# UNITED STATES

SECURITIES AND EXCHANGE COMMISSIONWashington,
D.C. 20549

# FORM 10-K

(Mark One)
[X]        Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required)

For the fiscal year ended December 31, 2003

# or

[   ]        Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required)

For the transition period from            to

Commission file number 0-21845

Wilshire Financial Services Group Inc.(Exact name of registrant as specified in its charter)

|Delaware                                                       | 93-1223879                          
|-------------------------------------------------------------- | ------------------------------------
|(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.)
|                                                               |                                     
|14523 SW Millikan Way, Suite 200, Beaverton, OR                | 97005                               
|(Address of principal executive offices)                       | (Zip Code)                          

(503) 223-5600
                                         (Registrant's telephone number, including area code)

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

None.

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

|                    | Name of each exchange 
|------------------- | ----------------------
|Title of each class | on which registered   
|Common Stock.       | Nasdaq National Market

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.        YesX      No____

Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.         YesX      No____

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 the registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X

Indicate by check mark whether the  registrant  is an  accelerated  filer (as defined in Rule 12b-2 of the Act).  Yes____ No X

The
aggregate market value of the voting stock held by non-affiliates of the
registrant as of the last business day of the registrants most recently
completed second fiscal quarter was $38,448,717.

As
of March 1, 2004, 20,398,822 shares of Wilshire Financial Services Group
Inc.s common stock, par value $0.01 per share, were outstanding.

# DOCUMENTS
INCORPORATED BY REFERENCE

None.



---

# WILSHIRE
FINANCIAL SERVICES GROUP INC.

# FORM 10-K

# INDEX

`Item                                                                                                Page
------                                                                                                ----
PART I...........................................................................................     4
     1. Business.................................................................................     4
     2. Properties...............................................................................     15
     3. Legal Proceedings........................................................................     15
     4. Submission of Matters to a Vote of Security Holders......................................     15

PART II..........................................................................................     16
     5. Market for the Registrant's Common Equity and Related Stockholder Matters................     16
     6. Selected Financial Data and Operating Statistics.........................................     16
     7. Management's Discussion and Analysis of Financial Condition and Results of Operations....     20
     7A. Quantitative and Qualitative Disclosures About Market Risk..............................     45
     8. Financial Statements and Supplementary Data..............................................     45
     9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.....     45
     9A. Controls and Procedures.................................................................     45

PART III.........................................................................................     46
     10. Directors and Executive Officers of the Registrant......................................     46
     11. Executive Compensation..................................................................     47
     12. Security Ownership of Certain Beneficial Owners and Management..........................     53
     13. Certain Relationships and Related Transactions..........................................     54
     14. Principal Accountant Fees and Services..................................................     55

PART IV..........................................................................................     56
     15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................     56`

2

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## FORWARD-LOOKING
STATEMENTS

The
Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in such statements. All of the statements
contained in this Annual Report on Form 10-K which are not identified as
historical should be considered forward-looking. In connection with certain
forward-looking statements contained in this Annual Report on Form 10-K and
those that may be made in the future by or on behalf of the Company which are
identified as forward-looking, the Company notes that there are various factors
that could cause actual results to differ materially from those set forth in any
such forward-looking statements. Such factors include, but are not limited to,
the condition of the real estate market, interest rates, regulatory matters, the
availability of pools of servicing rights and loans at acceptable prices, and
the availability and conditions of financing for loan pool acquisitions,
mortgage loan servicing rights and other financial assets. In addition, the
Companys future actual results may depend to a significant extent on its
ability to successfully complete the sale of its wholly owned subsidiary,
Wilshire Credit Corporation, to Merrill Lynch Mortgage Capital Inc. Accordingly,
there can be no assurance that the forward-looking statements contained in this
Annual Report on Form 10-K will be realized or that actual results will not be
significantly higher or lower. The forward-looking statements have not been
audited by, examined by or subjected to agreed-upon procedures by independent
accountants, and no third party has independently verified or reviewed such
statements. Readers of this Annual Report on Form 10-K should consider these
facts in evaluating the information contained herein. The inclusion of the
forward-looking statements contained in this Annual Report on Form 10-K should
not be regarded as a representation by the Company or any other person that the
forward-looking statements contained in this Annual Report on Form 10-K will be
achieved. In light of the foregoing, readers of this Annual Report on Form 10-K
are cautioned not to place undue reliance on the forward-looking statements
contained herein.

3

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# PART I.

## ITEM 1.
Business

## General

## The Company

Wilshire
Financial Services Group Inc. and subsidiaries (WFSG or the
Company), a diversified financial services company, conducts (1)
banking and lending operations in southern California and surrounding states,
(2) specialized mortgage loan servicing operations nationwide through Wilshire
Credit Corporation (WCC) and (3) mortgage investment operations
through Wilshire Funding Corporation (WFC). The Companys
operating segments differ in terms of regulatory environment, asset acquisition
strategies and funding sources, as discussed below:

|o | Banking OperationsThrough its banking subsidiary, First Bank of
Beverly Hills, F.S.B. (the Bank or FBBH), the Company
conducts a banking business focused primarily on niche products, including the
origination and acquisition of commercial and multi-family real estate loans,
investments in residential whole loans and investments in primarily AAA-rated
and government agency mortgage-backed securities. Additionally, the Bank funds
its interest-earning assets by attracting retail and wholesale deposits and
accessing borrowings through the Federal Home Loan Bank and repurchase
agreements. The Bank is a federally chartered savings bank and is regulated by
the Office of Thrift Supervision (OTS). At December 31, 2003, FBBH
had total assets of approximately $906.2 million and employed 53 people.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o | Loan Servicing OperationsThrough its loan servicing subsidiary,
WCC, the Company conducts a full-service mortgage and consumer loan servicing
business, specializing in the servicing of labor-intensive mortgage pools
requiring expertise in loss mitigation and/or investor reporting. As of December
31, 2003, WCC serviced approximately $6.4 billion principal balance of
residential and commercial mortgage pools for more than 500 individual and
institutional investors and government agencies, and employed 398 people.
WCCs funding sources consist primarily of internal liquidity and
commercial bank financing.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o | Mortgage Investment OperationsThe Companys investment
subsidiary, WFC, acquires mortgage-backed securities and pools of performing,
sub-performing and non-performing residential and commercial loans. WFC conducts
certain of these activities with an institutional investor where such
investments align the Companys interests with those of the institutional
investor. WFCs funding sources consist primarily of commercial bank
financing and co-investors, with debt service repayment terms that generally
parallel the cash flows of the underlying collateral.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
Bank is headquartered in Calabasas, California and conducts its branch banking
activities through its single branch in Beverly Hills, California. WFSGs
administrative, investment and loan servicing headquarters are located at 14523
SW Millikan Way, Suite 200, Beaverton, Oregon, 97005, and its telephone number
is (503) 223-5600. The Company employed 455 people, including executive and
administrative personnel at the parent company, as of December 31, 2003.

## Sale of
Wilshire Credit Corporation in 2004

On
January 16, 2004, WFSG entered into an agreement to sell WCC, the Companys
wholly-owned loan servicing subsidiary, to Merrill Lynch Mortgage Capital Inc.,
a division of Merrill Lynch & Co., New York, NY. The agreement provides that
WFSG will receive a cash purchase price of approximately $52 million before
transaction fees and expenses. The purchase price is subject to adjustment based
on the net asset value reflected on WCCs closing date balance sheet.
Closing is expected to occur in the second quarter of 2004 and is subject to
various customary conditions, including the receipt of regulatory approvals. In
the accompanying consolidated financial statements, WCC is accounted for as a
disposal group held for sale. Accordingly, the assets and liabilities of WCC
have each been combined and presented as separate captions on the Consolidated
Statements of Financial Condition. In addition, WCCs results of operations
have been removed from the Companys results from continuing operations on
the Consolidated Statements of Operations, and have been presented separately in
a single caption.

## Business
Strategy

In
its Banking Operations, the Bank raises deposits and obtains funding from other
cost-effective sources, including short-term repurchase agreements and
longer-term borrowings. The Bank deploys these funds to invest in securities and
originate or acquire mortgage loans within its tolerance limits for
interest-rate and credit risk. The resultant net interest spread and the
Banks favorable expense ratio have enabled the Bank to operate profitably
and comply with its regulatory requirements. The Bank seeks to grow its deposit
franchise in southern California and to leverage its strengths in commercial and
multi-family mortgage lending, residential whole loan and mortgage-backed
securities investments to increase its earning-asset base. As discussed more
fully below (see Item 7  Managements Discussion and Analysis of
Financial Condition and Results of Operations), the Banks management has
reduced substantially its exposure to credit risk through a reduction in its
delinquent loans (as a percent of total loans) to 1.3% at December 31, 2003,
compared with 1.5% and 1.9% at year-end 2002 and 2001, respectively. In
addition, the Bank has reduced its exposure to interest rate risk through its
purchases of adjustable-rate mortgages and mortgage-backed securities, the
utilization of longer-term Federal Home Loan Bank (FHLB) borrowings,
repurchase agreements, and hedging techniques such as interest-rate swap
agreements. In implementing its strategic focus, the Bank is committed to
growing its asset platform with high-quality earning assets while maintaining an
effective overhead cost structure.

4

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In
its Loan Servicing Operations, the Company has leveraged its core competencies
in special servicing, loss mitigation and client-customized investor reporting
by expanding its contract servicing for institutional investors, and by
investing its capital primarily in the purchase of servicing rights and/or
servicing platforms. The Company has maintained an infrastructure which it
believes provides a scalable platform for high quality earnings growth in the
form of recurring long-term servicing and investment income.

Through
WFC, the Company deploys its capital where such investments or co-investments
with others serve to provide anticipated superior risk-adjusted rates of return.
The Company employs financial leverage in instances where the expected cash
flows from the underlying earning assets generally match the contractual
repayment terms of the related debt.

Subsequent
to the sale of WCC, the Company will operate as a unitary bank holding company
and will focus its strategy on the growth and profitability of its remaining
Banking and Mortgage Investments segments. The Company believes that its success
in implementing this dual strategy in its Banking Operations and in its Mortgage
Investment Operations depends primarily on its ability to (1) evaluate and
manage both credit risk and interest-rate risk and (2) employ financial leverage
such that cash flows from the underlying investments generally match the debt
service requirements.

## BANKING
OPERATIONS

The
Bank originates and acquires loans secured by commercial and multi-family
properties, purchases government and agency securities and other securities
(including mortgage-backed securities), substantially all of which are rated AAA
or better, and offers specialty lending products. Until June 2001, the Bank also
conducted a Visa and Mastercard merchant bankcard processing business and
operated a commercial mortgage banking subsidiary, George Elkins Mortgage
Banking (GEMB). Effective June 30, 2001, the Bank disposed of these
two divisions, and has subsequently refocused on its core banking and lending
activities.

## Origination
and Acquisition of Mortgage Loans

The
Bank originates and acquires high-quality first-mortgage loans secured by
multi-family residential and commercial properties. The following table sets
forth the composition of the Banks portfolio of loans by type of loan at
the dates indicated.

`Composition of FBBH Loans

                                                                          December 31,
                                            ------------------------------------------------------------------------
                                                2003           2002           2001           2000           1999
                                            ------------   ------------   ------------   ------------   ------------
                                                                     (Dollars in thousands)
Single-family residential ................  $     71,031   $    119,539   $    220,875   $    225,091   $    190,375
Multi-family residential .................       231,374        171,974        151,030        156,647         96,611
Commercial real estate ...................       311,457        194,423        152,059        178,205        163,419
Consumer and other .......................         1,043          5,896          6,936          9,889         12,575
                                            ------------   ------------   ------------   ------------   ------------
     Loan portfolio principal balance ....       614,905        491,832        530,900        569,832        462,980
Premium and deferred fees ................         2,637          2,815          3,554          2,658          4,018
Allowance for loan losses (1) ............        (6,652)        (7,826)        (8,116)       (10,233)       (18,600)
                                            ------------   ------------   ------------   ------------   ------------
     Total Loan Portfolio, net ...........  $    610,890   $    486,821   $    526,338   $    562,257   $    448,398
                                            ============   ============   ============   ============   ============`

(1)        For discussion of the allowance for loan losses allocation for purchase discount, see "Asset  Quality--Allowance for Loan
           Losses"

5

---

The
real properties which secure the Banks mortgage loans are located
throughout the United States. At December 31, 2003, the state with the greatest
concentration of properties securing the loans was California, in which the Bank
held $420.0 million principal amount of loans, or approximately 68% of the
Banks total portfolio.

The
following table sets forth certain information at December 31, 2003 regarding
the dollar amount of loans based on their contractual terms to maturity and
includes scheduled payments but not potential prepayments, as well as the dollar
amount of those loans which have fixed or adjustable interest rates. Loan
balances have not been adjusted for unamortized discounts or premiums, deferred
loan fees and the allowance for loan losses.

6

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`Maturity of FBBH Loans

                                                                             Maturing in
                                          ----------------------------------------------------------------------------------
                                                             After One        After Five
                                             One Year       Year Through    Years Through      After Ten
                                             Or Less         Five Years       Ten Years          Years            Total
                                          --------------   --------------   --------------   --------------   --------------
                                                                        (Dollars in thousands)
Single-family residential ..............  $           14   $          194   $        3,281   $       67,542   $       71,031
Multi-family residential ...............             279           19,269           52,838          158,988          231,374
Commercial and other mortgage loans ....           5,477           42,203          216,024           47,753          311,457
Consumer and other loans ...............              59              634              145              205            1,043
Interest rate terms on amounts due:
    Fixed ..............................           5,620           45,901           40,493           32,094          124,108
    Adjustable .........................             209           16,399          231,795          242,394          490,797`

Scheduled
contractual principal repayments do not reflect the actual maturities of
mortgage loans because of prepayments and, in the case of conventional mortgage
loans, due-on-sale clauses. The average life of mortgage loans, particularly
fixed-rate loans, tends to increase when current mortgage loan rates are
substantially higher than rates on existing mortgage loans and, conversely,
decrease when current mortgage loan rates are substantially lower than rates on
existing mortgages. Throughout the past three years, the average lives of both
fixed- and adjustable-rate loans have shortened significantly, as a result of
rapid prepayments triggered by the continuing low interest-rate environment.
However, a substantial number of loans in the Banks portfolio have
prepayment penalties, which tend to slow the repayment rate and provide
additional fee income to the Bank in the event of early repayment.

## Acquisition of
Securities

The
Bank invests in securities to earn positive net interest spread. The following
table sets forth the Banks holdings of mortgage-backed and other
securities at the dates indicated:

`Mortgage-Backed and Other Securities

                                                                            December 31,
                                                             ------------------------------------------
                                                                 2003           2002           2001
                                                             ------------   ------------   ------------
Available for sale:                                                    (Dollars in thousands)
     AAA mortgage-backed securities .......................  $     62,160   $     48,320   $     51,436
     Government agency mortgage-backed securities .........       161,083        211,082         64,377
     Other mortgage-backed securities .....................           207            305            360
     Agency debt securities ...............................        10,184             --             --
     Trust preferred securities ...........................         8,040          8,020          8,000
     Mutual funds .........................................         3,862          3,942             --
Held to maturity:
     Agency securities ....................................         9,607             --             --
                                                             ------------   ------------   ------------
          Total investment securities .....................  $    255,143   $    271,669   $    124,173
                                                             ============   ============   ============`

7

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## Merchant
Bankcard Processing Operations

Through
June 2001, the Bank conducted a merchant bankcard processing business, which
generated revenues through merchant discounts and processing fees for Visa and
MasterCard transactions. The Bank sold this division effective June 30, 2001.

## Funding Sources

The
Banks principal funding sources consist of (1) checking, savings and
certificate of deposit accounts generated through its single retail branch
located in Beverly Hills, California (Retail Deposits); (2)
certificates of deposit generated through the Banks money desk
(Wholesale Deposits); (3) certificates of deposit generated through
independent brokers (Brokered Deposits); (4) borrowings from the
Federal Home Loan Bank of San Francisco (FHLB advances); and (5)
repurchase agreements and other short-term borrowings with major investment
banks. The Banks FHLB advances and repurchase agreements are secured by
certain interest-earning assets. The Banks deposits generally are not
collateralized, with the exception of approximately $30 million of public fund
certificates of deposit from the State of California, which are secured by loans
and mortgage-backed securities.

FBBH
generally accumulates deposits through its Beverly Hills branch, local media
advertising, and by participating in deposit rate surveys. The Bank competes for
deposits to a large extent on the basis of rates and, therefore, could
experience difficulties in attracting deposits if it could not continue to offer
deposit rates at levels competitive with those of other banks and savings
institutions.

The
following table sets forth information relating to the Banks deposits,
borrowings and other interest-bearing obligations at the dates indicated.

`Deposits, Borrowings and Interest-Bearing Obligations

                                                                                   December 31,
                                                                    ------------------------------------------
                                                                        2003           2002           2001
                                                                    ------------   ------------   ------------
                                                                              (Dollars in thousands)
      Deposits....................................................  $    473,409   $    395,781   $    439,469
      Repurchase agreements and other short-term borrowings.......        88,000         91,870             --
      FHLB advances...............................................       249,337        216,000        189,500
                                                                    ------------   ------------   ------------
            Total.................................................  $    810,746   $    703,651   $    628,969
                                                                    ============   ============   ============`

Deposits.  The following table sets forth information relating to the Bank's deposits at the dates indicated.

`December 31,
                                               ---------------------------------------------------------------------------
                                                         2003                      2002                     2001
                                               -----------------------   -----------------------   -----------------------
                                                               Avg.                      Avg.                      Avg.
                                                 Amount        Rate        Amount        Rate        Amount        Rate
                                               ----------   ----------   ----------   ----------   ----------   ----------
                                                                         (Dollars in thousands)
Noninterest bearing deposit accounts ........  $    4,175         0.00%  $    3,659         0.00%  $    2,794         0.00%
NOW and money market accounts ...............      65,500         1.72       43,044         1.98       28,811         2.12
Savings accounts ............................       2,319         1.07        1,746         1.98        4,265         1.91
Certificates of deposit .....................     401,415         2.45      347,332         3.52      403,599         4.42
                                               ----------   ----------   ----------   ----------   ----------   ----------
      Total deposits ........................  $  473,409         2.32%  $  395,781         3.32%  $  439,469         4.22%
                                               ==========   ==========   ==========   ==========   ==========   ==========`

As
a percentage of the Banks total deposits at December 31, 2003, Wholesale
Deposits account for 25%, Brokered Deposits account for 38% and Retail Deposits
account for 37%. Generally, the Bank obtains Wholesale Deposits on terms more
financially attractive to it than those obtainable through Brokered Deposits.

8

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The
following table sets forth, by various interest rate categories, the Banks
certificates of deposit at December 31, 2003.

`Interest Rates for Certificates of Deposit

                                                                          December 31, 2003
                                                                          -----------------
                                                                          (Dollars in thousands)
              1.50% or less.............................................   $    107,328
              1.51-2.50%................................................        162,422
              2.51-3.50%................................................         42,387
              3.51-4.50%................................................         41,165
              4.51-5.50%................................................         45,750
              5.51% or greater..........................................          2,363
                                                                           ------------
                    Total...............................................   $    401,415
                                                                           ============`

The
following table sets forth the amount and maturities of the Banks
certificates of deposit at December 31, 2003.

`Maturities of Certificates of Deposit

                                                                     Original Maturity in Months
                                                            ---------------------------------------------
                                                             12 or Less     Over 12 to 36      Over 36
                                                            -------------   -------------   -------------
                                                                       (Dollars in thousands)
        Balances Maturing in 3 Months or Less.............  $      67,976   $       3,947   $          45
              Weighted Average Rate.......................           1.49%           4.05%           4.25%
        Balances Maturing in over 3 Months to 12
           Months.........................................  $     180,177   $     101,096   $          35
              Weighted Average Rate.......................           1.64%           4.25%           4.80%
        Balances Maturing in over 12 Months to 36
           Months.........................................             --   $      36,301   $       1,504
              Weighted Average Rate.......................             --            2.70%           6.37%
        Balances Maturing in over 36 Months...............             --              --   $      10,334
              Weighted Average Rate.......................             --              --            3.36%`

At
December 31, 2003, the Bank had outstanding an aggregate of approximately $289.8
million of certificates of deposit in face amounts equal to or greater than
$100,000 maturing as follows: approximately $45.1 million within three months,
approximately $115.1 million over three months through six months, approximately
$84.9 million over six months through 12 months, and approximately $44.7 million
thereafter.

FHLB
Advances. The Bank obtains FHLB advances based on the security of certain of
its assets, provided FBBH has met certain standards related to its
creditworthiness. FHLB advances are available to member financial institutions
such as FBBH for investment and lending activities and other general business
purposes. FHLB advances are made pursuant to several different credit programs
(each of which has its own interest rate, which may be fixed or adjustable).
FBBH is currently authorized to obtain FHLB advances in amounts up to 35% of
total assets measured as of each previous quarter-end and for terms of up to 10
years.

