   |         |        
|                       | 2004 |       | $       | 285,700    |  |       | $ |  |  |   | $       | 285,700 | 
|                       | 2005 |       |         | 31,000     |  |       |   |  |  |   |         | 31,000  | 
|                       | 2006 |       |         | 86,000     |  |       |   |  |  |   |         | 86,000  | 
|                       | 2007 |       |         |           |  |       |   |  |  |   |         |        | 
|                       | 2008 |       |         | 224,000    |  |       |   |  |  |   |         | 224,000 | 
|Thereafter             |      |       | 71,000  |            |  |       |  |   |  |   | 71,000  |        
|                       |      |       |         |            |  |       |   |   |  |   |         |        
|                       |      | $     | 697,700 |            |  | $     |  |   |  | $ | 697,700 |        
|                       |      |       |         |            |  |       |   |   |  |   |         |        

A-26



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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

During the fourth quarter of 2003, the Company
successfully completed the exchange of $130 million in FHLB
putable advances, extending the maturity of the notes to
60 months, at a weighted average fixed rate of 4.03%, and
are callable by the FHLB after 2-3 years.

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

|                                                                    |  |                         |           |      |  |      |           |   |  |   |         |  
|------------------------------------------------------------------- |  | ----------------------- | --------- | ---- |  | ---- | --------- | - |  | - | ------- | -
|                                                                    |  |                        
|                                                                    |  | Year Ended December 31,
|                                                                    |  |                        
|                                                                    |  | 2003                    |           | 2002 |  | 2001
|(Dollars in thousands)                                              |  |                         |           |      |  |     
|Average balance during the year                                     |  | $                       | 579,960   |      |  | $    | 511,614   |   |  | $ | 407,836 |  
|Average interest rate during the year                               |  |                         | 3.62      | %    |  |      | 4.23      | % |  |   | 5.07    | %
|Maximum month-end balance during the year                           |  | $                       | 697,700   |      |  | $    | 611,500   |   |  | $ | 484,000 |  
|Loans and securities collateralizing the
    agreements at year end |  | $                       | 1,785,223 |      |  | $    | 1,567,788 |   |  | $ | 858,276 |  



|          |             
|--------- | ------------
|Note 10  | Income Taxes

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

|                                       |         |                          |        |        |        |      |        |        |        |   |        |        |        |  
|-------------------------------------- | ------- | ------------------------ | ------ | ------ | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | -
|                                       |         |                         
|                                       |         | Years Ended December 31,
|                                       |         |                         
|                                       |         | 2003                     |        | 2002   |        | 2001
|(Dollars in thousands)                 |         |                          |        |        |        |     
|Current income tax expense:            |         |                          |        |        |        |      |        |        |        |   |        |       
|                                       | Federal |                          | $      | 13,207 |        |      | $      | 14,465 |        |   | $      | 10,752 |       
|                                       | State   |                          |        | 3,445  |        |      |        | 4,043  |        |   |        | 3,356  |       
|                                       |         |                          |        |        |        |      |        |        |        |   |        |       
|                                       |         | Total current            |        |        | 16,652 |      |        |        | 18,508 |   |        |        | 14,108 |  
|Deferred income tax (benefit) expense: |         |                          |        |        |        |      |        |        |        |   |        |       
|                                       | Federal |                          |        | 1,354  |        |      |        | (1,476 | )      |   |        | (594   | )     
|                                       | State   |                          |        | (143   | )      |      |        | (1,648 | )      |   |        | (1,244 | )     
|                                       |         |                          |        |        |        |      |        |        |        |   |        |       
|                                       |         | Total deferred           |        |        | 1,211  |      |        |        | (3,124 | ) |        |        | (1,838 | )
|                                       |         |                          |        |        |        |      |        |        |        |   |        |       
|Income tax provision                   |         | $                        | 17,863 |        |        | $    | 15,384 |        |        | $ | 12,270 |       
|                                       |         |                          |        |        |        |      |        |        |        |   |        |       

A-27



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                 |                                          |              |        |        |         |   |        |        |         |  
|-------------------------------- | ---------------------------------------- | ------------ | ------ | ------ | ------- | - | ------ | ------ | ------- | -
|                                 |                                          |             
|                                 |                                          | December 31,
|                                 |                                          |             
|                                 |                                          | 2003         |        | 2002  
|(Dollars in thousands)           |                                          |              |        |       
|Deferred income tax liabilities: |                                          |              |        |        |         |   |        |       
|                                 | Loan fees                                |              | $      | (5,534 | )       |   | $      | (5,052 | )      
|                                 | FHLB stock                               |              |        | (3,869 | )       |   |        | (3,923 | )      
|                                 | Unrealized gain on investment securities |              |        |       |         |   |        | (1,414 | )      
|                                 | Depreciation                             |              |        | (268   | )       |   |        | (6     | )      
|                                 | Other                                    |              |        | (1,296 | )       |   |        | (3,982 | )      
|                                 |                                          |              |        |        |         |   |        |       
|                                 |                                          | Total        |        |        | (10,967 | ) |        |        | (14,377 | )
|Deferred income tax assets:      |                                          |              |        |        |         |   |        |       
|                                 | Bad debts                                |              |        | 15,410 |         |   |        | 15,901 |        
|                                 | Federal NOL                              |              |        | 589    |         |   |        | 589    |        
|                                 | Unrealized loss on investment securities |              |        | 638    |         |   |        |       |        
|                                 | Other                                    |              |        | 4,960  |         |   |        | 7,955  |        
|                                 |                                          |              |        |        |         |   |        |       
|                                 |                                          | Total        |        |        | 21,597  |   |        |        | 24,445  |  
|                                 |                                          |              |        |        |         |   |        |       
|Deferred tax asset, net          |                                          | $            | 10,630 |        |         | $ | 10,068 |       
|                                 |                                          |              |        |        |         |   |        |       

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

|                         |                                                           |                          |        |       |   |      |        |       |  |   |        |       | 
|------------------------ | --------------------------------------------------------- | ------------------------ | ------ | ----- | - | ---- | ------ | ----- |  | - | ------ | ----- | 
|                         |                                                           |                         
|                         |                                                           | Years Ended December 31,
|                         |                                                           |                         
|                         |                                                           | 2003                     |        | 2002  |   | 2001
|(Dollars in thousands)   |                                                           |                          |        |       |   |     
|Federal income tax       |                                                           | $                        | 16,237 |       |   | $    | 13,272 |       |  | $ | 10,185 |      
|Addition resulting from: |                                                           |                          |        |       |   |      |        |       |  |   |        |      
|                         | California franchise tax, net of federal income
    taxes |                          |        | 2,146 |   |      |        | 1,783 |  |   |        | 1,880 | 
|                         | Other                                                     |                          |        | (520  | ) |      |        | 329   |  |   |        | 205   | 
|                         |                                                           |                          |        |       |   |      |        |       |  |   |        |      
|Income tax provision     |                                                           | $                        | 17,863 |       |   | $    | 15,384 |       |  | $ | 12,270 |      
|                         |                                                           |                          |        |       |   |      |        |       |  |   |        |      



|          |                     
|--------- | --------------------
|Note 11  | Stockholders Equity



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

The Company previously had an Employee Stock
Ownership Plan (ESOP) that 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, 2003, the ESOP owned
103,649 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. Company contributions under the plan were
$0.7 million, $0.6 million and $0.5 million for
the years ended December 31, 2003, 2002 and 2001,
respectively.

A-28



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                           
| | --------------------------
| | 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 Plan
was amended in 2003 to permit directors to defer some, or all,
of their director fees. 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 quarter immediately
preceding the valuation date, plus 2.50%. The average interest
crediting rate was 6.29%, 7.25% and 7.52%, respectively, for
2003, 2002 and 2001. The salaries that were deferred were
$0.7 million, $0.5 million and $0.4 million,
respectively, for the years ended December 31, 2003, 2002
and 2001.



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

On May 21, 2001, the Company adopted the
Hawthorne Financial Corporation 2001 Stock Incentive Plan
(Stock Incentive Plan), which assumed all
outstanding stock options that had previously been issued to
directors and employees of the Company under its prior two stock
option plans and added 375,000 shares for future grants.
The Stock Incentive Plan provides for the grant of incentive and
nonqualified stock options and other stock-related compensation
to employees, the non-employee directors, consultants and other
independent advisors who provide services to the Company. To
date, the Company has granted stock options to employees and
directors only. At December 31, 2003, the Stock Incentive
Plan provides for the issuance of 1,528,350 maximum aggregate
shares of Company common stock upon the exercise of awards
granted under the plan. The exercise price of any option
generally may not be less than the fair market value of the
common stock on the date of grant, although under limited
circumstances, set forth in the Stock Incentive Plan, the
exercise price may be as low as 85% of the fair market value of
the Common Stock on the grant date, and the term of any option
may not exceed 10 years. As of February 27, 2004, the
number of stock options available under the Stock Incentive Plan
was 190,386.