The
following table sets forth the Banks FHLB advances at and for the years
ended December 31, 2003, 2002, and 2001:

`At or for the Year Ended
                                                                                      December 31,
                                                                       ------------------------------------------
                                                                           2003           2002           2001
                                                                       ------------   ------------   ------------
                                                                                 (Dollars in thousands)
FHLB Advances:
      Average amount outstanding during the period...................  $    223,424   $    189,923   $    153,269
      Maximum month-end balance outstanding during the period........       249,337        216,000        189,500
      Weighted average rate:
            During the period........................................          4.05%          5.23%          6.25%
            At end of period.........................................          3.27%          4.66%          5.54%`

9

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As
of December 31, 2003, the Bank had $78.5 million of FHLB advances maturing
within one year, $110.0 million maturing between one and two years, $44.5
million maturing between two and three years, and $16.3 million maturing between
three and four years. These advances are secured by mortgage-backed securities
and loans.

Repurchase
Agreements and Other Short-Term Borrowings. The Bank has outstanding
short-term repurchase agreements that provide immediate liquidity and financing
for purchases of investment securities and pools of loans. The following table
sets forth certain information related to the Banks repurchase agreements
and other short-term borrowings as of December 31, 2003, 2002 and 2001.

`At or for the Year Ended
                                                                                      December 31,
                                                                       ------------------------------------------
                                                                           2003           2002           2001
                                                                       ------------   ------------   ------------
                                                                                 (Dollars in thousands)
Repurchase Agreements and Other Short-Term Borrowings:
      Average amount outstanding during the period..................   $     89,162   $     55,651   $         23
      Maximum month-end balance outstanding during the period.......         95,433         91,870          4,277
      Weighted average rate:
            During the period.......................................           2.04%          2.43%          6.70%
            At end of period........................................           1.96%          2.16%            --%`

## Asset Quality
 Banking Operations

The
Bank is exposed to certain credit risks related to the value of the collateral
that secures its loans and the ability and willingness of borrowers to repay
their loans. The Bank closely monitors its pools of loans and foreclosed real
estate for potential problems on a periodic basis.

Non-Performing
Loans. It is the Banks policy to establish an allowance for
uncollectible interest previously accrued on loans that are over 90 days past
due, or at any time when, in the judgment of management, the probability of
collection of interest is deemed to be insufficient to warrant further accrual.
Upon such a determination, those loans are placed on non-accrual status and
deemed to be non-performing. When a loan is placed on non-accrual status,
previously accrued but unpaid interest is reversed by a charge to interest
income.

Foreclosed
Real Estate. The Bank carries its holdings of foreclosed real estate at the
lower of the net carrying value of the underlying loan or fair value less
estimated costs to sell. Holding and maintenance costs related to properties are
recorded as expenses in the period incurred. Declines in values of foreclosed
real estate subsequent to acquisition are charged to income and recognized as a
valuation allowance. The following table sets forth the aggregate carrying value
of the Banks holdings of foreclosed real estate (by source of acquisition)
at the dates indicated.

`Bank Foreclosed Real Estate by Loan Type

                                                                                  December 31,
                                                    ------------------------------------------------------------------------
                                                        2003           2002           2001           2000           1999
                                                    ------------   ------------   ------------   ------------   ------------
    Loans:                                                                   (Dollars in thousands)
    Single-family residential ...................   $        281   $      1,002   $        246   $        648   $      1,073
    Multi-family residential ....................             --             --             --             32            462
    Commercial and other mortgage loans .........             --             38            183            110            929
                                                    ------------   ------------   ------------   ------------   ------------
          Total .................................            281          1,040            429            790          2,464
    Valuation allowance for losses ..............            (14)            --             --            (11)          (198)
                                                    ------------   ------------   ------------   ------------   ------------
          Foreclosed real estate owned, net .....   $        267   $      1,040   $        429   $        779   $      2,266
                                                    ============   ============   ============   ============   ============`

Allowance
for Loan Losses. The Bank maintains an allowance for loan losses at a level
believed adequate by management to absorb estimated losses inherent in the loan
portfolios. The allowance is increased by provisions for loan losses charged
against operations, recoveries of previously charged off loans, and allocations
of discounts on purchased loans, and is decreased by loan charge-offs. Loans are
charged off when they are deemed to be uncollectible.

The
Bank uses its internal asset review system to evaluate its loan portfolio and to
classify loans as pass, special mention, substandard, doubtful or loss. These
terms correspond to varying degrees of risk that the loans will not be collected
in part or in full. The frequency at which a specific loan is subjected to
internal asset review depends on the type and size of the loan and the presence
or absence of other risk factors, such as delinquency and changes in collateral
values. The allowance for loan losses includes specific valuation allowances
(SVAs) established for impaired loans and for certain other
classified loans, and general valuation allowances (GVAs).

10

---

SVAs
are in most cases equal to the excess of the unpaid principal balance over the
fair value of the collateral for all impaired loans. GVAs are based on
quantitative factors that are updated each quarter, and represent the average of
the Banks loss mitigation factors and benchmark factors. In calculating
the allowance, qualitative factors are subject to managements evaluation
after consideration of certain credit risk characteristics. These factors
include, but are not limited to, the following: the institutions
historical and recent loss experience in its portfolios; the volume, severity
and trend of non-performing assets; the extent to which refinances or loan
modifications are made to maintain loans in a current status; known
deterioration in credit concentrations or certain classes of loans; loan to
value ratios of real estate secured loans; risks associated with specific types
of collateral; the quality and effectiveness of the lending policy, loan
purchase policy, internal asset review policy, charge-off, collection and
recovery policies; current and anticipated conditions in the general and local
economies which might affect the collectability of the institutions asset;
anticipated changes in the composition or volume of the loan portfolio;
reasonableness standards in accordance with regulatory agency policies; and the
comparison of the Banks allowance with that of industry peers.

To
assess the adequacy of the Banks allowance for loan losses, the portfolio
is segmented into three components: impaired loans, homogeneous loans, and
non-homogeneous loans.

        Impaired loans have
been defined as all loan types classified either substandard, doubtful, or loss
(including loans which may have been upgraded but which are troubled debt
restructurings). SVAs are measured on a loan-by-loan basis utilizing either the
discounted cash flow or fair market value approaches, as defined under the
accounting standards for impaired loans.

        Homogeneous loans have
been defined as loans secured by one to four single-family residences, mobile
home loans, and consumer loans, and are analyzed by their respective loan group.
GVA loss estimates are measured utilizing peer benchmark factors for homogeneous
pools.

        Non-homogeneous loans
include the following loan types: multifamily, commercial real estate,
bridge loans, construction loans, and commercial unsecured. The
non-homogeneous loans are analyzed individually. GVA loss estimates are
developed based upon risk rating utilizing migration analysis, which considers
the impact of losses on a loan-by-loan basis. A loss horizon of four years has
been developed with the objective of achieving loss data to capture a full
business cycle.

When
FBBH increases the allowance for loan losses related to loans, it records a
corresponding increase to the provision for loan losses in the statement of
operations. The OTS, as part of its examination process, periodically reviews
the Banks allowances for losses and the carrying values of its assets.
There can be no assurance that the OTS will not require additional reserves
following future examinations.

The
following table sets forth information with respect to the Banks allowance
for loan losses by category of loan.

`Allowance for Loan Losses by Loan Category

                                                                             December 31,
                                               ------------------------------------------------------------------------
                                                   2003           2002           2001           2000           1999
                                               ------------   ------------   ------------   ------------   ------------
Allowance for loan losses:                                              (Dollars in thousands)
          Real estate ......................   $      6,575   $      6,861   $      6,912   $      8,845   $     11,363
          Non-real estate ..................             77            825          1,060            961          2,601
          Discounted loans .................             --            140            144            427          4,636
                                               ------------   ------------   ------------   ------------   ------------
          Total allowance for loan losses ..   $      6,652   $      7,826   $      8,116   $     10,233   $     18,600
                                               ============   ============   ============   ============   ============

Percentage of loans in each category to total loans:
          Real estate ......................           99.8%          98.7%          98.6%          98.1%          94.1%
          Non-real estate ..................            0.2            1.2            1.3            1.7            2.6
          Discounted loans .................             --            0.1            0.1            0.2            3.3
                                               ------------   ------------   ------------   ------------   ------------
          Total ............................          100.0%         100.0%         100.0%         100.0%         100.0%
                                               ============   ============   ============   ============   ============`

11

---

The
following table sets forth the activity in the allowance for loan losses during
the periods indicated.

`Activity in the Allowance for Loan Losses

                                                                       Year Ended December 31,
                                                    --------------------------------------------------------------
                                                       2003         2002         2001         2000         1999
                                                    ----------   ----------   ----------   ----------   ----------
                                                                        (Dollars in thousands)
    Balance, beginning of period ................   $    7,826   $    8,116   $   10,233   $   18,600   $   23,398
    Allocation of purchased loan discount:
          at acquisition ........................           --           --           --           --           --
          at disposition ........................           --           --           --       (1,150)      (1,538)
    Charge-offs .................................         (492)        (474)        (894)      (1,794)      (2,468)
    Recoveries ..................................           68          184          507          377          458
    Recapture of loan losses ....................         (750)          --       (1,730)      (5,800)      (1,250)
                                                    ----------   ----------   ----------   ----------   ----------
    Balance, end of period ......................   $    6,652   $    7,826   $    8,116   $   10,233   $   18,600
                                                    ==========   ==========   ==========   ==========   ==========`

The
table below sets forth the delinquency status of the Banks loans at the
dates indicated.

`Delinquency Experience for Loans

                                                                      December 31,
                                        ------------------------------------------------------------------------
                                            2003           2002           2001           2000           1999
                                        ------------   ------------   ------------   ------------   ------------
Balance of delinquent loans:                                     (Dollars in thousands)
    31-60 days ......................   $      2,326   $      2,269   $      1,788   $     13,487   $      2,845
    61-90 days ......................            123          1,052            836            920          1,162
    91 days or more (1) .............          5,816          4,043          7,570          4,452          3,816
                                        ------------   ------------   ------------   ------------   ------------
          Total loans delinquent ....   $      8,265   $      7,364   $     10,194   $     18,859   $      7,823
                                        ============   ============   ============   ============   ============

Delinquent loans as a percentage of
   total loan portfolio:
    31-60 days.......................            0.4%           0.5%           0.3%           2.4%           0.6%
    61-90 days.......................             --            0.2            0.2            0.1            0.3
    91 days or more (1)..............            0.9            0.8            1.4            0.8            0.8
                                        ------------   ------------   ------------   ------------   ------------
          Total......................            1.3%           1.5%           1.9%           3.3%           1.7%
                                        ============   ============   ============   ============   ============`

(1)   All loans delinquent over 90 days were on nonaccrual status.

## LOAN SERVICING
OPERATIONS

From
its formation in 1999 to the present, WCC, a wholly-owned subsidiary of WFSG,
has conducted the Companys Loan Servicing Operations. As discussed above,
in January 2004 the Company entered into an agreement to sell WCC to Merrill
Lynch Mortgage Capital Inc. The closing of this sale is expected to occur in the
second quarter of 2004, subject to various conditions, including regulatory
approvals.

From
May 31, 1999, the effective date of WFSGs reorganization, through
September 30, 2002, WCC was a majority-owned (50.01%) subsidiary of WFSG. In
October 2002, pursuant to a litigation settlement, WFSG purchased the 49.99%
minority interest in WCC and currently owns 100% of the subsidiary. The 49.99%
interest not held by the Company is reflected as minority interest
in the Companys consolidated financial statements for the periods prior to
the purchase.

WCC
provides loan portfolio management services, including billing, portfolio
administration and collection services for pools of loans. WCC has developed
specialized procedures and proprietary software designed to service performing,
non-performing and sub-performing loans and foreclosed real estate. As part of
its loan pool acquisition or servicing analysis, WCC develops a strategy for
each pool of loans that is intended to maximize cash flow from that pool of
loans.

In
the normal course of performing loan servicing activities, WCC makes servicer
advances to various unrelated third parties which represent impound payments on
behalf of borrowers, scheduled remittances of principal and interest on certain
securitizations, and loan collection costs on securitizations and other
servicing arrangements. In addition, from time to time WCC will acquire
servicing portfolios and capitalize the related mortgage servicing rights
(PMSRs). WCC has financed its servicer advances and PMSR acquisitions primarily
through notes payable and lines of credit from commercial banks and
institutional lenders.

12

---

The
following table sets forth the composition of loans serviced by WCC by type of
loan at the dates indicated.

`December 31,
                                          ------------------------------------------
                                              2003           2002           2001
                                          ------------   ------------   ------------
                                                    (Dollars in thousands)
Single-family residential ..............  $  5,973,070   $  3,668,401   $  3,020,267
Multi-family residential ...............       116,119        121,908        141,297
Commercial real estate .................       289,629        218,976        192,275
Consumer and other .....................        71,135         78,880         90,497
                                          ------------   ------------   ------------
      Total (1) ........................  $  6,449,953   $  4,088,165   $  3,444,336
                                          ============   ============   ============`

|(1) | WCC's  servicing  portfolio at December 31, 2003 and 2002 also  included  approximately  $0.3 billion  unpaid  principal
    balance of non-performing consumer loans in addition to those presented above.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As
the above table indicates, WCCs loan servicing operations have grown
significantly in volume over the past three years, though the growth was
hindered somewhat by the continuing low interest-rate environment, which,
beginning in 2001, triggered rapid prepayments on the loans in the servicing
portfolio and resulted in accelerated amortization of the related PMSRs. WCC
achieved this growth primarily as a result of new contractual flow agreements
and acquisitions of PMSRs.

From
time to time, WCC acquires loans in certain circumstances in the course of its
loan servicing operations. The following table sets forth the composition of
discounted loans held by WCC by type of loan as of the dates indicated.

`Composition of Discounted Loans

                                                                                 December 31,
                                                   ------------------------------------------------------------------------
                                                       2003           2002           2001           2000           1999
                                                   ------------   ------------   ------------   ------------   ------------
                                                                            (Dollars in thousands)
Single-family residential.......................   $        276   $        505   $        471   $      3,746   $        841
Consumer and other..............................          1,818          1,288          9,090            740             --
                                                   ------------   ------------   ------------   ------------   ------------
      Discounted loans principal balance........          2,094          1,793          9,561          4,486            841
Unamortized premium (unaccreted discount)
    and deferred fees...........................             15            (47)        (2,479)           195           (152)
Allowance for loan losses (1)...................         (1,587)          (945)        (3,343)        (2,149)           (95)
                                                   ------------   ------------   ------------   ------------   ------------
      Total Discounted Loans, net (2) ..........   $        522   $        801   $      3,739   $      2,532   $        594
                                                   ============   ============   ============   ============   ============`

|(1) | For discussion of the allowance for loan losses allocation for purchase discount, see "Asset  Quality--Allowance for Loan
Losses."
|--- | ----------------------------------------------------------------------------------------------------------------------------------

|(2) | The real properties that secure WCC's  discounted  loans are located  throughout the United States and its  territories.
           At December 31, 2003,  the five states or  territories  with the greatest  concentration  of properties  securing  WCC's
           discounted  loans were  California,  New York,  North Carolina,  Florida and Guam, in which WCC held $1.1 million,  $0.2
           million, $147 thousand, $130 thousand and $129 thousand principal amount of loans, respectively.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

## Asset Quality
 Loan Servicing Operations

WCC
is exposed to certain credit risks related to the value of the collateral that
secures our loans and the ability of borrowers to repay their loans. We monitor
our pools of loans and foreclosed real estate for potential problems on a
periodic basis.

Non-Performing
Loans. It is our policy to establish an allowance for uncollectible interest
on previously accrued loans that are over 90 days past due, or at any time when,
in the judgment of management, the probability of collection of interest is
deemed to be insufficient to warrant further accrual. Upon such a determination,
those loans are placed on non-accrual status and deemed to be non-performing.
When a loan is placed on non-accrual status, previously accrued but unpaid
interest is reversed by a charge to interest income.

13

---

Foreclosed
Real Estate. WCC carries its holdings of foreclosed real estate at the lower
of cost or fair value less estimated costs to sell. Holding and maintenance
costs related to properties are recorded as expenses in the period incurred.
Declines in values of foreclosed real estate subsequent to acquisition are
charged to income and recognized as a valuation allowance. Subsequent increases
in the valuation of real estate owned are reflected as a reduction in the
valuation allowance, but not below zero, and credited to income. The following
table sets forth the aggregate carrying value of WCCs holdings of
foreclosed real estate (by source of acquisition) at the dates indicated.

`WCC Foreclosed Real Estate by Loan Type

                                                                                 December 31,
                                                        --------------------------------------------------------------
                                                           2003         2002         2001         2000         1999
                                                        ----------   ----------   ----------   ----------   ----------
                                                                            (Dollars in thousands)
            Single-family residential...............    $       --   $       --   $       --   $       21   $       --
            Land  ..................................            --           --          279          279           --
            Commercial and other mortgage loans.....           601           --           --           --           --
                                                        ----------   ----------   ----------   ----------   ----------
                  Total.............................           601           --          279          300           --
            Valuation allowance for losses..........           (20)          --         (226)        (203)          --
                                                        ----------   ----------   ----------   ----------   ----------
            Foreclosed real estate owned, net.......    $      581   $       --   $       53   $       97   $       --
                                                        ==========   ==========   ==========   ==========   ==========`

Allowance
for Loan Losses. We maintain an allowance for loan losses at a level
believed adequate by management to absorb estimated incurred losses in the loan
portfolios. The allowance is increased by provisions for loan losses charged
against operations, recoveries of previously charged-off loans, and allocations
of discounts on purchased loans, and is decreased by loan charge-offs. Loans are
charged off when they are deemed to be uncollectible.

## MORTGAGE
INVESTMENT OPERATIONS

The
Companys Mortgage Investment Operations are conducted by WFC, a
wholly-owned investment subsidiary formed in 1996. WFC acquires mortgage-backed
securities and pools of performing, sub-performing and non-performing
residential and commercial loans. WFC conducts certain of these activities with
an institutional investor where such investments align the Companys
interests with those of the institutional investor.

Loan
pools acquired by the Companys Mortgage Investment Operations consist
primarily of discounted loans. At December 31, 2003, WFC held approximately $3.8
million of such loans. Currently, WFC is seeking to sell these loans, and
continues to pursue collection on such loans when permitted by applicable
collection statutes and where it is deemed cost-effective.

The
following table sets forth the composition of discounted loans held by WFC by
type of loan at the dates indicated.

`Composition of Discounted Loans (1)

                                                                             December 31,
                                               ------------------------------------------------------------------------
                                                   2003           2002           2001           2000           1999
                                               ------------   ------------   ------------   ------------   ------------
                                                                        (Dollars in thousands)
Single-family residential ...................  $      2,229   $      3,025   $      6,172   $      4,938   $     17,016
Multi-family residential ....................             1            238          1,142            634          1,477
Commercial real estate ......................           817            980          1,582          3,464         14,990
Consumer and other (2) ......................        33,031         41,954         45,762        211,096        220,461
                                               ------------   ------------   ------------   ------------   ------------
      Discounted loans principal balance ....        36,078         46,197         54,658        220,132        253,944
Unaccreted discount and deferred fees .......          (220)          (393)        (1,018)        (1,580)        (4,472)
Allowance for loan losses (2) (3) ...........       (32,041)       (39,975)       (42,070)      (210,870)      (223,580)
                                               ------------   ------------   ------------   ------------   ------------
    Total Discounted Loans, net (4) .........  $      3,817   $      5,829   $     11,570   $      7,682   $     25,892
                                               ============   ============   ============   ============   ============`

14

---

|(1) | Prior to 1999, the predecessor  company to the Company purchased pools of non-performing  loans at prices representing a
           significant  discount  from the loans'  unpaid  balances.  The Company  fully  reserved  for  estimated  losses on these
           discounted loans at the time of their acquisition.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Approximately $166 million in unpaid principal balance of fully-reserved discounted loans were charged off in 2001.
|--- | -------------------------------------------------------------------------------------------------------------------

|(3) | For discussion of the allowance for loan losses allocation for purchase discount, see "Asset  Quality--Allowance for Loan
           Losses."
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------

|(4) | The real properties that secure WFC's discounted loans are located  throughout the United States.  At December 31, 2003,
           the five states with the greatest  concentration  of  properties  securing our  discounted  loans were  Florida,  Texas,
           Oregon,  California  and Maryland,  in which WFC held $7.4 million,  $4.0 million,  $2.6 million,  $2.6 million and $2.2
           million principal amount of loans, respectively.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
carrying value of WFCs subordinated mortgage-backed securities at December
31, 2003, 2002, and 2001 totaled $0.9 million, $1.8 million, and $3.4 million,
respectively. The related short-term repurchase agreement which financed these
securities was repaid in full in 2001.