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

|                                 |                     |                         |           |                |   |        |       |                |  |        |           |                |   |   |       |       |  |  |         |          |   |   |      |       | 
|-------------------------------- | ------------------- | ----------------------- | --------- | -------------- | - | ------ | ----- | -------------- |  | ------ | --------- | -------------- | - | - | ----- | ----- |  |  | ------- | -------- | - | - | ---- | ----- | 
|                                 |                     |                        
|(Dollars in thousands)           |                     | Year Ended December 31,
|                                 |                     |                        
|                                 |                     |                         |           |                |   |       
|                                 |                     | 2003                    |           | 2002           |   | 2001  
|                                 |                     |                         |           |                |   |       
|                                 |                     |                         |           | Weighted       |   |        |       | Weighted       |  |        |           | Weighted      
|                                 |                     |                         |           | Average        |   |        |       | Average        |  |        |           | Average       
|                                 |                     | Shares                  |           | Exercise Price |   | Shares |       | Exercise Price |  | Shares |           | Exercise Price
|                                 |                     |                         |           |                |   |        |       |                |  |        |           |               
|Outstanding, beginning of year   |                     |                         | 1,145,850 |                |   | $      | 12.04 |                |  |        | 976,576   |                |   | $ | 8.21  |       |  |  | 909,450 |          |   | $ | 6.39 |      
|                                 | Granted             |                         |           | 136,250        |   |        |       | 23.96          |  |        |           | 485,100        |   |   |       | 17.44 |  |  |         | 309,975  |   |   |      | 11.63 | 
|                                 | Exercised           |                         |           | (221,890       | ) |        |       | 7.18           |  |        |           | (158,075       | ) |   |       | 7.10  |  |  |         | (126,225 | ) |   |      | 3.52  | 
|                                 | Canceled or expired |                         |           | (149,085       | ) |        |       | 16.59          |  |        |           | (157,751       | ) |   |       | 9.88  |  |  |         | (116,625 | ) |   |      | 8.15  | 
|                                 |                     |                         |           |                |   |        |       |                |  |        |           |                |   |   |       |       |  |  |         |          |   |   |      |      
|Outstanding, end of year         |                     |                         | 911,125   |                |   | $      | 14.25 |                |  |        | 1,145,850 |                |   | $ | 12.04 |       |  |  | 976,575 |          |   | $ | 8.21 |      
|                                 |                     |                         |           |                |   |        |       |                |  |        |           |                |   |   |       |       |  |  |         |          |   |   |      |      
|Options exercisable, end of year |                     |                         | 541,940   |                |   |        |       |                |  |        | 418,650   |                |   |   |       |       |  |  | 194,726 |          |   |   |      |      
|                                 |                     |                         |           |                |   |        |       |                |  |        |           |                |   |   |       |       |  |  |         |          |   |   |      |      

A-29



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The table below summarizes information about
stock options outstanding and exercisable at December 31,
2003.

|                         |  |             |         |                       |  |             |      |                  |  |  |         |     |  |   |       | 
|------------------------ |  | ----------- | ------- | --------------------- |  | ----------- | ---- | ---------------- |  |  | ------- | --- |  | - | ----- | 
|                         |  |             |         |                       |  |            
|                         |  |             |         |                       |  | Exercisable
|                         |  |             |         | Weighted Average      |  |            
|                         |  | Number      |         | Remaining Contractual |  | Number      |      | Weighted Average
|Range of Exercise Prices |  | Outstanding |         | Life (Years)          |  | Outstanding |      | Price           
|                         |  |             |         |                       |  |             |      |                 
|$5.34 - $8.01            |  |             | 161,750 |                       |  |             | 4.46 |                  |  |  | 161,750 |     |  | $ | 5.68  | 
|$8.02 - $10.68           |  |             | 112,500 |                       |  |             | 3.56 |                  |  |  | 112,500 |     |  | $ | 9.64  | 
|$10.69 - $13.35          |  |             | 273,150 |                       |  |             | 7.31 |                  |  |  | 181,155 |     |  | $ | 11.57 | 
|$16.02 - $18.69          |  |             | 115,500 |                       |  |             | 8.67 |                  |  |  | 23,100  |     |  | $ | 17.61 | 
|$18.70 - $21.36          |  |             | 15,000  |                       |  |             | 9.39 |                  |  |  |        | (1) |  | $ | 0.00  | 
|$21.37 - $24.03          |  |             | 114,975 |                       |  |             | 8.57 |                  |  |  | 52,935  |     |  |   | 21.78 | 
|$24.04 - $26.70          |  |             | 118,250 |                       |  |             | 9.52 |                  |  |  | 10,500  |     |  |   | 24.36 | 
|                         |  |             |         |                       |  |             |      |                  |  |  |         |     |  |   |       | 
|                         |  |             | 911,125 |                       |  |             | 6.99 |                  |  |  | 541,940 |     |  | $ | 10.91 | 
|                         |  |             |         |                       |  |             |      |                  |  |  |         |     |  |   |       | 



---



|    |                                    
|--- | -----------------------------------
|(1) | These options were granted in 2003.



|          |                           
|--------- | --------------------------
|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 was 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
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 $2.1 million of expenses associated
with the early retirement of the senior notes in 2002.

As of December 31, 2003, cumulative
repurchases, under the Companys repurchase program,
included 2,100,516 shares at an average price of $15.15.



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

In 2001 and 2002, the Company organized 4
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 provisions of FIN 46R are required to be
adopted by the Company prior to the first reporting period that
ends after March 15, 2004. The adoption of FIN 46 did
not have, and the adoption of FIN 46R is not expected to
have, a significant impact on the financial position, results of
operations, or cash flows of the Company.