WFCs
funding sources consist primarily of borrowings with a co-investor and
commercial bank financing. The contractual repayment terms of these debt
facilities generally parallel the cash flows of the assets serving as
collateral.

## Asset Quality
 Mortgage Investment Operations

WFC
is exposed to certain credit risks related to the value of the collateral that
secures our loans and the ability of borrowers to repay their loans. We monitor
our pools of loans and foreclosed real estate for potential problems on a
periodic basis.

Non-Performing
Loans. It is our policy to establish an allowance for uncollectible interest
on previously accrued loans that are over 90 days past due, or at any time when,
in the judgment of management, the probability of collection of interest is
deemed to be insufficient to warrant further accrual. Upon such a determination,
those loans are placed on non-accrual status and deemed to be non-performing.
When a loan is placed on non-accrual status, previously accrued but unpaid
interest is reversed by a charge to interest income.

Foreclosed
Real Estate. WFC carries its holdings of foreclosed real estate at the lower
of cost or fair value less estimated costs to sell. Holding and maintenance
costs related to properties are recorded as expenses in the period incurred.
Declines in values of foreclosed real estate subsequent to acquisition are
charged to income and recognized as a valuation allowance. Subsequent increases
in the valuation of real estate owned are reflected as a reduction in the
valuation allowance, but not below zero, and credited to income. The following
table sets forth the aggregate carrying value of WFCs holdings of
foreclosed real estate (by source of acquisition) at the dates indicated.

`WFC Foreclosed Real Estate by Loan Type

                                                                                    December 31,
                                                           --------------------------------------------------------------
                                                              2003         2002         2001         2000         1999
                                                           ----------   ----------   ----------   ----------   ----------
         Loans (1):                                                            (Dollars in thousands)
            Single-family residential...................   $       --   $       28   $      357   $      429   $    1,872
            Multi-family residential....................           --           --          118           53          199
            Commercial and other mortgage loans.........           52          116          101          554        2,916
                                                           ----------   ----------   ----------   ----------   ----------
                  Total.................................           52          144          576        1,036        4,987
            Valuation allowance for losses..............          (52)         (83)        (328)        (143)      (1,567)
                                                           ----------   ----------   ----------   ----------   ----------
            Foreclosed real estate owned, net...........   $       --   $       61   $      248   $      893   $    3,420
                                                           ==========   ==========   ==========   ==========   ==========`

(1)      The decreases in foreclosed real estate are due to sale of the properties to third parties.

Allowance  for Loan Losses.  We maintain an allowance  for loan losses at a level  believed  adequate by management to absorb
estimated  incurred  losses in the loan  portfolios.  The  allowance is increased by  provisions  for loan losses  charged  against
operations,  recoveries of previously  charged-off loans, and allocations of discounts on purchased loans, and is decreased by loan
charge-offs. Loans are charged off when they are deemed to be uncollectible.

15

---

When the Company acquires pools of discounted  loans, it records an increase to the allowance for loan losses by allocating a
portion of the purchase discount deemed to be associated with measurable  credit risk.  Amounts allocated to the allowance for loan
losses from purchase  discounts do not increase the provision for loan losses recorded in the statement of operations;  rather they
decrease the amounts of the purchase  discounts that are accreted into the interest  income over the lives of the loans.  If, after
the initial allocation of the purchase discount to the allowance for loan losses,  management  subsequently identifies the need for
additional  allowances  against  discounted loans, the additional  allowances are established  through charges to the provision for
loan losses.

16

---

## Restructuring of WFSG

On June 10, 1999, the Company completed its plan of reorganization  under Chapter 11 of the United States Bankruptcy Code and
emerged from bankruptcy.  The restructuring was the Company's  necessary response to significant  adverse market factors arising in
late 1998 and continuing into early 1999. For financial reporting purposes,  the Company accounted for the restructuring  effective
May 31, 1999. The periods prior to this date have been  designated  "Predecessor  Company" and the periods  subsequent to this date
have  been  designated  "Reorganized  Company."  As a result  of the  restructuring,  the  Company  believes  that the  results  of
operations of the Reorganized Company are not comparable to those of the Predecessor Company.

## ITEM 2. Properties

The Company's  corporate  headquarters  and loan  servicing  operations are located in Beaverton,  Oregon,  where the Company
leases  approximately  123,000 square feet of office space from Millikan 78 Equities LLC, pursuant to a lease agreement expiring in
December 2012. The Bank leases its branch office in Beverly Hills,  California,  and office space for its administrative offices in
Calabasas,  California  pursuant to leases  expiring  September 30, 2008 and August 31, 2004,  respectively.  The Bank currently is
considering extending the lease of its offices in Calabasas and also is evaluating alternative locations for its offices.

Subsequent to the sale of WCC to Merrill Lynch Mortgage  Capital Inc., WCC will continue to operate at the corporate  offices
in  Beaverton,  Oregon,  and WFSG's  corporate  headquarters  will  relocate  to the Bank's  administrative  offices in  Calabasas,
California.  The Company  believes  that its  facilities  are suitable and adequate for its present  business  purposes and for the
foreseeable future.

## ITEM 3. Legal Proceedings

On May 13,  2002,  the Company  entered  into an agreement  to resolve all issues with all of the  plaintiffs  in  litigation
arising from the financial collapse of Capital  Consultants LLC ("CCL").  All parties have completed all of their obligations under
the settlement  agreement,  including the Company's  purchase of the 49.99% minority interest in WCC in October 2002. The execution
of the settlement  agreement does not affect WFSG's complete denial of all such claims.  Management,  after consultation with legal
counsel, believes that this litigation will be dismissed in the next few months.

In 2002, the Company recorded a $3.6 million  provision for estimated  expenses and losses in connection with the settlement,
$0.6 million in related  charges,  and  approximately  $0.55  million in legal fees and expenses,  net of insurance  reimbursement,
associated with finalizing and implementing  this settlement.  The settlement is expected to eliminate most of the Company's future
costs arising from the  financial  collapse of CCL.  However,  the Company does expect to incur  additional  expenses in connection
with  legal  costs  for a  prior  officer  arising  from  the  events  that  gave  rise to the  litigation.  The  Company  incurred
approximately  $2.5 million and $1.7  million,  respectively,  of such costs for former  officers for the years ended  December 31,
2003 and 2002.

In June 2001,  the Bank sold its Bankcard  Division to iPayment  Holdings,  Inc. for a purchase price of  approximately  $5.8
million,  with possible  additional  payments  totaling $0.4 million.  The Bank filed a lawsuit for payment of part of the purchase
price,  and iPayment,  in September  2002,  filed a  cross-complaint  against the Bank for fraud,  breach of contract and negligent
misrepresentation.  iPayment  claimed  damages for the difference in the purchase price due to the allegedly  decreased  value of a
portion of the merchant portfolio;  chargebacks  resulting from merchant fraud that iPayment is liable to pay, and will not be able
to recover,  from the merchant totaling between $5 to $6 million;  and attorneys' fees and punitive damages.  Without any admission
of liability,  the parties in February 2004 settled the case for $0.4 million to be paid by the Bank to iPayment,  in addition to a
mutual  release and  additional  indemnification  protection  for the Bank.  This  settlement  has been  reflected in the Company's
consolidated statement of operations for the year ended December 31, 2003.

The Company is a defendant in other legal actions  arising from  transactions  conducted in the ordinary  course of business.
Some of these claims involve individual  borrowers demanding material amounts for alleged damages.  Management,  after consultation
with legal counsel,  and based on prior  experience with consumer  claims,  believes the ultimate  liability,  if any, arising from
such actions will not materially affect the Company's consolidated results of operations, financial position or cash flows.

## ITEM 4. Submission of Matters to a Vote of Security Holders

Not applicable.

17

---

## PART II.

## ITEM 5. Market for the Registrant's Common Equity and Related Stockholder Matters

The Company's  common stock, par value $0.01 per share (the "Common Stock")  commenced  trading on the Nasdaq National Market
on March 10, 2004, and is listed under the symbol "WFSG."  Previously,  from August 13, 2003 to March 9, 2004, the Common Stock was
traded  on the  Nasdaq  SmallCap  Market  under  the  same  symbol.  Prior  to  August  13,  2003,  the  Common  Stock  was  traded
over-the-counter  under the symbol  "WFSG.OB."  At March 1, 2004,  there were 51 record  holders of the  Company's  Common Stock in
street name.

The following table sets forth the range of high and low sales prices for Common Stock for the periods indicated:

`Period                        High            Low
                                      ------                        ----            ---
                 Year ended December 31, 2003:
                       First Quarter..........................      $3.85          $3.25
                       Second Quarter.........................      $4.11          $3.73
                       Third Quarter..........................      $4.87          $4.07
                       Fourth Quarter.........................      $6.05          $4.67

                 Year ended December 31, 2002:
                       First Quarter..........................      $2.99          $2.03
                       Second Quarter.........................      $3.51          $2.30
                       Third Quarter..........................      $3.50          $3.22
                       Fourth Quarter.........................      $3.50          $3.15`

The
Company has not paid any cash dividends on its Common Stock. The Companys
Board of Directors intends to consider its future dividend policy, if any,
subsequent to the sale of WCC.

## ITEM 6.
Selected Financial Data and Operating Statistics

The
following tables present selected financial information for the Company at the
dates and for the periods indicated. The historical statements of operations and
financial condition data for the five years presented have been derived from the
audited consolidated financial statements of the Company. The financial data related to WCC in the following tables is presented separately as "Income (loss) from operations of subsidiary held for sale".  The 1999 statement of
operations and operating data includes the five-month period ended May 31, 1999
prior to reorganization (Predecessor Company) and the seven-month
period ended December 31, 1999 following reorganization (Reorganized
Company). Management does not believe that the results of the Predecessor
Company are comparable to those of the Reorganized Company.

18

---

`Year Ended December 31,
                                                                       ----------------------------------------------------------
                                                                          2003        2002        2001        2000        1999
                                                                       ----------  ----------  ----------  ----------  ----------
Statements of Operations Data:                                               (Dollars in thousands, except per-share amounts)
Total interest income ...............................................  $   45,536  $   52,715  $   56,429  $   54,019  $   64,462
Total interest expense ..............................................      23,685      28,622      34,910      35,141      43,908
                                                                       ----------  ----------  ----------  ----------  ----------
   Net interest income ..............................................      21,851      24,093      21,519      18,878      20,554
(Recapture of) provision for loan losses ............................        (539)        255      (1,801)     (4,027)      3,722
                                                                       ----------  ----------  ----------  ----------  ----------
   Net interest income after (recapture of) provision for loan losses      22,390      23,838      23,320      22,905      16,832
Other (loss) income(1) ..............................................        (136)     (1,603)      8,111      11,000     231,662
Other expenses ......................................................      16,323      20,817      22,172      25,525      51,359
                                                                       ----------  ----------  ----------  ----------  ----------
Income from continuing operations before reorganization items and
   income tax provision .............................................       5,931       1,418       9,259       8,380     197,135
Reorganization items ................................................          --          --          --          --     (52,034)
                                                                       ----------  ----------  ----------  ----------  ----------
Income from continuing operations before income tax provision........       5,931       1,418       9,259       8,380     145,101
Income tax provision ................................................       2,539         534       3,000       3,756       1,312
                                                                       ----------  ----------  ----------  ----------  ----------
Income from continuing operations ...................................       3,392         884       6,259       4,624     143,789
Income (loss) from operations of subsidiary held for sale, net of tax       3,495       1,764      (1,294)     (2,406)     (1,084)
Minority interest in subsidiary held for sale(2) ....................          --        (686)        647       1,203         542
                                                                       ----------  ----------  ----------  ----------  ----------
Income (loss) from operations of subsidiary held for sale, net of tax
   and minority interest ............................................       3,495       1,078        (647)     (1,203)       (542)
                                                                       ----------  ----------  ----------  ----------  ----------
Net income ..........................................................  $    6,887  $    1,962  $    5,612  $    3,421  $  143,247
                                                                       ==========  ==========  ==========  ==========  ==========
Earnings (loss) per share - Basic(3):
   Income from continuing operations.................................  $     0.18  $     0.05  $     0.31  $     0.23         N/A
   Discontinued operations...........................................        0.19        0.06       (0.03)      (0.06)        N/A
                                                                       ----------  ----------  ----------  ----------  ----------
   Net income........................................................  $     0.37  $     0.11  $     0.28  $     0.17         N/A
                                                                       ==========  ==========  ==========  ==========  ==========
Earnings (loss) per share - Diluted(3):
   Income from continuing operations.................................  $     0.17  $     0.04  $     0.30  $     0.23         N/A
   Discontinued operations...........................................        0.17        0.06       (0.03)      (0.06)        N/A
                                                                       ----------  ----------  ----------  ----------  ----------
   Net Income  ......................................................  $     0.34  $     0.10  $     0.27  $     0.17         N/A
                                                                       ==========  ==========  ==========  ==========  ==========


                                                                                              December 31,
                                                                       ----------------------------------------------------------
                                                                          2003      2002(12)    2001(12)    2000(12)    1999(12)
                                                                       ----------  ----------  ----------  ----------  ----------
Financial Condition Data:                                                                (Dollars in thousands)
Cash and cash equivalents............................................  $   18,739  $   15,981  $   39,393  $    8,551  $   50,975
Portfolio Assets:
      Discounted Loans, net..........................................       3,817       5,829      11,570       7,682      33,556
      Non-Discounted Loans, net......................................     610,807     486,667     526,070     561,876     460,656
      Mortgage-backed and other investment securities................     256,005     273,497     127,540      54,138      59,728
      Real estate owned, net.........................................         267       1,101         678       1,673      11,571
                                                                       ----------  ----------  ----------  ----------  ----------
            Total portfolio assets...................................     870,896     767,094     665,858     625,369     565,511
Total assets.........................................................     975,282     843,588     771,153     697,163     655,631
Deposits.............................................................     473,409     395,781     439,469     435,073     419,285
Short-term borrowings................................................      88,000      91,870          --       5,623      30,732
FHLB advances........................................................     249,337     216,000     189,500     132,000      80,000
Long-term investment financing.......................................         681       2,133       9,689          --          --
Junior subordinated notes payable to trust...........................      20,619          --          --          --          --
Trust preferred securities...........................................          --      20,000          --          --          --
Stockholders' equity.................................................     125,483     100,023      91,987      87,162      78,900`

19

---

`Year Ended December 31,
                                                                       ----------------------------------------------------------
                                                                          2003      2002(12)    2001(12)    2000(12)    1999(12)
                                                                       ----------  ----------  ----------  ----------  ----------

Financial Ratios and Other Data:
Return on average assets.............................................        0.80%       0.24%       0.75%       0.50%      17.62%
Return on average equity(4)..........................................        6.55%       2.05%       6.14%       4.10%   1,141.68%
Average interest yield on total loans(5).............................        6.12%       7.07%       7.82%       6.14%       5.97%
Net interest spread(6)...............................................        2.22%       2.44%       1.88%      (0.10)%      0.42%
Net interest margin(7)...............................................        2.64%       3.03%       2.89%       2.14%       2.04%
Ratio of earnings to fixed charges(8):
      Including interest on deposits.................................        1.25        1.05        1.27        1.24        0.34
      Excluding interest on deposits.................................        1.48        1.11        1.93        1.88          --
Long-term debt to total capitalization(9)............................        0.69        0.70        0.68        0.60        0.50
Total financial liabilities to equity................................        6.78        7.43        7.37        6.99        7.31
Average equity to average assets(10).................................       12.24%      11.73%      12.14%      12.08%       1.54%
Non-performing loans to loans at end of period(11)...................        0.95%       0.82%       1.43%       0.78%       2.95%
Allowance for loan losses to total loans at end of period............        1.10%       1.62%       1.58%       1.86%       5.74%



                                                                                        Year Ended December 31,
                                                                       ----------------------------------------------------------
                                                                          2003        2002        2001        2000        1999
                                                                       ----------  ----------  ----------  ----------  ----------
Operating Data:                                                                          (Dollars in thousands)
Investments and originations:
      Discounted Loans and foreclosed real estate....................  $        2  $       10  $   11,854  $    1,278  $    3,236
      Non-Discounted Loans...........................................      86,928      74,689     150,137     155,385     164,023
      Mortgage originations..........................................     206,042      70,754      74,026      56,177      32,317
      Mortgage-backed and other securities...........................     149,830     294,917     102,535      15,048         792
                                                                       ----------  ----------  ----------  ----------  ----------
            Total....................................................     442,802     440,370     338,552     227,888     200,368
Repayments...........................................................    (312,411)   (245,417)   (259,278)   (109,156)   (163,650)
Loan sales...........................................................      (8,072)     (2,433)    (35,789)    (26,880)   (354,634)
Net change in portfolio assets.......................................     103,802     101,236      40,489      71,490    (434,516)`

|(1) | Other income for 1999 included a gain of $225.6  million on the  extinguishment  of the  Predecessor  Company's  debt in
        connection with the Company's reorganization.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The minority  interest  adjustment  for 2002 reflects the minority  investor's  49.99% share of WCC's net income through
        September 30, 2002. In October 2002,  WFSG  purchased the minority  interest and currently  owns 100% of WCC. For the years
        ended  December 31, 2001,  2000 and 1999,  WCC  incurred net losses,  and the share of WCC's  results in which WFSG did not
        have an interest is presented as an addition on WFSG's consolidated statements of operations for those years.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Earnings  (loss) per share amounts are based on weighted  average number of shares  outstanding of WFSG stock during the
        applicable  periods.  For 1999,  earnings  per share for the full year is not  applicable,  as the  Company had a different
        issuance  of  common  stock for the  five-month  period  ended May 31,  1999  (prior  to the  reorganization)  than for the
        seven-month period ended December 31, 1999 (subsequent to the reorganization).
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | The  results  for 1999  reflect  the  Company's  deficit  balance in its equity  for the first five  months of 1999,  which
        significantly  reduced  the average  equity  (denominator)  for the year.  For the  seven-month  period  subsequent  to the
        reorganization, the Company's annualized return on average equity was (27.85)%.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | The low yield for 1999 was due to the  large  proportion  of  Discounted  Loans in the  Company's  portfolio.  The  average
        balance of Discounted  Loans  represents  the gross unpaid  principal  balance  before  adjusting for  allowances  for loan
        losses,  but  interest on such loans is  recognized  only when cash is received.  As a result,  these loans have an adverse
        effect on the overall loan yield.  In January  2001,  the Company  charged off  approximately  $166  million in  Discounted
        Loans.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Net interest spread represents average yield on interest-earning assets minus average rate paid on interest-bearing
 liabilities.
|--- | ---------------------------------------------------------------------------------------------------------------------------------

20

---

|(7) | Net interest margin represents net interest income divided by total average interest-earning assets.
|--- | ----------------------------------------------------------------------------------------------------

|(8) | The ratios of earnings to fixed charges were computed by dividing (x) income from  continuing  operations  before income
        taxes and  extraordinary  gains plus fixed charges by (y) fixed charges.  Fixed charges  represent total interest  expense,
        including and excluding  interest on deposits,  as applicable,  as well as the interest  component of rental  expense.  For
        1999, earnings were inadequate to cover fixed charges by $15.0 million.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) | Total capitalization equals long-term debt plus equity.
|--- | -------------------------------------------------------

|(10) | The low average equity to average assets ratio for 1999 was due to the Company's  deficit  balance in its equity for the
        first five months of 1999,  which  significantly  reduced the average equity  (numerator) for the year. For the seven-month
        period subsequent to the reorganization, the Company's average equity to average assets was 11.58%.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) | Non-performing  loans  include all  Non-Discounted  Loans that have been placed on  non-accrual  status by the  Company.
        Non-Discounted  Loans are placed on  non-accrual  status when they became past due more than 90 days or sooner when, in the
        judgment  of  management,  the  probability  of  collection  of interest is deemed to be  insufficient  to warrant  further
        accrual.  Discounted Loans are not included in non-performing loans.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) | These amounts give effect to the restatement discussed in Notes 1 and 25 to the consolidated financial statements.
|---- | ------------------------------------------------------------------------------------------------------------------

21

---

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

The
following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements of Wilshire Financial Services Group Inc. and
the notes thereto included elsewhere in this filing. References in this filing
to Wilshire Financial Services Group Inc., WFSG, the
Company, we, our, and us refer
to Wilshire Financial Services Group Inc. and our subsidiaries, unless the
context indicates otherwise.