A-30



---



##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The table below sets forth information concerning
the Companys Capital Securities as of December 31,
2003.

|                       |      |            |  |          |                        |      |  |         |          |          |  |      |          |      |  |         |        |  |  |  |        |  |  |               |  |  |        |  |  |  |          | 
|---------------------- | ---- | ---------- |  | -------- | ---------------------- | ---- |  | ------- | -------- | -------- |  | ---- | -------- | ---- |  | ------- | ------ |  |  |  | ------ |  |  | ------------- |  |  | ------ |  |  |  | -------- | 
|                      
|(Dollars in thousands)
|                       |      | Date of    |  | Maturity |                        |      |  | Current |          | Call    
|Ownership              |      | Subsidiary |  | Issuance |                        | Date |  | Amount  |          | Rate Cap |  | Rate |          | Rate |  | Date(1)
|                       |      |            |  |          |                        |      |  |         |          |          |  |      |          |      |  |        
|                       | 100% |            |  |          | HFC Capital Trust I    |      |  |         | 3/28/01  |          |  |      | 6/8/31   |      |  | $       | 9,000  |  |  |  | N/A    |  |  | Fixed         |  |  | 10.18% |  |  |  | 10 Years | 
|                       | 100% |            |  |          | HFC Capital Trust II   |      |  |         | 11/28/01 |          |  |      | 12/8/31  |      |  |         | 5,000  |  |  |  | 11.00% |  |  | LIBOR + 3.75% |  |  | 4.98%  |  |  |  | 5 Years  | 
|                       | 100% |            |  |          | HFC Capital Trust  III |      |  |         | 4/10/02  |          |  |      | 4/22/32  |      |  |         | 22,000 |  |  |  | 11.00% |  |  | LIBOR + 3.70% |  |  | 4.92%  |  |  |  | 5 Years  | 
|                       | 100% |            |  |          | HFC Capital Trust IV   |      |  |         | 11/1/02  |          |  |      | 11/15/32 |      |  |         | 15,000 |  |  |  | 12.00% |  |  | LIBOR + 3.35% |  |  | 4.62%  |  |  |  | 5 Years  | 
|                       |      |            |  |          |                        |      |  |         |          |          |  |      |          |      |  |         |        |  |  |  |        |  |  |               |  |  |        |  |  |  |          | 
|                       |      |            |  |          |                        |      |  |         |          |          |  |      |          |      |  | $       | 51,000 |  |  |  |        |  |  |               |  |  |        |  |  |  |          | 
|                       |      |            |  |          |                        |      |  |         |          |          |  |      |          |      |  |         |        |  |  |  |        |  |  |               |  |  |        |  |  |  |          | 



---



|    |                                                                            
|--- | ---------------------------------------------------------------------------
|(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, 2003 and
2002, that the Bank meets all capital adequacy requirements to
which it is subject. As of December 31, 2003 and 2002, 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, 2003, 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, 2003: |                                              |        |   |                   |  |                   |  |                   |   |            |   |         |  |  |  |      |   |  |   |         |  |  |  |      
|                         | Total capital to risk weighted assets        |        | $ | 230,052           |  |                   |  | 12.42             | % |            | $ | 148,202 |  |  |  | 8.00 | % |  | $ | 185,252 |  |  |  | 10.00 | %
|                         | Core capital to adjusted tangible assets     |        |   | 206,767           |  |                   |  | 7.81              | % |            |   | 105,851 |  |  |  | 4.00 | % |  |   | 132,314 |  |  |  | 5.00  | %
|                         | Tangible capital to adjusted tangible assets |        |   | 206,767           |  |                   |  | 7.81              | % |            |   | 36,964  |  |  |  | 1.50 | % |  |   | n/a     |  |  |  | n/a   |  
|                         | Tier 1 capital to risk weighted assets       |        |   | 206,767           |  |                   |  | 11.16             | % |            |   | n/a     |  |  |  | n/a  |   |  |   | 111,151 |  |  |  | 6.00  | %
|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  | %

A-31



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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|          |                              
|--------- | -----------------------------
|Note 14  | Commitments And Contingencies



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

From time to time, the Company is party to claims
and legal proceedings arising in the ordinary course of
business. Management evaluates the Companys and/or the
Banks exposure to the cases individually and in the
aggregate and provides for potential losses on such litigation,
if the amount of the loss is estimable and the loss is probable.
Management believes that there are no pending litigation matters
at the current time that are material. However, litigation is
inherently uncertain and no assurance can be given that any
current or future litigation will not result in any loss that
might be material to the Company.



| |                    
| | -------------------
| | Lending commitments

At December 31, 2003, the Company had
commitments to fund the undisbursed portion of existing
construction and land loans of $129.5 million and income
property and estate loans of $1.3 million. The commitments
to fund the undisbursed portion of existing lines of credit,
excluding construction and land lines of credit, totaled
$12.0 million.

In addition, as of December 31, 2003, the
Company had commitments to fund $66.1 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, 2003.



| |       
| | ------
| | Leases

The Company has entered into agreements to lease
certain office facilities under noncancelable operating leases
that expire at various dates to the year 2013. The leases
generally provide that the Company pays common area maintenance
expenses (CAM), including property taxes, insurance
and other items. Current rental commitments, excluding CAM, for
the remaining terms of these noncancelable leases as of
December 31, 2003 are as follows.

|                       |      |        |       |       | 
|---------------------- | ---- | ------ | ----- | ----- | 
|Year                   |      | Amount
|                       |      |       
|(Dollars in thousands) |      |       
|                       | 2004 |        | $     | 2,586 | 
|                       | 2005 |        |       | 2,479 | 
|                       | 2006 |        |       | 1,134 | 
|                       | 2007 |        |       | 1,033 | 
|                       | 2008 |        |       | 995   | 
|Thereafter             |      |        | 1,718 |      
|                       |      |        |       |      
|                       |      | $      | 9,945 |      
|                       |      |        |       |      

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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Lease expense, excluding CAM expenses, for office
facilities was $2.4 million, $2.0 million and
$1.9 million for the years ended December 31, 2003,
2002 and 2001, 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 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 credits issued by the Bank at December 31, 2003 and 2002.