## Results of Operations--2003 Compared to 2002

## Sale of
Wilshire Credit Corporation in 2004

On
January 16, 2004, the Company entered into an agreement to sell WCC, our
wholly-owned loan servicing subsidiary, to Merrill Lynch Mortgage Capital Inc.,
a division of Merrill Lynch & Co., New York, NY. The sale of WCC is expected
to close in the second quarter of 2004 and is subject to various customary
conditions, including the receipt of regulatory approvals. The agreement
provides that WFSG will receive a cash purchase price of approximately $52
million before transaction fees and expenses. Although the purchase price is
subject to adjustment based on the net asset value reflected on WCCs
closing date balance sheet, we anticipate realizing a substantial gain on this
sale.

Subsequent
to the sale of WCC, we will operate primarily as a unitary bank holding company.
Our business strategy will be focused on the growth and profitability of our
remaining Banking and Mortgage Investments segments, through increased lending
and investment activity. We believe that our success in implementing this dual
strategy in these two segments depends primarily on our ability to (1) evaluate
and manage both credit risk and interest-rate risk and (2) employ financial
leverage such that cash flows from the underlying investments generally match
the debt service requirements.

## Restatement of
Financial Statements

The
following Managements Discussion gives effect to the restatement of the
consolidated financial statements discussed in Notes 1 and 25 to the consolidated
financial statements.

## CONSOLIDATED
RESULTS

Our
consolidated net income for the year ended December 31, 2003 was $6.9 million,
or $0.34 per diluted share, compared with $2.0 million, or $0.10 per diluted
share, for the year ended December 31, 2002.

As
a result of the impending sale of WCC, we have presented the operating results
of WCC as Income from operations of subsidiary held for sale,
separate and apart from Income from continuing operations in the
consolidated statements of operations for each year presented. Our income from
continuing operations for the year ended December 31, 2003 was $3.4 million, or
$0.17 per diluted share, compared with approximately $0.9 million, or $0.04 per
diluted share, for the year ended December 31, 2002. Pre-tax income from
continuing operations was $5.9 million for 2003, compared with $1.4 million for
2002. WCCs net income was approximately $3.5 million for the year ended
December 31, 2003, compared with $1.1 million (net of the interest held by the
minority holder) for the year ended December 31, 2002.

Our
consolidated stockholders equity increased by $25.5 million during the
year ended December 31, 2003 to $125.5 million, or $6.00 per diluted share. The
increase results in part from our net income for the year and the sale of
additional shares of common stock pursuant to the exercise of stock options. In
addition, we recorded significant tax benefits in 2003, primarily through a
reduction in the valuation allowance applicable to our deferred tax asset which,
in turn, resulted in a net increase in stockholders equity of
approximately $21 million. Since these tax benefits relate to losses generated
prior to our 1999 reorganization, their recognition was recorded as a direct
increase to stockholders equity, and not as a reduction to income tax
expense in the consolidated statement of operations. These increases in equity
were partially offset by a $2.9 million decline in after-tax unrealized gains on
our portfolio of available-for-sale securities and hedging instruments.

The
increase in our income from continuing operations from 2002 to 2003 was
primarily attributable to the following factors:

-
We recorded a net recapture of $0.5 million of loan loss reserves in 2003,
versus incurring a loan loss provision of $0.3 million for the year ended
December 31, 2002, for a net improvement of $0.8 million.

22

---

-
The results for 2002 included approximately $4.75 million in legal fees and
expenses related to the settlement of litigation which arose from events prior
to our June 1999 restructuring. We believe that the settlement agreement will
eliminate most of our future costs arising from the financial collapse of
Capital Consultants LLC (CCL), but we continue to incur expenses on
behalf of a former officer in connection with the above-described litigation.
For the year ended December 31, 2003, we incurred approximately $2.5 million of
such costs for former officers, compared with approximately $1.7 million for the
year ended December 31, 2002.

-
The results for 2002 included $3.6 million in impairment write-downs related to
two interest-only mortgage-backed securities (I/Os) at our banking subsidiary,
First Bank of Beverly Hills, FSB (FBBH or the Bank),
with no such charges in 2003. Subsequent to recording the impairment
write-downs, the Bank sold the I/Os in the third and fourth quarters of 2002 for
a net realized gain of $0.7 million.

The
improvements in operations discussed above were partially offset by the
following factors:

-
Net interest income decreased by approximately $2.2 million from 2002 to 2003,
primarily as a result of sales and runoff of certain interest-earning assets at
our mortgage investment subsidiary.

-
Realized gains on sales of loans and investment securities declined by a total
of approximately $2.7 million as a result of reduced sales activity in 2003.

-
Holding company expenses for 2003 included increases in our defense costs of
former management and interest expense on trust preferred debentures, which
together increased expenses by approximately $1.3 million.

## Interest Income

A
significant portion of our consolidated earnings arises from net interest
income, which is the difference between interest income received and interest
expense paid. Net interest income is affected by the relative amount of
interest-earning assets and interest-bearing liabilities, the degree of mismatch
in the maturity and repricing characteristics of interest-earning assets and
interest-bearing liabilities, the percentage of discounted loans included in the
portfolio and the timing of receipt or accretion of purchase discount.

The
following table sets forth, for the periods indicated, information regarding the
total amount of the Companys income from interest-earning assets and the
resulting average yields, the interest expense associated with interest-bearing
liabilities, expressed in dollars and rates, and the net interest spread and net
interest margin. (The interest income and expense amounts in the table below are
consolidated, but primarily reflect the results of our Banking Operations. As
discussed later in this section, the principal source of revenues for our
Specialty Servicing and Finance Operations is loan servicing fees.) Information
is based on monthly balances during the indicated periods.

`Interest-Earning Assets and Interest-Bearing Liabilities

                                                                        Year Ended December 31,
                                    -----------------------------------------------------------------------------------------------
                                                 2003                             2002                            2001
                                    ------------------------------  -------------------------------  ------------------------------
                                     Average             Average     Average              Average     Average             Average
                                     Balance  Interest  Yield/Rate   Balance   Interest  Yield/Rate   Balance   Interest Yield/Rate
                                    --------- --------- ----------  ---------  --------- ----------  ---------  -------- ----------
Average Assets:                                                                (Dollars in thousands)
Mortgage-backed securities......... $ 224,973 $  10,190      4.53%  $ 219,053  $  13,522      6.17%  $  56,350  $  4,265       7.57%
Loan portfolio net of unaccreted
  discounts/unamortized premium(1).   559,886    34,243      6.12     538,589     38,054      7.07     638,356    49,896       7.82
Investment securities and other....    43,636     1,103      2.53      38,235      1,139      2.98      50,137     2,268       4.52
                                    --------- --------- ---------   ---------  --------- ----------  ---------  -------- ----------
     Total interest-earning assets.   828,495    45,536      5.50     795,877     52,715      6.62     744,843    56,429       7.58
                                    --------- --------- ---------   ---------  --------- ----------  ---------  -------- ----------
Non-interest earning cash..........     4,493                           4,727                            1,711
Allowance for loan losses..........   (44,449)                        (48,746)                         (64,872)
Other assets.......................    70,251                          63,078                           71,087
                                    ---------                       ---------                        ---------
     Total assets.................. $ 858,790                       $ 814,936                        $ 752,769
                                    =========                       =========                        =========`

23

---

`Average Liabilities and Stockholders' Equity:
Interest-bearing deposits.......... $ 389,251 $  11,315      2.91%  $ 413,042  $  15,683      3.80%  $ 453,223  $ 24,914       5.50%
Short-term borrowings..............    89,162     1,826      2.05      54,494      1,316      2.41         496        26       5.24
FHLB advances......................   223,424     9,102      4.07     198,923     10,401      5.23     153,269     9,575       6.25
Other borrowings...................    21,199     1,442      6.80      18,146      1,222      6.73       5,253       395       7.52
                                    --------- --------- ---------   ---------  --------- ---------   ---------  -------- ----------
     Total interest-bearing
       liabilities.................   723,036    23,685      3.28     684,605     28,622      4.18     612,241    34,910       5.70
                                    --------- --------- ---------   ---------  --------- ---------   ---------  -------- ----------
Non-interest bearing deposits......     3,928                           3,719                            7,874
Other liabilities..................    26,707                          31,013                           41,254
                                    ---------                       ---------                        ---------
     Total liabilities.............   753,671                         719,337                          661,369
Stockholders' equity...............   105,119                          95,599                           91,400
                                    ---------                       ---------                        ---------
     Total liabilities and
       stockholders' equity........ $ 858,790                       $ 814,936                        $ 752,769
                                    =========                       =========                        =========
Net interest income................           $  21,851                        $  24,093                        $ 21,519
                                              =========                        =========                        ========
Net interest spread(2).............                          2.22%                            2.44%                            1.88%
Net interest margin(3).............                          2.64%                            3.03%                            2.89%
Ratio of average interest-earning
   assets to average interest-
   bearing liabilities.............    114.59%                         116.25%                          121.66%`

|(1) | The average  balances of the loan portfolio  include  Discounted  Loans and  non-performing  loans, on which interest is
recognized on a cash basis.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Net interest spread  represents  average yield on  interest-earning  assets minus average rate paid on  interest-bearing
liabilities.
|--- | -------------------------------------------------------------------------------------------------------------------------------------

|(3) | Net interest margin represents net interest income divided by total average interest-earning assets.
|--- | ----------------------------------------------------------------------------------------------------

The
following table describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected our interest income and expense during the periods indicated. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (change
in volume multiplied by prior rate), (ii) changes in rate (change in rate
multiplied by prior volume) and (iii) total change in rate and volume. Changes
attributable to both volume and rate have been allocated proportionately to the
change due to volume and the change due to rate.

`Changes in Net Interest Income

                                                                             Year Ended December 31,
                                                    ---------------------------------------------------------------------------
                                                                2003 v. 2002                           2002 v. 2001
                                                    ------------------------------------   ------------------------------------
                                                    (Decrease)    Increase       Net        Increase    (Decrease)      Net
                                                       Rate        Volume       Change        Rate        Volume       Change
                                                    ----------   ----------   ----------   ----------   ----------   ----------
   Interest-Earning Assets:                                                   (Dollars in thousands)
        Mortgage-backed securities ..............   $   (3,688)  $      356   $   (3,332)  $     (923)  $   10,180   $    9,257
        Loan portfolio ..........................       (5,270)       1,459       (3,811)      (4,508)      (7,334)     (11,842)
        Investment securities and other .........         (185)         149          (36)        (666)        (463)      (1,129)
                                                    ----------   ----------   ----------   ----------   ----------   ----------
          Total interest-earning assets .........       (9,143)       1,964       (7,179)      (6,097)       2,383       (3,714)
    Interest-Bearing Liabilities:
        Interest-bearing deposits ...............       (3,506)        (862)      (4,368)      (7,174)      (2,057)      (9,231)
        Short-term borrowings and other
           Interest-bearing obligations .........         (225)         735          510          (22)       1,312        1,290
        FHLB advances ...........................       (2,479)       1,180       (1,299)      (1,726)       2,552          826
        Long-term debt ..........................           12          208          220          (45)         872          827
                                                    ----------   ----------   ----------   ----------   ----------   ----------
          Total interest-bearing liabilities ....       (6,198)       1,261       (4,937)      (8,967)       2,679       (6,288)
                                                    ----------   ----------   ----------   ----------   ----------   ----------
        (Decrease) increase in net interest income  $   (2,945)  $      703   $   (2,242)  $    2,870   $     (296)  $    2,574
                                                    ==========   ==========   ==========   ==========   ==========   ==========`

## Liquidity and
Financial Resources

The
Company is party to various financial obligations, including repayment of
borrowings, operating lease payments and commitments to extend credit. The table
below presents the Companys financial obligations outstanding as of
December 31, 2003:

`Payments due within time period at December 31, 2003
                                               ------------------------------------------------------------------------
                                               0-12 Months     1-3 Years      4-5 Years    After 5 Years       Total
                                               ------------   ------------   ------------   ------------   ------------
                                                                        (Dollars in thousands)
Short-term borrowings .......................  $     48,000   $     40,000   $         --   $         --   $     88,000
Operating leases ............................           589            649            508             --          1,746
FHLB advances ...............................        78,500        154,500         16,337             --        249,337
Long-term investment financing ..............            --             --             --            681            681
Junior subordinated notes payable to trust ..            --             --             --         20,619         20,619
                                               ------------   ------------   ------------   ------------   ------------
   Total ....................................  $    127,089   $    195,149   $     16,845   $     21,300   $    360,383
                                               ============   ============   ============   ============   ============`

24

---

Following is a discussion  of the  operating  results and Liquidity of the Company's  three  business  segments:  our Banking
Operations, Loan Servicing Operations, and Mortgage Investment Operations.

## FIRST BANK OF
BEVERLY HILLS, F.S.B.

The
following table compares income before taxes for FBBH for the years ended
December 31, 2003 and 2002 (dollars in thousands):

`Year Ended December 31,
                                          ------------------------------------------
                                                                          Increase
                                              2003           2002        (Decrease)
                                          ------------   ------------   ------------
         Interest income ..............   $     42,542   $     45,899   $     (3,357)
         Interest expense .............         22,604         27,445         (4,841)
                                          ------------   ------------   ------------
         Net interest income ..........         19,938         18,454          1,484
         Recapture of loan losses .....           (750)            --           (750)
                                          ------------   ------------   ------------
         Net interest income after
            recapture of loan losses ..         20,688         18,454          2,234
         Realized gains (losses) ......            249         (1,354)         1,603
         Other income .................            579            253            326
         Compensation and employee
            benefits expense ..........          4,632          3,985            647
         Other expenses ...............          5,506          5,348            158
                                          ------------   ------------   ------------
         Income before taxes ..........   $     11,378   $      8,020   $      3,358
                                          ============   ============   ============`

Net Interest Income

The
following table sets forth information regarding the Banks income from
interest-earning assets and expenses from interest-bearing liabilities for the
years ended December 31, 2003 and 2002 (dollars in thousands):

`Year Ended December 31, 2003           Year Ended December 31, 2002
                                               ------------------------------------   ------------------------------------
                                                Average                  Annualized    Average                  Annualized
                                                Balance      Interest    Yield/Rate    Balance      Interest    Yield/Rate
                                               ----------   ----------   ----------   ----------   ----------   ----------
Interest-Earning Assets:
Federal funds and short-term investments ....  $   19,087   $      247         1.28%  $   23,355   $      428         1.81%
Mortgage-backed and other securities ........     246,207        9,270         3.77      230,269       11,232         4.88%
Loans .......................................     511,324       33,025         6.46      483,851       34,239         7.08%
                                               ----------   ----------   ----------   ----------   ----------   ----------
Total interest-earning assets ...............  $  776,618   $   42,542         5.40%  $  737,475   $   45,899         6.14%
                                               ----------   ----------   ----------   ----------   ----------   ----------

Interest-Bearing Liabilities:
Interest-bearing deposits ...................  $  390,336   $   11,315         2.90%  $  417,795   $   15,683         3.75%
Borrowings ..................................     312,586       11,289         3.61      252,954       11,762         4.65%
                                               ----------   ----------   ----------   ----------   ----------   ----------
    Total interest-bearing liabilities ......  $  702,922   $   22,604         3.21%  $  670,749   $   27,445         4.09%
                                               ----------   ----------   ----------   ----------   ----------   ----------

               Net interest income...........               $   19,938                             $   18,454
               Net interest spread...........                                  2.19%                                  2.05%
               Net interest margin...........                                  2.57%                                  2.50%`

The
Banks net interest income was $19.9 million for the year ended December
31, 2003, compared with $18.5 million for the year ended December 31, 2002. The
net interest spread increased by 14 basis points, from 2.05% in 2002 to 2.19% in
2003, and the net interest margin increased from 2.50% to 2.57% for the same
periods.

The
increase in net interest income was primarily attributable to the Banks
significant loan origination activity in 2003, utilizing new low-cost borrowings
as funding sources. The Banks total average interest-earning assets
increased by $39.1 million for 2003, or approximately $7.0 million more than the
increase in its average interest-bearing liabilities. This net improvement in
earning-asset volume helped mitigate the effects of declining interest rates. As
a result, the decrease in the Banks interest income of $3.4 million was
less than the $4.8 million decrease in its interest expense, contributing to the
nearly $1.5 million increase in net interest income.

25

---

The
continuing low interest-rate environment has impacted the Banks
interest-bearing liabilities to a slightly greater extent than its
interest-earning assets. For the year ended December 31, 2003, the overall yield
on the Banks average interest-earning assets was 5.40%, a decline of 74
basis points from the 6.14% average yield for 2002. However, this drop in yield
was exceeded by an 88-basis point decline, from 4.09% to 3.21%, in the
Banks cost of interest-bearing liabilities, resulting in the higher net
interest spread in 2003.

The
Banks interest income on mortgage-backed and other investment securities
was $9.3 million in 2003, compared with $11.2 million for 2002. This decrease
was due to a 111-basis point drop in average yield, from 4.88% in 2002 to 3.77%
in 2003. Partially offsetting the effects of the lower yield was a $15.9 million
increase in the average asset balance for 2003. Utilizing new debt facilities,
the Bank purchased approximately $150 million in AAA-rated mortgage-backed and
other investment securities in 2003, including $109 million in the third and
fourth quarters.

The
Banks interest income on loans for the year ended December 31, 2003 was
approximately $33.0 million, compared with $34.2 million for the year ended
December 31, 2002. This decrease was due to a decline in the average yield on
loans of 62 basis points, from 7.08% for 2002 to 6.46% for 2003, as a result of
the continuing decline in interest rates. However, this decline in yield was
partially offset by a $27 million increase in the average portfolio balance. The
Bank originated and purchased a total of $293 million in new loans in 2003,
including approximately $210 million in the third and fourth quarters, resulting
in a higher average earning volume despite continuing significant principal
repayments.

FBBHs
interest expense on deposits decreased by approximately $4.4 million from the
year ended December 31, 2002 to the year ended December 31, 2003. This decrease
was the result of declines in both the average balance and average rates paid in
2003 versus 2002. The Bank raised significant amounts of wholesale certificates
of deposit in prior years to fund certain loan acquisitions, but has since
permitted the run-off of the higher-rate CDs and utilized lower-costing debt
facilities as its primary funding source. As a result, the average balance of
deposits decreased by $27.5 million, from approximately $417.8 million for the
year ended December 31, 2002 to $390.3 million for the year ended December 31,
2003. The average rate paid on the Banks deposits decreased by 85 basis
points from 2002 to 2003.

The
Banks interest expense on borrowings for the year ended December 31, 2003
was approximately $11.3 million, compared with approximately $11.8 million for
the year ended December 31, 2002. The decrease in 2003 was due to a 104-basis
point decline in the average cost, from 4.65% in 2002 to 3.61% in 2003,
reflecting the continuing declining interest-rate environment. The lower average
cost in 2003 was partially offset by the higher average borrowing balance, as
the Bank obtained additional FHLB advances to finance its earning-asset
acquisitions.

Recapture of Loan Losses
        Provisions
for losses on loans are charged to operations to maintain an allowance for
losses on the loan portfolio at a level which the Bank believes is adequate
based on an evaluation of the inherent risks in the portfolio. The Banks
evaluation is based on an analysis of the loan portfolio, historical loss
experience, current economic conditions and trends, collateral values, and other
relevant factors.

Based
on its quarterly evaluations of the adequacy of its loan loss reserves, the Bank
did not record a provision for loan losses in 2003 or 2002. In the second
quarter of 2003, the Bank recaptured $0.75 million of loan loss reserves,
primarily as a result of the sale of its performing mobile home loan portfolio.

Realized Gains (Losses)
        For
the year ended December 31, 2003, the Bank realized gains totaling approximately
$0.2 million on sales of $9.2 million of government agency mortgage-backed
securities.

The
Bank incurred approximately $1.4 million in net losses on its investment
securities for the year ended December 31, 2002. These losses were due to
write-downs in market value totaling $3.6 million related to three interest-only
mortgage-backed securities (I/Os), partially offset by approximately $2.2
million in net realized gains on sales of mortgage-backed and treasury
securities. The Bank purchased a total of $13.1 million in I/Os in 2002 as a
hedge against possible interest rate increases. However, as rates continued to
decline, the value of the I/Os was adversely affected. Since this decline in
market value was deemed to be other than temporary, the write-downs were
reflected as Market valuation losses and impairments in the
accompanying statements of operations, and not as a reduction to
stockholders equity. The Bank sold the I/Os in the third and fourth
quarters of 2002 for a net realized gain of approximately $0.7 million.

26

---

Compensation and Employee Benefits Expense
        The
Banks compensation and benefits totaled approximately $4.6 million for
2003, compared with $4.0 million for 2002. The increase was due to an increase
in the Banks employee head count from 2002 to 2003, primarily as a result
of the expansion of its commercial lending operations.

Other Expenses
        The
Banks other expenses totaled approximately $5.5 million for the year ended
December 31, 2003, compared with $5.3 million for the year ended December 31,
2002. The increase resulted primarily from the accrual of $0.4 million for the
settlement of litigation related to the Banks sale of its Bankcard
operations in 2001 (see Item 3  Legal Proceedings). In addition, the Bank
incurred higher legal expenses in 2003 associated with this litigation. These
increases were partially offset by decreases in other expense categories. The
Banks occupancy expenses declined from the prior year due to the sublease
of excess office space after the sale of its Bankcard division, and data
processing expenses have dropped as a result of the Banks efforts to
control overhead. In addition, depreciation expense has declined as certain
equipment and leasehold improvements have become fully depreciated. The Bank did not record any impairment of its goodwill for the years ended December 31, 2003 or 2002, pursuant to its test on March 31 of both
years. In addition, the Bank tested goodwill for impairment as of March 31, 2004 and determined that no impairment charge was required.

## Changes in
Financial Condition  First Bank of Beverly Hills

Following
are condensed statements of financial condition for FBBH as of December 31, 2003
and 2002:

`December 31,   December 31,
                                                                       2003           2002
                                                                   ------------   ------------
ASSETS:                                                               (Dollars in thousands)
Cash and cash equivalents .......................................  $     15,535   $     10,003
Mortgage-backed securities available for sale, at fair value ....       223,450        259,707
Other investment securities available for sale, at fair value ...        22,086         11,962
Investment securities held to maturity, at amortized cost .......         9,607             --
Loans, net ......................................................       610,890        486,821
Real estate owned, net ..........................................           267          1,040
Other assets ....................................................        24,351         24,545
                                                                   ------------   ------------
    Total assets ................................................  $    906,186   $    794,078
                                                                   ============   ============

LIABILITIES:
Deposits ........................................................  $    473,409   $    395,781
Short-term borrowings ...........................................        88,000         91,870
FHLB advances ...................................................       249,337        216,000
Other liabilities ...............................................        14,540         13,795
                                                                   ------------   ------------
    Total liabilities ...........................................       825,286        717,446

NET WORTH .......................................................        80,900         76,632
                                                                   ------------   ------------
    Total liabilities and net worth .............................  $    906,186   $    794,078
                                                                   ============   ============`

Mortgage-Backed
and Other Securities Available for Sale. The Banks total portfolio
of mortgage-backed securities (MBS) available for sale decreased by $36.3
million during the year ended December 31, 2003. This decrease was primarily due
to $150.6 million in principal repayments and $3.4 million in unrealized losses,
as the declining interest-rate environment continued to trigger significant
paydowns on the loans underlying the securities in the portfolio. In addition,
the Bank sold approximately $9.2 million of agency MBS in the third quarter.
These portfolio decreases were partially offset by $129.4 million in purchases
of AAA-rated and agency MBS, including $101.6 million in the third and fourth
quarters.

The
Banks portfolio of other investment securities available for sale
increased by approximately $10.1 million for the year ended December 31, 2003.
The Bank purchased approximately $20.5 million of such securities in 2003, and,
in the third quarter, transferred $9.6 million of FHLB bonds from its portfolio
of securities available for sale to securities held to maturity.

Loans,
net. The Banks portfolio of loans, net of discounts and
allowances, increased by approximately $124.1 million for the year ended
December 31, 2003. The Bank originated $206.0 million of predominantly
commercial mortgage loans and purchased an additional $86.9 million of
multi-family, commercial and residential loans. These additions to the portfolio
were partially offset by $159.9 million of principal repayments and $8.1 million
of sales of loans during the year.

27

---

Real
Estate Owned, net. The Banks portfolio of real estate owned, net
decreased by approximately $0.8 million in 2003, as a result of sales and
write-downs of properties totaling $1.5 million, partially offset by $0.7
million in new acquisitions through foreclosures.

Deposits.  The Bank's  deposits  increased by  approximately  $77.6  million  during the year ended  December 31, 2003.  This
increase  was due to a $118.5  million  increase  in the third and fourth  quarters,  consisting  primarily  of new  wholesale  and
brokered  certificates  of  deposit.  The Bank used the funds  generated  by these  new  deposits  primarily  for  commercial  loan
originations.  As part of an ongoing strategy to reduce its cost of funds, the Bank generally seeks to utilize  lower-costing  debt
facilities in lieu of deposits as its primary funding source,  and,  throughout 2002 and the first two quarters of 2003,  permitted
the run-off of higher-rate  certificates of deposit.  However,  due to authorized limits on its FHLB advance  borrowings,  the Bank
from time to time must raise new CDs to finance its acquisitions of interest-earning assets.

Short-Term
Borrowings. The Banks short-term borrowings decreased by
approximately $3.9 million during the year ended December 31, 2003. This
decrease was due to repayments of $166.9 million of repurchase agreements,
partially offset by repurchase advances and renewals totaling $163 million.
These borrowings are used primarily to finance the Banks purchases of
mortgage-backed and other investment securities.

FHLB
Advances. The Banks FHLB advances increased by $33.3 million in
2003, as a result of $177.3 million of new advances during the period, partially
offset by maturities of $144.0 million. The Banks FHLB advances are
currently limited to 35% of its total assets as of the previous quarter-end.

Net
Worth. The Banks total net worth increased by approximately
$4.3 million for the year ended December 31, 2003. The Bank earned net income
for the year of $6.6 million, which was partially offset by a decline in
after-tax unrealized gains of approximately $2.3 million on its portfolio of
available-for-sale securities and hedging instruments.

## Off-Balance
Sheet Arrangements

The
Bank is party to financial instruments with off-balance-sheet risk in the normal
course of business. These financial instruments include commitments to extend
credit and involve, to varying degrees, elements of risk in excess of the amount
recognized in the balance sheet.

At December 31, 2003
and 2002, the Bank had outstanding commitments to extend credit of approximately
$53.6 million and $1.7 million, respectively. The Bank also had unfunded
commitments under lines of credit of $0.5 million and $1.4 million at
December 31, 2003 and 2002, respectively. These commitments expose the Bank
to credit risk in excess of amounts reflected in the consolidated financial
statements. The Bank receives collateral to support loans and commitments to
extend credit for which collateral is deemed necessary.

## Swap Agreement

In
2002 the Bank entered into an interest rate swap agreement which effectively
fixes the interest rate paid on $35 million, as of December 31, 2003 and 2002,
of borrowings under reverse repurchase agreements. Under this agreement, the
Bank receives a floating rate of interest and pays a fixed rate of interest. The
fair value of the swap as of December 31, 2003 and 2002 was unfavorable by $257
thousand and $243 thousand, respectively. The swap qualifies for cash flow
hedging for accounting purposes, and therefore, these amounts are shown, net of
taxes, in accumulated other comprehensive income as unrealized losses. The swap
expires in December 2004.

## Regulatory
Capital Requirements

Federally
insured savings associations such as FBBH are required to maintain minimum
levels of regulatory capital. Those standards generally are as stringent as the
comparable capital requirements imposed on national banks. The OTS has indicated
that the capital level of FBBH exceeds the minimum requirement for well
capitalized status under provisions of the Prompt Corrective Action
Regulation.

28

---

The
following table sets forth the Banks regulatory capital ratios at December
31, 2003.

## Regulatory
Capital Ratios

`Amount Required
                                                                                   For Capital      To be Categorized
                                                                                    Adequacy                as
                                                                Actual              Purposes       "Well Capitalized"
                                                         ------------------   ------------------   -------------------
                                                          Amount     Ratio     Amount     Ratio     Amount      Ratio
                                                         ---------  -------   ---------  -------   ---------   -------
                                                                            (Dollars in thousands)
Total Capital to Risk-Weighted Assets (Risk-Based
    Capital)...........................................  $  83,995    12.2%   $  54,944   =>8.0%   $  68,679   =>10.0%
Tier 1 Capital to Risk-Weighted Assets.................     77,520    11.3%      Not Applicable       41,198   => 6.0%
Core Capital to Tangible Assets........................     77,520     8.6%      36,098   =>4.0%      45,122   => 5.0%
Tangible Capital to Tangible Assets....................     77,520     8.6%      13,537   =>1.5%       Not Applicable`

## Liquidity and
Capital Resources

Liquidity
is the measurement of the Banks ability to meet potential cash
requirements, including ongoing commitments to repay borrowings, fund
investments, purchase pools of loans, and make payments for general business
purposes. The Banks sources of liquidity include wholesale and retail
deposits, FHLB advances (up to 35% of the Banks total assets as of the
previous quarter-end), repurchase agreements, whole loan and mortgage-backed
securities sales, and net interest income. Liquidity in the Banks
operations is actively managed on a daily basis and periodically reviewed by the
Banks Board of Directors.

At
December 31, 2003 the Banks cash balances totaled approximately $15.5
million, compared with $10.0 million at December 31, 2002. The increase in cash
was due primarily to principal repayments of loans and mortgage-backed
securities and proceeds from new deposits and borrowings, partially offset by
originations and purchases of new loans, purchases of mortgage-backed and other
investment securities, and repayments of debt facilities.

At
December 31, 2003, the Bank had approximately $401.4 million of certificates of
deposit. Scheduled maturities of certificates of deposit during the 12 months
ending December 31, 2004 and thereafter amounted to approximately $353.3 million
and $48.1 million, respectively. Wholesale deposits generally are more
responsive to changes in interest rates than core deposits, and thus are more
likely to be withdrawn by the investor upon maturity as changes in interest
rates and other factors are perceived by investors to make other investments
more attractive. Bank management continues its effort to reduce its exposure to
interest rate changes by utilizing funding sources whose repricing
characteristics more closely match those of the Banks interest-earning
assets.

The
Bank is party to various contractual financial obligations, including repayment
of borrowings, operating lease payments and commitments to extend credit. The
table below presents the Banks future financial obligations outstanding as
of December 31, 2003:

`Payments due within time period at December 31, 2003
                                ------------------------------------------------------------------------
                                0-12 Months     1-3 Years      4-5 Years    After 5 Years      Total
                                ------------   ------------   ------------   ------------   ------------
                                                         (Dollars in thousands)
Short-term borrowings ........  $     48,000   $     40,000   $         --   $         --   $     88,000
Operating leases .............           589            649            508             --          1,746
FHLB advances ................        78,500        154,500         16,337             --        249,337
                                ------------   ------------   ------------   ------------   ------------
   Total .....................  $    127,089   $    195,149   $     16,845   $         --   $    339,083
                                ============   ============   ============   ============   ============`

In
2001 the OTS rescinded the regulatory requirement that institutions maintain an
average daily balance of liquid assets of at least 4% of its liquidity base.
Even though the percentage requirement has been eliminated, each bank is still
required by the OTS to maintain adequate liquidity to assure safe and sound
operation. It is the Banks responsibility to determine the appropriate
level of liquidity to be maintained.

29

---

## LOAN SERVICING
OPERATIONS

WFSG
has conducted its Loan Servicing Operations through WCC, our servicing
subsidiary which was formed pursuant to our June 10, 1999 reorganization. As
discussed earlier, in January 2004 the Company entered into an agreement to sell
WCC to Merrill Lynch Mortgage Capital Inc. The closing of this sale is expected
to occur in the second quarter of 2004, subject to various conditions, including
regulatory approvals. WCCs results of operations have been removed from the Companys results from continuing operations on the Consolidated Statements of Operations,
and have been presented separately in a single caption as Income (loss) from operations of subsidiary held for sale.

Some
of WCCs activities have been conducted with a co-investor which has
participation interests in the returns generated by the assets that serve as
collateral for the related borrowings. The share of such activities held by this
co-investor is reflected as Investor participation interest in WCC's statements of operations.

The
following table compares WCCs income before taxes for the years ended
December 31, 2003 and 2002 (dollars in thousands).

`Year Ended December 31,
                                                         ------------------------------------------
                                                                                         Increase
                                                             2003           2002        (Decrease)
                                                         ------------   ------------   ------------
         Servicing income ............................   $     35,342   $     26,786   $      8,556
         Interest income .............................             70            302           (232)
         Net realized gains ..........................             75          1,904         (1,829)
         Other income (loss) .........................            541           (164)           705
                                                         ------------   ------------   ------------
         Total revenues ..............................         36,028         28,828          7,200
                                                         ------------   ------------   ------------
         Interest expense ............................            614            639            (25)
         Provision for loan losses ...................             --            166           (166)
         Compensation and employee benefits expense ..         22,669         18,747          3,922
         Other expenses ..............................          7,019          7,321           (302)
                                                         ------------   ------------   ------------
         Total provisions and expenses ...............         30,302         26,873          3,429
                                                         ------------   ------------   ------------
         Income before taxes..........................   $      5,726   $      1,955   $      3,771
                                                         ============   ============   ============`

Servicing Income
        The
components of WCCs servicing income are reflected in the following table:

`Year Ended
                                                                       December  31,
                                                                ---------------------------
                                                                    2003           2002
                                                                ------------   ------------
                                                                   (Dollars in thousands)
         Servicing revenue ..................................   $     32,218   $     26,062
         Ancillary fees .....................................         10,277          6,672
         Amortization of mortgage servicing rights ..........         (4,687)        (2,693)
         Valuation adjustment for mortgage servicing rights..            305           (689)
         Custodial float ....................................          1,194          1,589
         Unreimbursed servicing expenses ....................         (1,339)          (778)
         Prepayment interest shortfall expense ..............         (2,626)        (3,377)
                                                                ------------   ------------
               Total servicing income .......................   $     35,342   $     26,786
                                                                ============   ============`

WCCs
total servicing income for the year ended December 31, 2003 was $35.3 million,
compared with $26.8 million for the year ended December 31, 2002. The increase
over the prior year was due primarily to the continuing growth in WCCs
servicing volume, as shown in the table below. Through new contractual
agreements and servicing rights acquisitions, WCC increased its portfolio of
serviced loans by approximately $2.4 billion in 2003, despite significant loan
principal repayments precipitated by the continuing low-interest rate
environment. As a result of this growth, WCCs total servicing revenues and
ancillary fees (including late charges) increased by approximately 30% from 2002
to 2003.

The
increase in WCCs servicing income for the 2003 periods also reflects an
adjustment of $1.3 million which was recorded in September 2003. This adjustment
represents the reimbursement of deposits of interest made by WCC for prepaid
serviced loans in excess of the amount actually owed by WCC. WCC had previously
deposited these funds into custodial accounts in compliance with the related
servicing agreements. However, the terms of the servicing agreements were
subsequently clarified and retroactively applied, resulting in WCCs
recovery of these excess funds. The adjustment is reflected as a reduction to
prepayment interest shortfall expense in the above table for the
year ended December 31, 2003.

30

---

Net
servicing income has been negatively impacted by the prevailing low
interest-rate environment, which has triggered extremely rapid prepayments of
loans comprising our serviced asset base. These accelerated prepayments have
resulted in significant amortization expense on our purchased mortgage servicing
rights (PMSRs) over the past three years (though the increases from 2002 to 2003
shown above are attributable also to the larger portfolio volume). In addition,
as a result of the continuing low interest rates, float income earned on deposit
balances has declined from the prior year to the current.

The
following table sets forth the composition of loans serviced by WCC by type of
loan at the dates indicated.

`December 31,   December 31,
                                                        2003           2002
                                                    ------------   ------------
                                                       (Dollars in thousands)
         Single-family residential ..............   $  5,973,070   $  3,668,401
         Multi-family residential ...............        116,119        121,908
         Commercial real estate .................        289,629        218,976
         Consumer and other .....................         71,135         78,880
                                                    ------------   ------------
               Total (1) ........................   $  6,449,953   $  4,088,165
                                                    ============   ============`

|(1) | WCC's  servicing  portfolio at December 31, 2003 and 2002 included  approximately  $0.3 billion unpaid  principal  balance of
      non-performing consumer loans in addition to those reflected in the above table.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Interest Income and Interest Expense
        WCCs
interest income was $70 thousand for the year ended December 31, 2003, compared
with $0.3 million for the year ended December 31, 2002. The decrease in 2003 was
due to a drop in loan volume as a result of WCCs sales of $7.3 million
unpaid principal balance of loans in 2002. WCC used the proceeds from the sale
to pay down certain debt facilities, resulting in a corresponding decrease in
interest expense on the related borrowings. However, WCCs overall interest
expense held constant at $0.6 million for 2002 and 2003, as the Company used new
borrowings and its line of credit facility in 2003 to fund new servicing rights
acquisitions and advances on new servicing arrangements.

Net Realized Gains
        WCCs
gains on sales totaled $75 thousand for the year ended December 31, 2003,
compared with $1.9 million for the year ended December 31, 2002. WCC sold $7.3
million unpaid principal balance of loans in the second quarter of 2002,
resulting in the $1.9 million gain. However, one half of this gain was shared
with a co-investor and is included in other income (loss) as discussed below.

Other Income (Loss)
        The
components of WCCs other income (loss) are reflected in the following
table:

`Year Ended
                                                      December 31,
                                               ---------------------------
                                                   2003           2002
                                               ------------   ------------
         Other income (loss):                     (Dollars in thousands)
         Real estate owned, net ............   $        (20)  $        (56)
         Investor participation interest ...              2           (922)
         Other, net ........................            559            814
                                               ------------   ------------
             Total other income (loss) .....   $        541   $       (164)
                                               ============   ============`

The
increase in WCCs total other income for 2003 was a result of the $0.9
million of Investor participation interest expense recorded for the
year ended December 31, 2002. This charge primarily reflects the
co-investors share of WCCs gain on its June 2002 sale of loans.
WCCs other, net consists primarily of miscellaneous gains from recoveries
of servicer advances in excess of the advances carrying values.

Compensation and Employee Benefits Expense
        WCCs
compensation and employee benefits totaled $22.7 million for the year ended
December 31, 2003, compared with $18.7 million for the year ended December 31,
2002. The increase in 2003 was due primarily to a continuing increase in
WCCs employee head count as a result of the growth of its loan servicing
operations. Additionally, in the second quarter of 2003 some existing employees
were transferred to WCCs payroll as part of the Companys
reallocation of certain operating expenses among its business segments. Those
employees will remain with WCC subsequent to its sale, and the Company will no
longer incur their related compensation expense.

31

---

Other Expenses
        WCCs
other expenses totaled $7.0 million for the year ended December 31, 2003, a
decrease of $0.3 million from 2002. The decrease was due primarily to a $0.2
million decline in legal expenses. In March 2002 we recorded an additional
accrual for legal fees in connection with the settlement of litigation which
arose from certain events prior to our 1999 restructuring.

## Changes in
Financial Condition  Wilshire Credit Corporation

Following
are condensed statements of financial condition for WCC as of December 31, 2003
and 2002:

`December 31,   December 31,
                                                                       2003           2002
                                                                   ------------   ------------
    ASSETS:                                                           (Dollars in thousands)
    Cash and cash equivalents ..................................   $        109   $      1,598
    Discounted loans, net ......................................            522            801
    Servicer advance receivables, net ..........................         22,972         21,035
    Purchased mortgage servicing rights, net ...................          8,519          4,256
    Other assets ...............................................         10,576          5,697
                                                                   ------------   ------------
        Total assets ...........................................   $     42,698   $     33,387
                                                                   ============   ============

    LIABILITIES:
    Short-term borrowings and investment financing .............   $      3,352   $      2,151
    Other liabilities ..........................................          9,542          8,134
                                                                   ------------   ------------
        Total liabilities ......................................         12,894         10,285

    NET WORTH ..................................................         29,804         23,102
                                                                   ------------   ------------
        Total liabilities and net worth ........................   $     42,698   $     33,387
                                                                   ============   ============`

Discounted
Loans, net. WCCs discounted loans, net decreased by approximately
$0.3 million in 2003 primarily as a result of principal payments received during
the current year.

Servicer
Advance Receivables, net. Servicer advance receivables, net
increased by approximately $1.9 million during the year ended December 31, 2003.
This increase resulted primarily from new senior lien advances made by WCC
during the year, partially offset by recoveries of advances on loans previously
made.

Purchased
Mortgage Servicing Rights, net. WCCs Purchased mortgage servicing
rights, net (PMSRs) increased by approximately $4.3 million for the year ended
December 31, 2003. WCC purchased approximately $8.6 million of PMSRs associated
with new servicing portfolio acquisitions during the year and also recorded a
net recovery of $0.3 million of impairment charges previously taken. These
increases were partially offset by amortization of PMSRs totaling $4.7 million
for the year.  For the year ended December 31, 2003, WCC recorded other than temporary impairment of PMSRs of $1.4 million,
which reduced both the gross carrying value of the PMSRs and the PMSRs valuation allowance.  The amount of the
other than temporary impairment was determined by selecting an appropriate interest rate shock to estimate the amount
of the PMSRs fair value that WCC might expect to recover in the foreseeable future.  To the extent that the gross
carrying value of the PMSRs exceeded the estimated recoverable amount, that portion of the gross carrying value was
written off as an other than temporary impairment.  Although the writedown had no impact on WCCs results of operations
or financial condition, it did reduce the gross carrying value of the PMSRs, which is used as the basis for PMSR amortization.