As of December 31, 2003, the Federal Home
Loan Bank issued 5 letters of credit (LC) for a
total of $203.5 million. The purpose of the LCs is to
fulfill the collateral requirements for 5 deposits totaling
$185.0 million placed by the State of California with the
Bank. The LCs are issued in favor of the Treasurer of the State
of California and mature over the next 6 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.

A-33



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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|          |                                 
|--------- | --------------------------------
|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,     
|                         |                                          |                             
|                         |                                          |                              |         |           
|                         |                                          | 2003                         |         | 2002      
|                         |                                          |                              |         |           
|                         |                                          | Carrying                     |         | Estimated  |           | Carrying |         | Estimated 
|                         |                                          | Amount                       |         | Fair Value |           | Amount   |         | Fair Value
|(Dollars in thousands)   |                                          |                              |         |            |           |          |         |           
|Assets:                  |                                          |                              |         |            |           |          |         |            |           |  |         |           |           |  |         |          
|                         | Cash and cash equivalents                |                              | $       | 17,829     |           |          | $       | 17,829     |           |  | $       | 21,849    |           |  | $       | 21,849    |          
|                         | Investment securities available-for-sale |                              |         | 381,287    |           |          |         | 381,287    |           |  |         | 267,596   |           |  |         | 267,596   |          
|                         | Loans receivables                        |                              |         | 2,154,114  |           |          |         | 2,203,610  |           |  |         | 2,114,255 |           |  |         | 2,159,032 |          
|                         | Investment in FHLB stock                 |                              |         | 38,189     |           |          |         | 38,189     |           |  |         | 34,705    |           |  |         | 34,705    |          
|                         | Accrued interest receivable              |                              |         | 9,859      |           |          |         | 9,859      |           |  |         | 11,512    |           |  |         | 11,512    |          
|Liabilities:             |                                          |                              |         |            |           |          |         |            |           |  |         |           |           |  |         |          
|                         | Deposits:                                |                              |         |            |           |          |         |            |           |  |         |           |           |  |         |           |          
|                         |                                          | Noninterest-bearing checking |         |            | 51,670    |          |         |            | 51,670    |  |         |           | 39,818    |  |         |           | 39,818    | 
|                         |                                          | Checking/NOW                 |         |            | 86,579    |          |         |            | 86,579    |  |         |           | 77,648    |  |         |           | 77,648    | 
|                         |                                          | Passbook                     |         |            | 75,374    |          |         |            | 75,374    |  |         |           | 64,475    |  |         |           | 64,475    | 
|                         |                                          | Money market                 |         |            | 506,182   |          |         |            | 506,182   |  |         |           | 455,405   |  |         |           | 455,405   | 
|                         |                                          | Certificates of deposit      |         |            | 1,002,759 |          |         |            | 1,004,891 |  |         |           | 1,025,464 |  |         |           | 1,026,818 | 
|FHLB advances            |                                          |                              | 697,155 |            |           |          | 711,197 |            |           |  | 600,190 |           |           |  | 625,281 |          
|Capital securities       |                                          |                              | 51,000  |            |           |          | 52,749  |            |           |  | 51,000  |           |           |  | 53,160  |          
|Accrued interest payable |                                          |                              | 1,454   |            |           |          | 1,454   |            |           |  | 1,514   |           |           |  | 1,514   |          

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

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

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

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

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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

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, 2003 and 2002. 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. There were no recruitment fees paid
to the director-related company in 2003. Recruitment fees paid
to the director-related company in 2002 and 2001, totaled $12
thousand and $100 thousand, respectively.

The Company does not currently have any related
party transactions other than the extension of credit to certain
executives in the form of overdraft protection lines, as
disclosed herein. In managements opinion, such overdraft
protection lines of credit were made under terms that were
consistent with the Companys normal lending policies.

During the years ended December 31, 2003,
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.

A-35



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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,
|                                      |                                       | 2003                                   |                                            | 2002        
|(Dollars in thousands)                |                                       |                                        |                                            |             
|Assets:                               |                                       |                                        |                                            |              |         |         |   |        
|                                      | Cash at the Bank and cash equivalents |                                        | $                                          | 3,079        |         |         | $ | 1,749   |        
|                                      | Investment in subsidiaries            |                                        |                                            | 233,046      |         |         |   | 209,414 |        
|                                      | Other assets                          |                                        |                                            | 3,087        |         |         |   | 5,912   |        
|                                      |                                       |                                        |                                            |              |         |         |   |        
|                                      |                                       |                                        | Total assets                               |              | $       | 239,212 |   |         | $       | 217,075 | 
|                                      |                                       |                                        |                                            |              |         |         |   |        
|                                     
|Liabilities and Stockholders Equity:
|                                      | Liabilities:                          |                                        |                                            |              |         |         |   |         |        
|                                      |                                       | Junior subordinated debentures         |                                            | $            | 52,600  |         |   | $       | 52,600  |        
|                                      |                                       | Accounts payable and other liabilities |                                            |              | 1,338   |         |   |         | 1,409   |        
|                                      |                                       |                                        |                                            |              |         |         |   |        
|                                      |                                       |                                        | Total liabilities                          |              |         | 53,938  |   |         |         | 54,009  | 
|                                      |                                       |                                        |                                            |              |         |         |   |        
|                                      |                                       | Stockholders equity                   |                                            |              | 185,274 |         |   |         | 163,066 |        
|                                      |                                       |                                        |                                            |              |         |         |   |        
|                                      |                                       |                                        | Total liabilities and stockholders equity |              | $       | 239,212 |   |         | $       | 217,075 | 
|                                      |                                       |                                        |                                            |              |         |         |   |        