Short-Term
Borrowings and Investment Financing. WCCs investment financing
increased by approximately $1.2 million in 2003, as a result of $5.7 million of
new borrowings to finance its acquisitions of servicing rights, offset by $4.5
million of repayments. WCC in 2003 also borrowed $8.5 million on its commercial
bank line of credit to fund new servicer advances but repaid this credit line in
full prior to year-end.

## Liquidity and
Capital Resources

WCCs
sources of cash flow have included primarily servicing revenue and lines of
credit from commercial banks. The availability of liquidity from our line of
credit facilities has been subject to the Companys maintenance of
sufficient available collateral to pledge against such borrowings, and the
Company has maintained sufficient capital under the credit agreements.
WCCs liquidity has been actively managed on a daily basis and periodically
reviewed by the Companys Board of Directors to ensure the maintenance of
sufficient funds to meet WCCs operating needs.

At
December 31, 2003, WCCs liquidity (including cash and unused borrowings
under credit facilities) totaled $18.8 million, compared with approximately
$21.1 million at December 31, 2002. Adequate credit facilities and other sources
of funding have been essential to the continuation of WCCs ability to
purchase servicing assets, secure new contractual servicing agreements, and to
meet our advancing obligations under the servicing agreements.

32

---

WCC
is party to various contractual financial obligations, including the repayment
of borrowings and operating leases. The table below presents WCCs
financial obligations outstanding as of December 31, 2003:

`Payments due within time period at December 31, 2003
                                -----------------------------------------------------------------------------
                                 0-12 Months      1-3 Years       4-5 Years     After 5 Years       Total
                                -------------   -------------   -------------   -------------   -------------
                                                           (Dollars in thousands)
Operating leases .............  $       1,117   $       1,876   $       2,014   $       4,473   $       9,480
Investment financing .........          3,190             162              --              --           3,352
                                -------------   -------------   -------------   -------------   -------------
   Total .....................  $       4,307   $       2,038   $       2,014   $       4,473   $      12,832
                                =============   =============   =============   =============   =============`

WCCs
obligation for the lease of the Companys corporate offices in Beaverton,
Oregon is guaranteed by WFSG. The Company is requesting that the landlord
release this guaranty in connection with the sale of WCC to Merrill Lynch
Mortgage Capital Inc. (expected to occur in the second quarter of 2004).

## MORTGAGE INVESTMENT OPERATIONS

WFSG
conducts its Mortgage Investment Operations through WFC, our wholly-owned
investment subsidiary. Some of WFCs activities are conducted with a
co-investor which has participation interests in the returns generated by the
assets that serve as collateral for the loans. The share of such activities held
by this co-investor is reflected as Investor participation interest
in the Companys consolidated statements of operations.

The
following table compares WFCs income before taxes for the years ended
December 31, 2003 and 2002 (dollars in thousands).

`Year Ended December 31,
                                                              ------------------------------------------
                                                                                              Increase
                                                                  2003           2002        (Decrease)
                                                              ------------   ------------   ------------
         Interest income ..................................   $      2,929   $      6,348   $     (3,419)
         Realized (losses) gains ..........................           (435)           523           (958)
         Other loss, net ..................................           (572)          (745)           173
                                                              ------------   ------------   ------------
         Total revenues ...................................          1,922          6,126         (4,204)
                                                              ------------   ------------   ------------
         Interest expense .................................             74            439           (365)
         Provision for loan losses ........................            211            255            (44)
         Compensation and employee benefits expense .......            543          1,065           (522)
         Other expenses ...................................            205            796           (591)
                                                              ------------   ------------   ------------
         Total provisions and expenses ....................          1,033          2,555         (1,522)
                                                              ------------   ------------   ------------
         Income before taxes ..............................   $        889   $      3,571   $     (2,682)
                                                              ============   ============   ============`

Interest Income and Interest Expense
        WFCs
interest income was approximately $2.9 million for the year ended December 31,
2003, compared with $6.3 million for the year ended December 31, 2002. The
decrease in 2003 was due to a decline in loan volume as a result of WFCs
sale of approximately $3.3 million unpaid principal balance of loans in June
2002 and also due to principal repayments. In addition, in the prior year WFC
recorded approximately $0.3 million in additional loan interest income on the
recovery of discounts and reserves on loans which terminated during that period.
WFCs interest on mortgage-backed securities declined by approximately $0.9
million from 2002 to 2003, due to the runoff of WFCs MBS portfolio as a
result of prepayments on the loans underlying the securities. WFC records the
receipt of such payments directly to interest income, as its portfolio of
securities has been written down to an amortized cost of zero.

WFCs
interest expense decreased by approximately $0.4 million from the year ended
December 31, 2002 to the year ended December 31, 2003. This decrease resulted
from WFCs repayments of debt facilities in June 2002 with the proceeds
from the loan sale described above and also from the continuing decline in
interest rates.

33

---

Realized (Losses) Gains
        WFCs
realized losses for the year ended December 31, 2003 reflect impairment charges
taken on certain investments and a loss on a sale of loans. For the year ended
December 31, 2002, WFC realized a gain from the sale of approximately $3.3
million unpaid principal balance of loans in June 2002. Since the loans sold
were originally acquired with a co-investor, one half of the gain on sale was
shared with the co-investor and included in Investor participation
interest as discussed below.

Other Loss, Net
        The
components of WFCs other loss are reflected in the following table:

`Year Ended
                                                    December 31,
                                             ---------------------------
                                                 2003           2002
                                             ------------   ------------
         Other loss:                           (Dollars in thousands)
         Real estate owned, net ..........   $        (57)  $         85
         Investor participation interest..           (207)          (834)
         Other, net ......................           (308)             4
                                             ------------   ------------
             Total other loss ............   $       (572)  $       (745)
                                             ============   ============`

Other
loss includes the co-investors share of certain investment activities
conducted with WFC, which is reported as Investor participation
interest expense in the above table. The larger investor participation
interest expense amount in 2002 primarily reflects the co-investors 50%
share of the gain on WFCs loan sale in June 2002.

Compensation and Employee Benefits Expense
        WFCs
compensation and employee benefits decreased by approximately $0.5 million from
the year ended December 31, 2002 to the year ended December 31, 2003. As part of
the Companys reallocation of operating expenses among its business
segments, certain employees compensation was transferred to WCC from WFC,
commencing in the second quarter of 2003. Those employees will remain with WCC
subsequent to its sale, and the Company will no longer incur their related
compensation expense.

Other Expenses
        WFCs
other operating expenses decreased by approximately $0.6 million from the year
ended December 31, 2002 to the year ended December 31, 2003. This decrease was
primarily due to a decline in depreciation expense from the prior year to the
current year, as a result of the transfer of certain fixed assets from WFC to
WFSGs other business segments.

## Changes in
Financial Condition  Wilshire Funding Corporation

Following
are WFCs condensed statements of financial condition as of December 31,
2003 and 2002:

`December 31,   December 31,
                                                                            2003           2002
                                                                        ------------   ------------
ASSETS:                                                                   (Dollars in thousands)
Cash and cash equivalents ............................................  $         37   $      1,172
Mortgage-backed securities available for sale, at fair value .........           862          1,828
Discounted loans, net ................................................         3,817          5,829
Real estate owned, net ...............................................            --             61
Intercompany receivables .............................................        17,911         16,354
Other assets .........................................................           627          1,851
                                                                        ------------   ------------
    Total assets .....................................................  $     23,254   $     27,095
                                                                        ============   ============

LIABILITIES:
Investment financing .................................................  $        681   $      2,133
Other liabilities ....................................................         2,055          4,150
                                                                        ------------   ------------
    Total liabilities ................................................         2,736          6,283

NET WORTH ............................................................        20,518         20,812
                                                                        ------------   ------------
    Total liabilities and net worth ..................................  $     23,254   $     27,095
                                                                        ============   ============`

34

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Mortgage-Backed
Securities Available for Sale. WFCs portfolio of mortgage-backed
securities available for sale decreased by approximately $1.0 million during
2003 as a result of continuing paydowns on the underlying loan portfolio. WFC
received $1.8 million in principal and interest repayments in the current year
on its mortgage-backed securities, which have been written down to an amortized
cost of zero. Consequently, any payments received on these securities are
recorded directly to interest income.

Discounted
Loans, net. WFCs discounted loans, net decreased by approximately
$2.0 million for the year ended December 31, 2003, primarily as a result of $1.9
million of principal repayments and a loan loss provision of approximately $0.2
million.

Intercompany
Receivables.Intercompany receivables increased by approximately $1.6
million during the year ended December 31, 2003. This increase was primarily due
to the ongoing transfer of funds from WFC to WFSG to meet the holding
companys operating costs, partially offset by WFCs settlement of its
tax obligation to WFSG for prior tax years.

Other Assets.
WFCs other assets included $0.25 million and $0.7 million of PMSRs as of December 31, 2003 and 2002, respectively.  For the
year ended December 31, 2003, WFC recorded other than temporary impairment of PMSRs of $0.4 million, which reduced both the gross
carrying value of the PMSRs and PMSRs valuation allowance.  The amount of the other than temporary impairment was determined
by selecting an appropriate interest rate shock to estimate the amount of the PMSRs fair value that WFC might expect to recover
in the foreseeable future.  To the extent that the gross carrying value of the PMSRs exceeded the estimated recoverable amount, that
portion of the gross carrying value was written off as an other than temporary impairment.  Although the writedown had no impact
on WFCs results of operations of financial condition, it did reduce the gross carrying value of the PMSRs, which is used as the
basis for PMSR amortization.

Investment
Financing. WFCs investment financing decreased by approximately
$1.5 million during 2003, as a result of repayments of debt facilities which
financed previous asset acquisitions.

## Liquidity and
Capital Resources

WFCs
sources of cash flow include whole loan and mortgage-backed securities sales,
net interest income, and borrowings from co-investors. WFCs liquidity is
actively managed on a daily basis and is periodically reviewed by our Board of
Directors. This process is intended to ensure the maintenance of sufficient
funds to meet WFCs operating needs. Based on our current and expected
asset size, capital levels, and organizational infrastructure, we believe there
will be sufficient available liquidity to meet WFCs needs.

We
no longer own subordinated mortgage-backed securities backed by loan pools
serviced by unaffiliated third parties, and currently hold subordinated
mortgage-backed securities only where we act as servicer of the loan pools
backing these securities. At December 31, 2003 WFC held $0.9 million of such
mortgage-backed securities.

WFC
has a financial obligation with a co-investor consisting of a line-of-credit
borrowing which had an outstanding balance of $0.7 million at December 31, 2003.
WFCs obligation under this debt facility does not carry a fixed
contractual maturity, but is repaid as cash flows on the underlying collateral
are received.

## HOLDING
COMPANY AND MISCELLANEOUS OPERATIONS

Our
Holding Company and Miscellaneous Operations consist of other operating revenues
and expenses not directly attributable to our Banking, Loan Servicing or
Mortgage Investment Operations, and also includes eliminations of intercompany
accounts and transactions. Primary sources of liquidity include funds available
from the Companys wholly-owned non-bank subsidiaries, proceeds from the
July 2002 issuance of junior subordinated debt, and payments received from FBBH
pursuant to a tax allocation agreement between the Company and the Bank.
However, the OTS has limited the amount of these payments to the lesser of (1)
the Banks stand-alone tax liability and (2) the total tax payments made by
the Company. In January 2003 the Bank remitted $0.4 million to the Company for a
portion of its 2001 liability, and in October 2003 the Bank remitted $0.8
million for its 2002 liability under the foregoing formula. WFSG will continue
to depend on its non-Bank subsidiaries to meet its liquidity needs.

# Results of
Operations  2002 Compared to 2001

## CONSOLIDATED RESULTS

Our
consolidated net income for the year ended December 31, 2002 was approximately
$2.0 million, or $0.10 per diluted share, compared with $5.6 million, or $0.27
per diluted share, for the year ended December 31, 2001. During the year ended
December 31, 2002, we recorded approximately $2.3 million in unrealized holding
gains, net of taxes, on our portfolio of available-for-sale securities,
resulting in total comprehensive income of approximately $4.3 million.

Our
consolidated stockholders equity at December 31, 2002 was $100.0 million
($4.97 per diluted share), an increase of $8.0 million over December 31, 2001
equity. This increase reflects the net income for the year, after-tax unrealized
gains of approximately $2.3 million on our portfolio of available for sale
securities and hedging instruments, and $1.0 million in tax benefits relating to
losses generated in WFSGs pre-reorganizational period. In addition, in
July 2002 we converted our $7.69 million in subordinated debentures into
approximately 3.4 million shares of common stock. These increases in
stockholders equity were partially offset by our repurchase of
approximately 1.5 million shares of our common stock in July 2002 for $5.1
million.

35

---

The
decrease in net income from 2001 to 2002 was primarily attributable to the
following factors:

- We incurred significant
charges in 2002 related to the settlement of litigation which arose from events
prior to WFSGs June 1999 restructuring. These charges included a $3.6
million provision for estimated expenses and losses in connection with the
settlement, $0.6 million in related charges, and approximately $0.55 million in
legal fees and expenses associated with finalizing and implementing this
settlement agreement, net of insurance reimbursements. We believe that the
settlement agreement will eliminate most of our future costs arising from the
financial collapse of Capital Consultants LLC (CCL), but we continue
to incur expenses on behalf of prior officers in connection with the events that
gave rise to the litigation. Such costs were approximately $1.7 million for the
year ended December 31, 2002 and $1.7 million for the year ended December 31,
2001.

- Our banking subsidiary,
First Bank of Beverly Hills, F.S.B., recorded $3.6 million in impairment charges
related to three interest-only mortgage-backed securities (I/Os) held as an
economic hedge against a potential increase in interest rates. Subsequent to
recording the impairment write-downs, the Bank sold the I/Os in the third and
fourth quarters of 2002 for a net realized gain of $0.7 million.

- We incurred approximately
$0.9 million in expenses and charges related to the September 2002 relocation of
our corporate headquarters and loan servicing operations from multiple locations
in Portland, Oregon to a single facility in Beaverton, Oregon.

- The year 2001 results
reflect $4.8 million in net gains from the Banks sales of its Bankcard
processing and Mortgage Banking divisions in June 2001, and $0.6 million of
income from the operations of those divisions prior to their sale.

- The year 2001 results
include $2.1 million in recaptures of loan loss reserves at the Bank pursuant to
the settlement and payoff of a troubled loan.

The
above factors were partially offset by the following developments in 2002:

- Our majority share of the
income from our loan servicing subsidiary, WCC, increased by $1.7 million from
2001 to 2002. As a result of WCCs impending sale, its operating results
are presented separately under the caption Income (loss) from operations
of subsidiary held for sale in the accompanying consolidated statements of
operations.

- Net interest income
increased by $2.6 million, as we more effectively deployed capital and, to a
lesser extent, excess liquidity, and invested in high-quality interest-earning
assets.

- WFSG in October 2002
purchased the 49.99% minority interest in WCC from CCLs receiver for $10.5
million. As a result, WFSG now owns 100% of WCC and no longer reflects an
adjustment for minority interest in the consolidated financial statements. This
purchase was completed pursuant to the litigation settlement agreement discussed
earlier. We financed this acquisition primarily through the issuance of $20
million, 30-year, floating-rate subordinated debt in July 2002.

Effective
the second quarter of 2003, the Company redefined its operating segments in
order to reflect a complete separation of its investment operations from its
servicing operations. The following discussion has been revised from the prior
year to reflect the new segmentation. Consequently, the operating results of the
Companys investment subsidiary, WFC, are reported and discussed as an
individual business segment (Mortgage Investments), separate from
those of its loan servicing subsidiary, WCC (Loan Servicing). (In
prior periods, the results of WCC and WFC were combined into one operating
segment known as Specialty Servicing and Finance Operations.)

36

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## FIRST BANK OF
BEVERLY HILLS, F.S.B.

The
following table compares income before taxes for FBBH for the years ended
December 31, 2002 and 2001 (dollars in thousands):

`Year Ended December 31,
                                                              ------------------------------------------
                                                                                              Increase
                                                                  2002           2001        (Decrease)
                                                              ------------   ------------   ------------
         Interest income ..................................   $     45,899   $     52,008   $     (6,109)
         Interest expense .................................         27,445         34,480         (7,035)
                                                              ------------   ------------   ------------
         Net interest income ..............................         18,454         17,528            926
         Recapture of loan losses .........................             --         (1,730)         1,730
                                                              ------------   ------------   ------------
         Net interest income after recapture of
            loan losses ...................................         18,454         19,258           (804)
         Realized (losses) gains ..........................         (1,354)           624         (1,978)
         Other income .....................................            253          8,521         (8,268)
         Compensation and employee benefits expense .......          3,985          8,125         (4,140)
         Other expenses ...................................          5,348          7,737         (2,389)
                                                              ------------   ------------   ------------
         Income before taxes ..............................   $      8,020   $     12,541   $     (4,521)
                                                              ============   ============   ============`

Net Interest Income
        The
Banks net interest income for the year ended December 31, 2002 was
approximately $18.5 million, compared with approximately $17.5 million for the
year ended December 31, 2001. The Banks net interest spread increased
slightly, from 2.00% in 2001 to 2.05% in 2002, and the interest margin decreased
from 2.60% to 2.50% for the same periods.

The
increase in net interest income primarily resulted from the Banks
significant investments in high-quality mortgage-backed and other investment
securities throughout 2002, utilizing its excess liquidity at year-end 2001 and
new low-cost borrowings in 2002 as funding sources. The Banks average
interest-earning assets increased by $62.8 million in 2002, or approximately
$7.3 million more than the increase in its interest-bearing liabilities. As a
result, despite the declining interest-rate environment, the decrease in the
Banks interest income of $6.1 million was less than the $7.0 million
decrease in its interest expense, contributing to the nearly $1 million increase
in net interest income.

The
Banks interest income on investment securities increased by $8.3 million
from 2001 to 2002, primarily as a result of purchases of $281 million in
AAA-rated and government agency mortgage-backed and other investment securities
in 2002. This significantly higher volume more than offset the effects of the
105-basis point decline, from 5.93% to 4.88%, in the average yield earned on
these securities in 2001 and 2002. The Bank incurred net interest expense of
$0.3 million on three interest-only federal agency mortgage-backed securities
due to accelerated amortization resulting from prepayments. The Bank also
recorded impairment write-downs on these securities in 2002 totaling $3.6
million, which are reflected as Market valuation losses and
impairments in the accompanying consolidated statements of operations. The
Bank sold these securities in the third and fourth quarters for a net realized
gain of $0.7 million.

The
Banks interest income on loans decreased by $12.8 million from the year
ended December 31, 2001 to the year ended December 31, 2002. The decline in
interest rates throughout both years triggered both a continuing downward
repricing of FBBHs adjustable-rate loans and an acceleration of
prepayments on its fixed-rate loans. As a result, the Banks average yield
on loans decreased by 111 basis points, from 8.19% to 7.08%, from 2001 to 2002,
and the weighted-average loan balance declined by $90.6 million over the same
periods. The Bank received $182.0 million in repayments on its loans in 2002, or
approximately 34% of the ending balance at December 31, 2001, compared with new
loan originations of $70.8 million during the year. To mitigate the effects of
this run-off, the Bank purchased approximately $74.7 million in commercial and
multi-family mortgage loans during 2002, including two portfolios totaling $38.9
million in the fourth quarter.

FBBHs
interest expense on deposits decreased by $9.2 million from the year ended
December 31, 2001 to the year ended December 31, 2002. This decrease was a
result of declines in both the average balance and average rates paid. The Bank
raised significant amounts of certificates of deposit throughout 2001 to fund
certain loan acquisitions in that year but has since permitted the run-off of
the higher-rate CDs to reduce its overall cost of funds. As a result, the
average balance of deposits decreased by $45.1 million from 2001 to 2002. In
addition, the average rate paid on deposits declined by 163 basis points, from
5.38% to 3.75%, for the same periods.

37

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The
Banks interest expense on borrowings increased by approximately $2.2
million from 2001 to 2002, as a result of a $100.7 million increase in the total
average balance of borrowings. The proceeds from these borrowings were used
primarily to fund the purchases of mortgage-backed and other securities
described above and, to a lesser extent, to replace matured certificates of
deposit. The increase in the volume of borrowings was partially offset by a
decrease in the weighted-average rate paid from 6.28% for the year ended
December 31, 2001 to 4.65% for the year ended December 31, 2002. The decrease in
market interest rates primarily affected the cost of the Banks short-term
repurchase agreements only; substantially all of the Banks FHLB advances
had fixed rates of interest and thus were unaffected by rate changes.

Provision for Loan Losses
        Provisions
for losses on loans are charged to operations to maintain an allowance for
losses on the loan portfolio at a level which the Bank believes is adequate
based on an evaluation of the inherent risks in the portfolio. The Banks
evaluation is based on an analysis of the loan portfolio, historical loss
experience, current economic conditions and trends, collateral values, and other
relevant factors.

Based
on its quarterly evaluations of the adequacy of its loan loss reserves, the Bank
did not record a provision for loan losses in 2002. For the year ended December
31, 2001, the Bank recaptured $2.1 million of provisions, resulting from the
settlement and payoff of a troubled loan in September 2001. This recapture was
partially offset by a provision of $0.4 million taken in 2001.

Realized (Losses) Gains
        The
Bank incurred approximately $1.4 million in net losses on its investment
securities for the year ended December 31, 2002. These losses were due to
write-downs in market value totaling $3.6 million related to three interest-only
mortgage-backed securities (I/Os), partially offset by approximately $2.2
million in net realized gains on sales of mortgage-backed and treasury
securities. The Bank purchased a total of $13.1 million in I/Os in 2002 as a
hedge against possible interest rate increases. However, as rates continued to
decline, the value of the I/Os was adversely affected. Since this decline in
market value was deemed to be other than temporary, the write-downs were
reflected as Market valuation losses and impairments in the
accompanying statements of operations, and not as a reduction to
stockholders equity. The Bank sold the I/Os in the third and fourth
quarters of 2002 for a net realized gain of approximately $0.7 million. The
Banks investment gains in 2001 reflect $0.6 million in gains on sales of
approximately $31.4 million of loans.

Other Income
        The
Banks other income was approximately $0.3 million for the year ended
December 31, 2002, compared with $8.5 million for the year ended December 31,
2001. The year 2001 results reflect the Banks gain of $4.8 million on the
June 2001 sales of the Banks Bankcard processing division and its mortgage
loan origination subsidiary, George Elkins Mortgage Banking (GEMB), in addition
to the revenues from these divisions prior to their sale.

Compensation and Employee Benefits Expense
        The
Banks compensation and benefits totaled approximately $4.0 million for the
year ended December 31, 2002, compared with $8.1 million for the year ended
December 31, 2001. The decrease was largely due to the Banks sales of its
Bankcard processing operations and GEMB in June 2001. Prior to their sale, these
two divisions incurred a total of approximately $2.8 million in compensation and
related expenses in 2001. In addition, compensation and employee benefits
decreased further by approximately $1.6 million primarily as a result of
severance pay and bonuses for some of the Banks former executives in early
2001.

Other Expenses
        The
Banks other expenses were approximately $5.3 million for the year ended
December 31, 2002, compared with $7.7 million for the year ended December 31,
2001. This decrease also was partially due to the sales of the Bankcard
processing division and GEMB, which incurred approximately $0.9 million in
general and administrative expenses in 2001 prior to their sale. The Bank also
realized cost savings in a number of other expense categories: professional
services decreased by approximately $0.7 million due to consulting fees
associated with conversions of the Banks accounting and deposit systems in
the 2001 period, and also due to legal fees incurred in 2001 in connection with
litigation that was resolved in the Banks favor; FDIC insurance premiums
declined by approximately $0.3 million as a result of an improvement in the
Banks regulatory rating; and, as of January 2002, the Bank no longer
amortizes goodwill pursuant to the adoption of a new accounting standard
(goodwill amortization was approximately $0.2 million in 2001). Various other
general and administrative expenses declined in 2002 as a result of the
Banks efforts to reduce corporate overhead.

38

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## Regulatory
Capital Requirements

Federally
insured savings associations such as FBBH are required to maintain minimum
levels of regulatory capital. Those standards generally are as stringent as the
comparable capital requirements imposed on national banks. The OTS indicated
that the capital level of FBBH exceeded the minimum requirement for well
capitalized status under provisions of the Prompt Corrective Action
Regulation.

The
following table sets forth the Banks regulatory capital ratios at December
31, 2002.

`Regulatory Capital Ratios

                                                                                   Amount Required
                                                                                     For Capital       To be Categorized
                                                                                       Adequacy                 as
                                                                  Actual               Purposes       "Well Capitalized"
                                                          -------------------   -------------------   -------------------
                                                            Amount     Ratio      Amount     Ratio      Amount     Ratio
                                                          ----------  -------   ----------  -------   ----------  -------
                                                                                 (Dollars in thousands)
Total Capital to Risk-Weighted Assets (Risk-Based
    Capital)............................................  $   76,792     15.7%  $   39,155    =>8.0%  $   48,943   =>10.0%
Tier 1 Capital to Risk-Weighted Assets..................      70,662     14.4%       Not Applicable       29,361   => 6.0%
Core Capital to Tangible Assets.........................      70,662      9.0%      31,546    =>4.0%      39,432   => 5.0%
Tangible Capital to Tangible Assets.....................      70,662      9.0%      11,830    =>1.5%       Not Applicable`

## LOAN SERVICING
OPERATIONS

WFSG
has conducted its Loan Servicing Operations through WCC, our servicing
subsidiary which was formed pursuant to our June 10, 1999 reorganization. Some
of WCCs activities have been conducted with a co-investor which has
participation interests in the returns generated by the assets that serve as
collateral for the related borrowings. The share of such activities held by this
co-investor is reflected as Investor participation interest in the
Companys consolidated statements of operations.

The
following table compares WCCs income (loss) before taxes for the years
ended December 31, 2002 and 2001 (dollars in thousands).

`Year Ended December 31,
                                                                   ------------------------------------------
                                                                                                   Increase
                                                                       2002           2001        (Decrease)
                                                                   ------------   ------------   ------------
         Servicing income ......................................   $     26,786   $     18,453   $      8,333
         Interest income .......................................            302          1,194           (892)
         Net realized gains ....................................          1,904            560          1,344
         Other (loss) income ...................................           (164)         1,458         (1,622)
                                                                   ------------   ------------   ------------
         Total revenues ........................................         28,828         21,665          7,163
                                                                   ------------   ------------   ------------
         Interest expense ......................................            639            785           (146)
         Provision for loan losses .............................            166             17            149
         Compensation and employee benefits expense ............         18,747         14,500          4,247
         Other expenses ........................................          7,321          7,657           (336)
                                                                   ------------   ------------   ------------
         Total provisions and expenses .........................         26,873         22,959          3,914
                                                                   ------------   ------------   ------------
         Income (loss) before taxes ............................   $      1,955   $     (1,294)  $      3,249
                                                                   ============   ============   ============`

39

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Servicing Income
        The
components of WCCs servicing income are reflected in the following table:

`Year Ended
                                                                                    December  31,
                                                                             ---------------------------
                                                                                 2002           2001
                                                                             ------------   ------------
         Servicing revenue ...............................................   $     26,062   $     19,740
         Ancillary fees ..................................................          6,672          4,986
         Amortization of mortgage servicing rights .......................         (2,693)        (4,310)
         Valuation adjustment for mortgage servicing rights ..............           (689)        (1,552)
         Custodial float .................................................          1,589          2,439
         Unreimbursed servicing expenses .................................           (778)          (320)
         Prepayment interest shortfall expense ...........................         (3,377)        (2,530)
                                                                             ------------   ------------
               Total servicing income ....................................   $     26,786   $     18,453
                                                                             ============   ============`

WCCs
total servicing income for the year ended December 31, 2002 was $26.8 million,
compared with $18.5 million for the year ended December 31, 2001. WCCs
servicing operations grew significantly in 2002 over the 2001 levels, as shown
by the portfolio totals in the table below, due to new contractual flow
agreements and, to a lesser extent, servicing rights acquisitions. As a result
of this continued expansion, WCCs gross servicing revenue and ancillary
fees (primarily late charges and prepayment penalties) increased by
approximately 32% and 34%, respectively, from 2001 to 2002.

However,
the decline in mortgage interest rates throughout 2001 and 2002 continued to
have an adverse effect on our net servicing income. As interest rates fell, the
prepayment rates on the underlying loans in our servicing portfolio reached
unusually high levels, though the prepayments slowed somewhat in 2002 as compared with 2001. As a result of these rapid repayments, we continued to record significant amortization expense
on our purchased mortgage servicing rights (PMSRs). Our amortization of PMSRs
was approximately $2.7 million for the year ended December 31, 2002, compared
with $4.3 million for 2001. In addition, we recorded further valuation
allowances on our PMSRs of $0.7 million and $1.6 million for 2002 and 2001,
respectively. As a result of underlying loan prepayments, we also incurred an
increase in the interest we are required to pay to securitization trusts
(prepayment interest shortfall expense) under our servicing
agreements. Further, the decline in interest rates adversely affected our float
income earned on deposit balances, which decreased by $0.85 million in 2002 as
compared with 2001.

The
following table sets forth the composition of loans serviced by WCC by type of
loan at the dates indicated.

`December 31,   December 31,
                                              2002           2001
                                          ------------   ------------
                                             (Dollars in thousands)
         Single-family residential ....   $  3,668,401   $  3,020,267
         Multi-family residential .....        121,908        141,297
         Commercial real estate .......        218,976        192,275
         Consumer and other ...........         78,880         90,497
                                          ------------   ------------
               Total (1) ..............   $  4,088,165   $  3,444,336
                                          ============   ============`

|(1) | WCC's  servicing  portfolio  at  December  31,  2002  included   approximately  $0.3  billion  unpaid  principal  balance  of
      non-performing consumer loans in addition to those reflected in the above table.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Interest Income and Interest Expense
        WCCs
interest income was $0.3 million for the year ended December 31, 2002, compared
with $1.2 million for the year ended December 31, 2001. The decrease in 2002 was
due to a drop in loan volume as a result of both portfolio runoff and a sale of
$7.3 million unpaid principal balance of loans in June 2002. WCC used the
proceeds from the sale to pay down the related debt facility, contributing to a
decrease in interest expense. However, the overall decline in WCCs
interest expense from 2001 to 2002 was only $146 thousand, significantly less
than the decline in interest income. The smaller decrease in interest expense
was a result of additional borrowings in 2002 to fund new servicing rights
acquisitions and advances on new servicing arrangements.

Net Realized Gains
        WCCs
net realized gains totaled $1.9 million for the year ended December 31, 2002,
compared with $0.6 million for the year ended December 31, 2001. WCC sold $7.3
million unpaid principal balance of loans in the second quarter of 2002,
resulting in the $1.9 million gain. However, one half of this gain was shared
with a co-investor and is included in other (loss) income as discussed below.

40

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Other (Loss) Income
        The
components of WCCs other (loss) income are reflected in the following
table:

`Year Ended
                                                            December 31,
                                                    ---------------------------
                                                        2002           2001
                                                    ------------   ------------
         Other (loss) income:
         Real estate owned, net .................   $        (56)  $        (21)
         Investor participation interest ........           (922)          (739)
         Other, net .............................            814          2,218
                                                    ------------   ------------
             Total other (loss) income ..........   $       (164)  $      1,458
                                                    ============   ============`

WCCs
$0.9 million of Investor participation interest expense for 2002
includes the co-investors share of WCCs gain on its June 2002 loan
sale, as discussed above. WCCs other, net consists primarily of
miscellaneous gains from recoveries of servicer advances in excess of the
advances carrying values. In 2001, WCC recorded larger gains on such
recoveries, in addition to a gain of $0.4 million on a sale of PMSRs.

Compensation and Employee Benefits Expense
        WCCs
compensation and employee benefits totaled $18.7 million for the year ended
December 31, 2002, compared with $14.5 million for the year ended December 31,
2001. The higher expenses in 2002 were due to a significant increase in
WCCs employee head count from 2001 to 2002, reflecting the growth in the
volume of our servicing business.

Other Expenses
        WCCs
other expenses totaled $7.3 million for the year ended December 31, 2002,
compared with $7.7 million for the year ended December 31, 2001. This decrease
was due to a decline in legal expenses from 2001 to 2002. In September and
December 2002, pursuant to analyses of the legal accrual and our estimated
future expenses, we reduced by $0.7 million our reserves for legal fees. In
2001, in contrast, we incurred significant legal expenses as the litigation and
settlement negotiations were proceeding.

This
decrease was partially offset by increases in other expense categories. Our
occupancy expense increased by approximately $0.3 million in 2002, primarily due
to our relocation, which resulted in the recording of rent expense at both our
current facility in Beaverton and our former locations in Portland for the month
of September. Other operating expenses, such as postage, marketing and
advertising, increased slightly in 2002 due to the continuing growth of our
servicing operations and our increased marketing efforts.

## MORTGAGE INVESTMENT OPERATIONS

WFSG
conducts its Mortgage Investment Operations through WFC, our wholly-owned
investment subsidiary. Some of WFCs activities are conducted with a
co-investor which has participation interests in the returns generated by the
assets that serve as collateral for the loans. The share of such activities held
by this co-investor is reflected as Investor participation interest
in the Companys consolidated statements of operations.

41

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The
following table compares WFCs income (loss) before taxes for the years
ended December 31, 2002 and 2001 (dollars in thousands).

`Year Ended December 31,
                                                              ------------------------------------------
                                                                                              Increase
                                                                  2002           2001        (Decrease)
                                                              ------------   ------------   ------------
         Interest income ..................................   $      6,348   $      4,111   $      2,237
         Net realized gains (losses) ......................            523           (504)         1,027
         Other loss .......................................           (745)          (908)           163
                                                              ------------   ------------   ------------
         Total revenues ...................................          6,126          2,699          3,427
                                                              ------------   ------------   ------------
         Interest expense .................................            439            572           (133)
         Provision for (recapture of) loan losses .........            255            (71)           326
         Compensation and employee benefits expense .......          1,065            989             76
         Other expenses ...................................            796          1,624           (828)
                                                              ------------   ------------   ------------
         Total provisions and expenses ....................          2,555          3,114           (559)
                                                              ------------   ------------   ------------
         Income (loss) before taxes .......................   $      3,571   $       (415)  $      3,986
                                                              ============   ============   ============`

Interest Income and Interest Expense
        WFCs
interest income was approximately $6.3 million for the year ended December 31,
2002, compared with $4.1 million for the year ended December 31, 2002. The
increase in 2002 was due primarily to an increase of approximately $1.5 million
in interest on WFCs portfolio of mortgage-backed securities. WFC received
significant cash repayments on its portfolio in the third and fourth quarters of
2002, including $1.8 million of payments beyond the carrying values of two
securities which WFC recorded directly to interest income.

WFCs
interest income on loans increased by $0.9 million from 2001 to 2002, due to an
increase in average loan volume in 2002. WFC purchased $10.6 million unpaid
principal balance of loans in August 2001 and sold a portion of this portfolio
in June 2002, resulting in the higher average balance for 2002. In addition, in
the first quarter of 2002 WFC recorded $0.3 million in loan interest income on
the recovery of discounts and reserves on loans that terminated during that
period.

WFCs
interest expense was $0.4 million for the year ended December 31, 2002, compared
with $0.6 million for the year ended December 31, 2001. This decrease resulted
from WFCs repayments of debt facilities in June 2002 with the proceeds
from the loan sale described above and also from the continuing decline in
interest rates.

Net Realized Gains (Losses)
        WFC
recorded net realized gains of $0.5 million for 2002, primarily as a result of a
$0.6 gain from the sale of approximately $3.3 million unpaid principal balance
of loans in June 2002. Since the loans sold were originally acquired with a
co-investor, one half of the gain on sale was shared with the co-investor and
included in Investor participation interest as discussed below. This
gain was partially offset by a $0.1 million impairment charge taken on
miscellaneous investments. For the year ended December 31, 2001 WFCs net
realized losses were $0.5 million, reflecting primarily a write-down in the
carrying value of certain investments.

Other Loss
        The
components of WFCs other loss are reflected in the following table:

`Year Ended
                                                    December 31,
                                             ---------------------------
                                                 2002           2001
                                             ------------   ------------
                                                (Dollars in thousands)
         Other loss:
         Real estate owned, net ..........   $         85   $       (144)
         Investor participation interest..           (834)          (297)
         Other, net ......................              4           (467)
                                             ------------   ------------
             Total other loss ............   $       (745)  $       (908)
                                             ============   ============`

Other
loss includes the co-investors share of certain investment activities
conducted with WFC, which is reported as Investor participation
interest expense in the above table. The larger investor participation
interest expense amount in 2002 primarily reflects the co-investors 50%
share of the gain on WFCs loan sale in June 2002.

42

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Compensation and Employee Benefits Expense
        WFCs
compensation and employee benefits increased by $76 thousand 2001 to 2002,
largely as a result of increased costs relating to employee benefits and taxes.

Other Expenses
        WFCs
other operating expenses decreased by approximately $0.8 million from the year
ended December 31, 2002 to the year ended December 31, 2003. The largest
decline, approximately $0.5 million, occurred in legal expenses as a result of
the litigation settlement agreement which was reached on May 13, 2002.
Throughout 2001 we incurred significant legal fees as the settlement
negotiations were proceeding. WFCs depreciation expense decreased by
approximately $0.15 million from 2001 to 2002 as certain fixed assets became
fully depreciated.

## HOLDING
COMPANY AND MISCELLANEOUS OPERATIONS

Our
Holding Company and Miscellaneous Operations consist of other operating revenues
and expenses not directly attributable to our Banking Operations, Loan Servicing
Operations or Mortgage Investment Operations, and also includes eliminations of
intercompany accounts and transactions. Primary sources of liquidity include
funds available from the Companys wholly-owned non-bank subsidiaries,
proceeds from the July 2002 issuance of junior subordinated debt, and payments
received from FBBH pursuant to a tax allocation agreement between the Company
and the Bank. However, the OTS has limited the amount of these payments to the
lesser of (1) the Banks stand-alone tax liability and (2) the total tax
payments made by the Company. In February 2002, the Bank remitted $0.7 million
to the Company for a portion of its 2001 liability under the foregoing formula.
WFSG will continue to depend on its non-Bank subsidiaries to meet its liquidity
needs.

The
Company funded the costs of the litigation settlement described above and
acquisition of the minority interest in WCC through a combination of proceeds
from the junior subordinated debt and $5 million WFSG received from FBBHs
redemption of preferred stock.

## QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Managing
risk is an essential part of successfully operating a financial services
company. The most prominent risk exposures are credit quality, interest rate
sensitivity, and liquidity. Credit quality risk is the risk of not collecting
interest and/or the principal balance of a loan or investment when it is due.
Interest rate risk is the potential reduction of net interest income as the
result of changes in interest rates. Rate movements can affect the repricing of
assets and liabilities differently, as well as their market value. Liquidity
risk is the possible inability to fund obligations to depositors, investors and
borrowers.

## Asset and
Liability Management

It
is our objective to attempt to control risks associated with interest rate
movements. In general, managements strategy is to limit our exposure to
earnings volatility and variations in the value of assets and liabilities as
interest rates change over time. Our asset and Liability management strategy is
formulated and monitored by the Investment committee of the Company and the
Asset and Liability committee of the Bank (the Committees) which
meet to review, among other things, the sensitivity of our assets and
liabilities to interest rate changes, the book and market values of assets and
liabilities, unrealized gains and losses (including those attributable to
hedging transactions), purchase activity, and maturities of investments and
borrowings. FBBHs Asset and Liability Committee establishes rate
sensitivity tolerances (within regulatory guidelines) which are approved by the
Banks Board of Directors, and coordinates with the Banks Board with
respect to overall asset and liability composition.

The
Committees are authorized to utilize financial techniques to assist them in the
management of interest rate risk. These techniques include interest rate swap
agreements, pursuant to which the parties exchange the difference between
fixed-rate and floating-rate interest payments on a specified principal amount
(referred to as the notional amount) for a specified period without
the exchange of the underlying principal amount. The Bank has entered into a $35
million notional principal amount interest rate swap agreement, which became
effective in December 2002 and matures in December 2004. Pursuant to the
agreement, the Bank will pay interest at a fixed rate of 2.22% and receive
quarterly interest payments at the three-month LIBOR rate.

We
continually monitor the interest rate sensitivity of our portfolios of
interest-earning assets and interest-bearing liabilities in conjunction with the
current interest rate environment. When a new pool of loans, securities or
mortgage servicing rights is acquired, we will assess the incremental change in
our sensitivity to interest rates, and determine accordingly whether or not to
hedge.

43

---

In
addition, as required by OTS regulations, the Banks Asset and Liability
Committee also regularly reviews interest rate risk by forecasting the impact of
alternative interest rate environments on the interest rate sensitivity of Net
Portfolio Value (NPV), which is defined as the net present value of
an institutions existing assets, liabilities and off-balance sheet
instruments. The Committee further evaluates such impacts against the maximum
tolerable change in interest income that is authorized by the Board of Directors
of the Bank.