STATEMENTS OF INCOME

|                                                        |                     |                          |        |      |  |      |        |   |  |   |        |    | 
|------------------------------------------------------- | ------------------- | ------------------------ | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -- | 
|                                                        |                     |                         
|                                                        |                     | Years Ended December 31,
|                                                        |                     |                         
|                                                        |                     | 2003                     |        | 2002 |  | 2001
|(Dollars in thousands)                                  |                     |                          |        |      |  |     
|Interest revenue from investments                       |                     | $                        | 15     |      |  | $    | 138    |   |  | $ | 41     |   
|Interest cost                                           |                     |                          | 3,116  |      |  |      | 5,474  |   |  |   | 4,716  |   
|                                                        |                     |                          |        |      |  |      |        |   |  |   |        |   
|Net interest (cost)/income                              |                     |                          | (3,101 | )    |  |      | (5,336 | ) |  |   | (4,675 | ) 
|Noninterest revenue:                                    |                     |                          |        |      |  |      |        |   |  |   |        |   
|                                                        | Other non-operating |                          |        |     |  |      |        |  |  |   |        | 95 | 
|Operating expense                                       |                     |                          | (1,327 | )    |  |      | (3,648 | ) |  |   | (1,911 | ) 
|                                                        |                     |                          |        |      |  |      |        |   |  |   |        |   
|Loss before income taxes and equity in
    subsidiaries |                     |                          | (4,428 | )    |  |      | (8,984 | ) |  |   | (6,491 | ) 
|Income tax benefit                                      |                     |                          | 1,803  |      |  |      | 3,342  |   |  |   | 2,706  |   
|                                                        |                     |                          |        |      |  |      |        |   |  |   |        |   
|Income before income taxes                              |                     |                          | (2,625 | )    |  |      | (5,642 | ) |  |   | (3,785 | ) 
|Equity in net earnings of subsidiary                    |                     |                          | 31,133 |      |  |      | 28,341 |   |  |   | 20,618 |   
|                                                        |                     |                          |        |      |  |      |        |   |  |   |        |   
|Net Income                                              |                     | $                        | 28,508 |      |  | $    | 22,699 |   |  | $ | 16,833 |   
|                                                        |                     |                          |        |      |  |      |        |   |  |   |        |   

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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                                          
|                                                         |                                                              |                                                                  
|                                                         |                                                              | 2003                                                              |                                       | 2002   |         | 2001
|(Dollars in thousands)                                   |                                                              |                                                                   |                                       |        |         |     
|Cash Flows from Operating Activities:                    |                                                              |                                                                   |                                       |        |         |      |        |         |         |        |       |        
|                                                         | Net income                                                   |                                                                   | $                                     | 28,508 |         |      | $      | 22,699  |         |        | $     | 16,833  |        
|                                                         | Adjustments:                                                 |                                                                   |                                       |        |         |      |        |         |         |        |       |         |        
|                                                         |                                                              | Equity in net undistributed earnings of subsidiary                |                                       |        | (31,133 | )    |        |         | (28,341 | )      |       |         | (20,618 | )     
|                                                         |                                                              | Net loss on extinguishment of debt                                |                                       |        |        |      |        |         | 1,203   |        |       |         |        |       
|                                                         |                                                              | Amortization                                                      |                                       |        | 291     |      |        |         | 887     |        |       |         | 255     |       
|                                                         |                                                              | Deferred compensation expense                                     |                                       |        |        |      |        |         | 152     |        |       |         | 76      |       
|                                                         |                                                              | Increase/(decrease) in interest receivable                        |                                       |        |        |      |        |         | 14      |        |       |         |        |       
|                                                         |                                                              | Decrease/(increase) in other assets                               |                                       |        | 1,511   |      |        |         | (2,993  | )      |       |         | 789     |       
|                                                         |                                                              | (Decrease)/increase in accounts payable and other
    liabilities |                                       |        | (71     | )    |        |         | 1,267   |        |       |         | (537    | )     
|                                                         |                                                              |                                                                   |                                       |        |         |      |        |         |         |        |       |        
|                                                         |                                                              |                                                                   | Net cash used in operating activities |        |         | (894 | )      |         |         | (5,112 | )     |         |         | (3,202 | )
|                                                         |                                                              |                                                                   |                                       |        |         |      |        |         |         |        |       |        
|Cash Flows from Financing Activities:                    |                                                              |                                                                   |                                       |        |         |      |        |         |         |        |       |        
|                                                         | Net proceeds from exercise of stock options and
    warrants |                                                                   |                                       | 1,850  |         |      |        | 3,856   |         |        |       | 461     |        
|                                                         | Treasury stock purchases                                     |                                                                   |                                       | (7,126 | )       |      |        | (18,176 | )       |        |       | (2,977  | )      
|                                                         | Cash dividend received                                       |                                                                   |                                       | 7,500  |         |      |        | 33,570  |         |        |       | 6,000   |        
|                                                         | Acquisition of First Fidelity, net of cash
    acquired      |                                                                   |                                       |       |         |      |        | (24,836 | )       |        |       |        |        
|                                                         | Reduction in senior notes                                    |                                                                   |                                       |       |         |      |        | (27,381 | )       |        |       | (13,580 | )      
|                                                         | Proceeds from capital securities                             |                                                                   |                                       |       |         |      |        | 37,000  |         |        |       | 14,000  |        
|                                                         |                                                              |                                                                   |                                       |        |         |      |        |         |         |        |       |        
|                                                         |                                                              | Net cash provided by financing activities                         |                                       |        | 2,224   |      |        |         | 4,033   |        |       |         | 3,904   |       
|                                                         |                                                              |                                                                   |                                       |        |         |      |        |         |         |        |       |        
|Net increase/(decrease) in cash and cash
    equivalents |                                                              |                                                                   | 1,330                                 |        |         |      | (1,079 | )       |         |        | 702   |        
|Cash and cash equivalents, beginning of year             |                                                              |                                                                   | 1,749                                 |        |         |      | 2,828  |         |         |        | 2,126 |        
|                                                         |                                                              |                                                                   |                                       |        |         |      |        |         |         |        |       |        
|Cash and cash equivalents, end of year                   |                                                              | $                                                                 | 3,079                                 |        |         | $    | 1,749  |         |         | $      | 2,828 |        
|                                                         |                                                              |                                                                   |                                       |        |         |      |        |         |         |        |       |        

A-37



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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 2003             
|(Dollars in thousands, except per share data)             |                                    |                                         
|                                                          |                                    | March 31                                 |        | June 30 |        | September 30 |        | December 31
|                                                          |                                    |                                          |        |         |        |              |        |            
|Interest revenue                                          |                                    | $                                        | 37,589 |         |        | $            | 35,561 |             |        | $ | 33,810 |        |        | $ | 33,519 |       
|Interest cost                                             |                                    |                                          | 16,155 |         |        |              | 15,742 |             |        |   | 14,164 |        |        |   | 13,798 |       
|                                                          |                                    |                                          |        |         |        |              |        |             |        |   |        |        |        |   |        |       
|                                                          | Net interest income                |                                          |        | 21,434  |        |              |        | 19,819      |        |   |        | 19,646 |        |   |        | 19,721 |       
|Provision for credit losses                               |                                    |                                          | 300    |         |        |              | 100    |             |        |   | 50     |        |        |   | 50     |       
|                                                          |                                    |                                          |        |         |        |              |        |             |        |   |        |        |        |   |        |       
|Net interest income after provision for credit
    losses |                                    |                                          | 21,134 |         |        |              | 19,719 |             |        |   | 19,596 |        |        |   | 19,671 |       
|Noninterest revenue                                       |                                    |                                          | 1,537  |         |        |              | 2,152  |             |        |   | 2,559  |        |        |   | 2,408  |       
|Income/(loss) from real estate owned, net                 |                                    |                                          | 1      |         |        |              | (4     | )           |        |   | (48    | )      |        |   |       |       
|Noninterest expense:                                      |                                    |                                          |        |         |        |              |        |             |        |   |        |        |        |   |        |       
|                                                          | General and administrative expense |                                          |        | 10,938  |        |              |        | 10,182      |        |   |        | 10,371 |        |   |        | 10,761 |       
|                                                          | Other/legal settlements            |                                          |        | 226     |        |              |        | 38          |        |   |        | (54    | )      |   |        | (108   | )     
|                                                          |                                    |                                          |        |         |        |              |        |             |        |   |        |        |        |   |        |       
|                                                          |                                    | Total general and administrative expense |        |         | 11,164 |              |        |             | 10,220 |   |        |        | 10,317 |   |        |        | 10,653 | 
|                                                          |                                    |                                          |        |         |        |              |        |             |        |   |        |        |        |   |        |       
|Income before income taxes                                |                                    |                                          | 11,508 |         |        |              | 11,647 |             |        |   | 11,790 |        |        |   | 11,426 |       
|Income tax provision                                      |                                    |                                          | 4,772  |         |        |              | 4,743  |             |        |   | 4,614  |        |        |   | 3,734  |       
|                                                          |                                    |                                          |        |         |        |              |        |             |        |   |        |        |        |   |        |       
|Net income                                                |                                    |                                          | 6,736  |         |        |              | 6,904  |             |        |   | 7,176  |        |        |   | 7,692  |       
|                                                          |                                    |                                          |        |         |        |              |        |             |        |   |        |        |        |   |        |       
|Basic earnings per share                                  |                                    | $                                        | 0.59   |         |        | $            | 0.60   |             |        | $ | 0.62   |        |        | $ | 0.66   |       
|                                                          |                                    |                                          |        |         |        |              |        |             |        |   |        |        |        |   |        |       
|Diluted earnings per share                                |                                    | $                                        | 0.54   |         |        | $            | 0.55   |             |        | $ | 0.57   |        |        | $ | 0.61   |       
|                                                          |                                    |                                          |        |         |        |              |        |             |        |   |        |        |        |   |        |       

|                                                          |                                    |                                          |        |         |       |              |        |             |       |   |        |        |        |   |        |        |        | 
|--------------------------------------------------------- | ---------------------------------- | ---------------------------------------- | ------ | ------- | ----- | ------------ | ------ | ----------- | ----- | - | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                                          |                                    |                                         
|                                                          |                                    | Three Months Ended for 2002             
|                                                          |                                    |                                         
|                                                          |                                    | March 31                                 |        | June 30 |       | September 30 |        | December 31
|(Dollars in thousands, except per share data)             |                                    |                                          |        |         |       |              |        |            
|Interest revenue                                          |                                    | $                                        | 33,369 |         |       | $            | 31,543 |             |       | $ | 33,630 |        |        | $ | 38,652 |       
|Interest cost                                             |                                    |                                          | 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 revenue                                       |                                    |                                          | 1,293  |         |       |              | 1,195  |             |       |   | 1,741  |        |        |   | 2,158  |       
|Income from real estate owned, net                        |                                    |                                          | 69     |         |       |              |       |             |       |   | 2      |        |        |   |       |       
|Noninterest expense:                                      |                                    |                                          |        |         |       |              |        |             |       |   |        |        |        |   |        |       
|                                                          | General and administrative expense |                                          |        | 8,061   |       |              |        | 8,259       |       |   |        | 10,218 |        |   |        | 13,751 |       
|                                                          | Other/legal settlements            |                                          |        | 20      |       |              |        |            |       |   |        | 198    |        |   |        | 105    |       
|                                                          |                                    |                                          |        |         |       |              |        |             |       |   |        |        |        |   |        |       
|                                                          |                                    | Total general and administrative expense |        |         | 8,081 |              |        |             | 8,259 |   |        |        | 10,416 |   |        |        | 13,856 | 
|                                                          |                                    |                                          |        |         |       |              |        |             |       |   |        |        |        |   |        |       
|Income before income taxes                                |                                    |                                          | 10,354 |         |       |              | 9,271  |             |       |   | 8,838  |        |        |   | 9,620  |       
|Income tax provision                                      |                                    |                                          | 4,452  |         |       |              | 3,987  |             |       |   | 3,227  |        |        |   | 3,718  |       
|                                                          |                                    |                                          |        |         |       |              |        |             |       |   |        |        |        |   |        |       
|Net income                                                |                                    | $                                        | 5,902  |         |       | $            | 5,284  |             |       | $ | 5,611  |        |        | $ | 5,902  |       
|                                                          |                                    |                                          |        |         |       |              |        |             |       |   |        |        |        |   |        |       
|Basic earnings per share                                  |                                    | $                                        | 0.73   |         |       | $            | 0.61   |             |       | $ | 0.54   |        |        | $ | 0.53   |       
|                                                          |                                    |                                          |        |         |       |              |        |             |       |   |        |        |        |   |        |       
|Diluted earnings per share                                |                                    | $                                        | 0.51   |         |       | $            | 0.46   |             |       | $ | 0.46   |        |        | $ | 0.47   |       
|                                                          |                                    |                                          |        |         |       |              |        |             |       |   |        |        |        |   |        |       

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##### Table of Contents



HAWTHORNE FINANCIAL CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|          |                 
|--------- | ----------------
|Note 21  | Subsequent Event

On January 27, 2004, Hawthorne Financial
Corporation (Hawthorne) entered into an Agreement
and Plan of Reorganization (Agreement) with
Commercial Capital Bancorp (CCBI) and CCBI
Acquisition Corporation, pursuant to which Hawthorne will be
acquired by CCBI. Under the terms of the agreement, which has
been unanimously approved by the Boards of Directors of both
companies, shareholders of Hawthorne will receive
1.933 shares of CCBI common stock in exchange for each
share of Hawthorne stock. The transaction, which is expected to
be a reorganization for tax purposes, values each share of
Hawthorne common stock at $37.92, based on CCBIs closing
price of $26.15 on January 27, 2004. The value of the
transaction and value of each share of Hawthorne common stock on
consummation of the merger may be higher or lower depending on
the price of CCBIs common stock on such date. The
transaction is expected to close in the summer of 2004, pending
shareholder and regulatory approval and satisfaction of other
customary conditions. At December 31, 2003, CCBI had
$1.72 billion in total assets, $1.05 billion in total
loans, $645.6 million in total deposits and
$102.0 million in total equity. At December 31, 2003,
Hawthorne had $2.67 billion in total assets,
$2.15 billion in total loans, $1.72 billion in total
deposits and $185.3 million in total equity.

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