The
following table quantifies the potential changes in the Companys net
portfolio value at December 31, 2003, should interest rates increase or decrease
by 100 to 300 basis points, assuming the yield curves of the rate shocks will be
parallel to each other.

`Interest Rate Sensitivity of Net Portfolio Value

                                                    Net Portfolio Value            NPV as % of Assets
                                            ----------------------------------   ----------------------
                                            $  Amount   $  Change     % Change   NPV Ratio     Change
                                            ---------   -----------   --------   ---------   ----------
            Change in Rates                         (Dollars in thousands)
          +300bp.........................   $  95,596   $   (27,855)      (23)%      10.35%        (228) bp
          +200bp.........................     105,165       (18,286)      (15)       11.17         (146) bp
          +100bp.........................     115,027        (8,424)       (7)       11.98          (65) bp
             0bp.........................     123,451            --        --        12.63           --
          -100bp.........................     124,637         1,186         1        12.62           (1) bp
          -200bp.........................     120,734        (2,717)       (2)       12.17          (46) bp
          -300bp.........................     120,887        (2,564)       (2)       12.13          (50) bp`

In
determining net portfolio value, Management relies upon various assumptions,
including, but not limited to, prepayment speeds on the Companys assets
and the discount rates to be used. We review our assumptions regularly and
adjust them when it is deemed appropriate based on current and future expected
market conditions.

Management
believes that the assumptions (including prepayment assumptions) it uses to
evaluate the vulnerability of our operations to changes in interest rates
approximate actual experience and considers them reasonable. However, the
interest rate sensitivity of our assets and liabilities and the estimated
effects of changes in interest rates on NPV could vary substantially if
different assumptions were used or actual experience differs from the historical
experience on which they are based.

## Regulation

On
January 9, 2001, the OTS terminated Cease and Desist Orders to which WFSG,
Wilshire Acquisitions Corporation (WAC, the holding company for the
Bank), and WCC had stipulated on January 7, 2000. The orders had prohibited
these entities from entering into transactions that would cause the Bank to
violate or be in violation of transactions with affiliates regulations.
The orders also had required 30-day advance notification before adding,
replacing or terminating any member of the Banks board of directors or any
senior executive of the Bank.

On
January 11, 2002, the OTS determined the Bank may reimburse WFSG for the
Banks stand-alone tax obligations for periods that are no longer subject
to tax carry-back. For those periods that are subject to tax carry-back, the
Bank may reimburse WFSG in the lesser amount of WFSGs actual payments to
the taxing authorities or the Banks stand-alone tax obligations. The Bank
reimbursed WFSG for actual payments to the taxing authorities in 2002 and 2001
of $0.7 million and $2.0 million, respectively.

44

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## CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The
Managements Discussion and Analysis of Financial Condition and
Results of Operations, as well as disclosures included elsewhere in this
Form 10-K, are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America.  The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of
contingencies.  On an ongoing basis, we evaluate the estimates used,
including those related to allowances for loan losses, other than temporary
impairment in the market values of investment securities and other assets,
assumptions used to estimate fair values of certain financial instruments for
which there is not an active market, the selection of yields utilized to
recognize interest income on certain mortgage-backed securities, and
contingencies and litigation. We base our estimates on historical
experience, current conditions and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources as well as identifying and
assessing our accounting treatment with respect to commitments and
contingencies.  Actual results may differ from these estimates under
different assumptions or conditions.

We
believe the following critical accounting policies involve the more significant
judgments and estimates used in the preparation of the consolidated financial
statements:

      Mortgage-Backed
and Other Investment Securities Available for Sale.The Companys
mortgage-backed and other investment securities available for sale are reported
at their current fair market value. In determining current fair value when
quotes from third parties are not available, we estimate the present value of
the anticipated cash flows of the securities based on certain assumptions,
including the amount and timing of future repayments, the discount rate to be
used, and default rates and expected losses on the loans underlying the
securities. If the change in market value is considered temporary, the
unrealized holding gains and losses are reported net of tax, when applicable, as
a separate component of accumulated other comprehensive income in
stockholders equity. In the event of a decline in market value, management
must evaluate whether the decline is temporary in nature or other than
temporary. Declines that are considered other than temporary are reflected as
Market valuation losses and impairments in the consolidated
statements of operations and not as a direct reduction to stockholders
equity. The Companys portfolio of mortgage-backed and other investment
securities available for sale increased significantly over the past two years
and, as of December 31, 2003, represented more than 25% of consolidated total
assets. Consequently, fluctuations in the securities values can have a
significant impact on our financial condition and results of operations.

      Allowance
for Loan Losses. The Bank maintains an allowance for loan losses at a level
believed adequate by management to absorb estimated losses inherent in the loan
portfolios. The allowance is increased by provisions for loan losses charged
against operations, recoveries of previously charged off loans, and allocations
of discounts on purchased loans, and is decreased by loan charge-offs. Loans are
charged off when they are deemed to be uncollectible.

The
Bank uses its internal asset review system to evaluate its loan portfolio and to
classify loans as pass, special mention, substandard, doubtful or loss. These
terms correspond to varying degrees of risk that the loans will not be collected
in part or in full. The frequency at which a specific loan is subjected to
internal asset review depends on the type and size of the loan and the presence
or absence of other risk factors, such as delinquency and changes in collateral
values. The allowance for loan losses includes specific valuation allowances
(SVAs) established for impaired loans and for certain other
classified loans, and general valuation allowances (GVAs).

SVAs
are in most cases equal to the excess of the unpaid principal balance over the
fair value of the collateral for all impaired loans. GVAs are based on
qualitative and quantitative factors that are updated each quarter. The
qualitative factors are subject to managements evaluation after
consideration of certain credit risk characteristics. These factors include, but
are not limited to, the following: the institutions historical and recent
loss experience in its portfolios; the volume, severity and trend of
non-performing assets; the extent to which refinances or loan modifications are
made to maintain loans in a current status; known deterioration in credit
concentrations or certain classes of loans; loan to value ratios of real estate
secured loans; risks associated with specific types of collateral; the quality
and effectiveness of the lending policy, loan purchase policy, internal asset
review policy, charge-off, collection and recovery policies; current and
anticipated conditions in the general and local economies which might affect the
collectability of the institutions asset; anticipated changes in the
composition or volume of the loan portfolio; reasonableness standards in
accordance with regulatory agency policies; and the comparison of the
Banks allowance with that of industry peers.

To
assess the adequacy of the Banks allowance for loan losses, the portfolio
is segmented into three components: impaired loans, homogeneous loans, and
non-homogeneous loans.

45

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      Impaired loans have
been defined as all loan types classified either substandard, doubtful, or loss
(including loans which may have been upgraded but which are troubled debt
restructurings). SVAs are measured on a loan-by-loan basis utilizing either the
discounted cash flow or fair market value approaches, as defined under the
accounting standards for impaired loans.

      Homogeneous loans have
been defined as loans secured by one to four single-family residences, mobile
home loans, and consumer loans, and are analyzed by their respective loan group.
GVA loss estimates are measured utilizing peer benchmark factors for homogeneous
pools.

      Non-homogeneous loans
include the following loan types: multifamily, commercial real estate,
bridge loans, construction loans, and commercial unsecured. The
non-homogeneous loans are analyzed individually. GVA loss estimates are
developed based upon risk rating utilizing migration analysis, which considers
the impact of losses on a loan-by-loan basis. A loss horizon of four years has
been developed with the objective of achieving loss data to capture a full
business cycle.

When
the Bank increases the allowance for loan losses related to loans, it records a
corresponding increase to the provision for loan losses in the statement of
operations. The OTS, as part of its examination process, periodically reviews
the Banks allowances for losses and the carrying values of its assets.
There can be no assurance that the OTS will not require additional reserves
following future examinations.

When
our Mortgage Investment Operations acquire pools of discounted loans, we record
an increase to the allowance for loan losses by allocating a portion of the
purchase discount deemed to be associated with measurable credit risk. Amounts
allocated to the allowance for loan losses from purchase discounts do not
increase the provision for loan losses recorded in the statement of operations;
rather they decrease the amounts of the purchase discounts that are accreted
into the interest income over the lives of the loans. If, after the initial
allocation of the purchase discount to the allowance for loan losses, management
subsequently identifies the need for additional allowances against discounted
loans, the additional allowances are established through charges to the
provision for loan losses.

      Purchased
Mortgage Servicing Rights. In determining the fair value of purchased
mortgage servicing rights (PMSRs) presented in the accompanying consolidated
financial statements, we make assumptions of market discount rates, prepayment
speeds, default rates and related servicing costs which affect the estimated
present value of future cash flows. Changes in these assumptions and economic
factors may result in increases or decreases in the carrying value of our PMSRs
and increases or decreases in the amortization of PMSRs and valuation allowances
related to PMSRs.

      Income
Taxes. At December 31, 2003, we had a total deferred tax asset of
approximately $48.2 million, net of deferred tax liabilities. This asset
represents the tax effect of future deductible or taxable amounts and is
attributable to carryforwards, such as net operating losses and capital losses,
and also to temporary differences between amounts that have been recognized in
the financial statements and amounts that have been recognized in the
Companys income tax returns. In accounting for the deferred tax asset, we
apply Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes, which requires that deferred tax assets be reduced by a
valuation allowance if it is more likely than not that some portion or all of
the deferred tax asset will not be realized. We evaluate the deferred tax asset
annually and, based on our evaluation at year-end 2003, we have recorded a
valuation allowance of approximately $30.1 million. The net deferred tax asset,
$18.1 million, is reported as an asset in our consolidated statement of
financial condition as of December 31, 2003. We currently believe that it is
more likely than not that this portion of the deferred tax asset will be
realized. However, there can be no assurance that the amount, if any, that we
ultimately realize will not differ materially from our assessment. As portions
of the deferred tax asset are realized and the valuation allowance is reduced,
the related benefits, to the extent they relate to our post-reorganizational
period, are recorded as a deferred tax benefit in our consolidated statements of
operations. As benefits relating to our pre-reorganizational period are
realized, they are recorded as a direct increase to stockholders equity.

     
Contingencies. We are party to various legal proceedings, as discussed
above and in the notes to the consolidated financial statements.  These
matters have a degree of uncertainty associated with them.  We continually
assess the likely outcomes of these proceedings, the amounts of any related
ongoing costs, and the adequacy of amounts provided for these
matters.   There also can be no assurance that all matters that may be
brought against us or that we may bring against other parties are known to us at
any point in time.

For
further information on these and other significant accounting policies, see Note
1 to the Consolidated Financial Statements.

46

---

## ITEM 7A.
Quantitative and Qualitative Disclosure About Market Risk

See
Item 7Qualitative and Quantitative Disclosures About Market Risk
Asset and Liability Managementof Part II of this Report.

## ITEM 8.
Financial Statements and Supplementary Data

See
Item 15 of Part IV of this Report.

## ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure

Not Applicable.

## ITEM 9A.
Controls and Procedures

## Evaluation of
Controls and Procedures

We
maintain a set of disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our reports filed under the
Securities Exchange Act of 1934, as amended (Exchange Act) is
recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms. As of the end of the period covered by this
report, we carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer
(CEO)/Chief Financial Officer (CFO), of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Rule 13a-14 of
the Exchange Act. This evaluation included a review of Wilshire Credit
Corporations process of periodically reconciling its servicer advance
receivables. The Company and its auditors have identified an internal control deficiency
related to the reconciliation of servicer advances and concluded that it constituted
a material weakness for the year ended December 31, 2003. The Companys CEO/CFO has
directed management to take appropriate corrective measures. Based on the
foregoing, our CEO/CFO concluded that other than this deficiency, the Companys disclosure controls and
procedures are effective in timely alerting him to material information relating
to the Company (including its consolidated subsidiaries) required to be included
in the Companys Exchange Act filings.

## Changes in
internal controls

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

47

---

# PART III

## ITEM 10.
Directors and Executive Officers of the Registrant

The
following sets forth information about the executive officers and directors of
the Company as of March 1, 2004. The business address of each executive officer
and director is the address of the Company, 14523 SW Millikan Way, Suite 200,
Beaverton, OR 97005, and each executive officer and director is a United States
citizen, unless otherwise noted.

## Directors

Larry
B. Faigin,age 61, was appointed to the Board of Directors in June 1999 and
has been Chairman since September 1999. In June 2003, Mr. Faigin was re-elected
to a one-year term. Mr. Faigin is President and Chief Executive Officer of China
Housing Partners, LLC, a residential developer in China. Previously, he was
President and Chief Executive Officer of GreenPark Remediation, LLC, a company
that specializes in acquiring environmentally-impacted land and remediating and
improving the property for further development. He also has served as a
consultant to Chevron Corporation, and as Chief Executive Officer and Director
of Wood Brothers Homes, Inc.

Howard
Amster, age 56, has been a director of the Company since November 2001 and,
in June 2003, was re-elected to a one-year term. Mr. Amster is a professional
real estate operator. Mr. Amster is a principal of Ramat Securities Ltd., a
Cleveland-based investment firm. Previously, Mr. Amster was an investment
consultant with First Union Securities (formerly Kemper Securities) from 1992 to
June 2000. From June 1979 to 1991, Mr. Amster was co-manager of a convertible
bond hedging department at Kemper Securities. Mr. Amster is also a director of
Horizon Group Properties, Inc., Maple Leaf Financial, and Astrex Inc., and
previously served as a director of American Savings of Florida.

Robert
M. Deutschman, age 46, has been a director of the Company since June 1999
and, in June 2003, was re-elected to a one-year term. Mr. Deutschman is a
Managing Director of Cappello Capital Corp., a financial service and advisory
company which engages in merchant banking, venture capital and investment
banking. Prior to joining Cappello, Mr. Deutschman was a Managing Director of
Saybrook Capital Corp. From 1991 until 1994, Mr. Deutschman was a Senior Vice
President and Director of Principal Investments in the Public Finance Group of
Houlihan Lokey Howard & Zukin.

Stephen
P. Glennon,age 59, has been the Companys Chief Executive Officer
since September 1999, its Chief Financial Officer since April 2003, and a
director since December 1999. In June 2003, he was re-elected to a one-year term
on the Board of Directors. From 1994 until joining the Company, Mr. Glennon
served as Chief Executive Officer of Glennon Associates, a firm of private
investment bankers specializing in financial restructuring and turnaround
management of financial sector companies. Mr. Glennon previously served as an
investment banker with Lehman Brothers, N.Y. and Lepercq, de Neuflize & Co.,
N.Y. Mr. Glennon currently serves as a director of New Water Street Corporation,
N.Y. and Alabama Real Estate Holdings, N.Y.

Robert
H. Kanner, age 56, has been a director of the Company since January 2002
and, in June 2003, was re-elected to a one-year term. From 1987 until the
present, Mr. Kanner has been Chairman of the Board and President of Pubco
Corporation, a manufacturer and marketer of labeling products and supplies and
specialized construction products, and has been that companys President
and a director since 1983.

Edmund
M. Kaufman,age 74, has been a director of the Company since March 2000 and,
in June 2003, was re-elected to a one-year term. Mr. Kaufman is a private
investor and the owner of a bookstore specializing in mystery and crime fiction.
Previously, Mr. Kaufman was a partner with the law firm of Irell & Manella
LLP for thirty-six (36) years, specializing in mergers and acquisitions and
corporate finance. Mr. Kaufman is a director emeritus of the Los Angeles Opera,
and is a member of the Board of Trustees of the Friends of the University of
California Press.

Daniel
A. Markee, age 46, has been a director of the Company since June 1999 and,
in June 2003, was re-elected to a one-year term. Mr. Markee is a principal of
LendSource, Inc., a firm specializing in the origination of first mortgage, home
equity and consumer installment debt. From 1993 until 1997, Mr. Markee was
involved in the real estate investment business as President of Forterra, Inc.,
and as a principal of Euro-American Partners, Inc.

48

---

## Executive
Officers

Stephen P. Glennon,  age 59, has been the Company's Chief Executive Officer since September 1999, its Chief Financial Officer
since April 2003, and a director since December 1999.  From 1994 until joining the Company,  Mr. Glennon served as Chief  Executive
Officer of Glennon  Associates,  a firm of private  investment  bankers  specializing  in financial  restructuring  and  turnaround
management of financial sector companies.  Mr. Glennon  previously  served as an investment  banker with Lehman Brothers,  N.Y. and
Lepercq,  de Neuflize & Co., N.Y. Mr.  Glennon  currently  serves as a director of New Water Street  Corporation,  N.Y. and Alabama
Real Estate Holdings, N.Y.

Joseph W. Kiley III, age 48, has been President and Chief  Executive  Officer of FBBH since  September 2001 and a director of
FBBH since  November  2001.  From March 2001 until this  appointment,  Mr. Kiley served as the Bank's  Executive Vice President and
Chief  Financial  Officer.  Prior to joining the Bank, Mr. Kiley was Executive  Vice  President of Operations  and Chief  Financial
Officer of National  Mercantile  Bancorp,  the parent of Mercantile  National Bank in Century  City,  California  from July 1996 to
February 2001.  Previously,  Mr. Kiley was Chief Financial Officer of Hancock Savings Bank, F.S.B. in Los Angeles,  California from
1992 to 1996. Mr. Kiley is a Certified Public Accountant.

Jay
H. Memmott, age 42, has been President and Chief Executive Officer of
Wilshire Credit Corporation since November 1999. Prior to his appointment as
President, Mr. Memmott served as Vice President in charge of Loan Servicing of
the Companys prior affiliated servicer from August 1997 to November 1999.
From April 1990 to August 1997, Mr. Memmott served as a Vice President of Coast
Federal Bank in Los Angeles, California.

Bradley
B. Newman,age 42, has been Executive Vice President, Capital Markets since
July 2002. Previously, Mr. Newman was Senior Vice President, Capital Markets
from November 1999 to July 2002 and Vice President, Capital
Markets/Securitization for the Company from August 1998 to November 1999. From
September 1995 to August 1998, Mr. Newman was Chief Operating Officer of J.G.
Newman Co., an insurance underwriter.

Mark
H. Peterman, age 56, has been the Companys Executive Vice President,
Legal Counsel and Secretary since November 1999. Mr. Peterman served as Senior
Vice President and Legal Counsel from July 1998 through November 1999.
Previously, Mr. Peterman was a partner in the law firm of Stoel Rives LLP
between 1975 and July 1998.

Russell
T. Campbell, age 40, has been Senior Vice President, Acquisitions since
April 2000. Mr. Campbell held several management positions at the Company from
1997 to April 2000. From 1992 to 1997, he was Chief Financial Officer for Oregon
Business Media. Prior to 1992, Mr. Campbell was a CPA working in the commercial
real estate industry.

## Section 16(a)
Beneficial Ownership Reporting Compliance

Section
16(a) of the Securities Exchange Act of 1934 requires a companys directors
and executive officers, and beneficial owners of more than 10% of the common
stock of such company, to file with the Securities and Exchange Commission
initial reports of ownership and periodic reports of changes in ownership of the
companys securities. To the knowledge of the Company, no director,
officer, or beneficial owner of more than 10% of the Companys Common Stock
failed to timely furnish reports required of such person by Section 16(a) on
Forms 3, 4 and 5 during the year ended December 31, 2003.

## ITEM 11.
Executive Compensation

## Compensation
of Directors

Each
member of the Board of Directors who is not an officer or employee of the
Company is paid an annual stipend of $25,000, a per-meeting fee of $1,000 for
each Board of Directors meeting attended in person, $500 for each meeting
attended telephonically, and a $500 per-meeting fee for each committee meeting
attended on days other than when Board of Directors meetings are held.
Non-employee directors who are also directors of FBBH receive an additional
yearly stipend of $10,000. Directors who serve as the chair of the Audit
Committee or of the Board receive an additional yearly stipend of $10,000, and
the chairperson of the Compensation Committee receives an additional yearly
stipend of $5,000. Other members of the Audit Committee and Compensation
Committee receive yearly stipends of $5,000 and $2,500, respectively. Officers
and employees of the Company who also serve as directors do not receive any
retainer or additional fees for serving as a director.

49

---

Upon
joining the Board, each non-employee director was granted an option to purchase
30,000 shares of common stock at a price per share equal to the fair market
value of the shares of common stock on the grant date. Through the year ended
December 31, 2002, following their re-election to the board at the annual
meeting, the directors received options to purchase an additional 20,000 shares
of WFSG common stock. In April 2003, the Board of Directors revised the
Companys 1999 Equity Participation Plan to remove the automatic annual
grant of stock options to directors upon their re-election to the board. All
options granted to the directors vest in thirds on each anniversary of the grant
date.

## Executive
Compensation Table

The
following table sets forth the total compensation paid or accrued by the Company
for services rendered during the year ended December 31, 2003 to the Chief
Executive Officer of the Company and each of the four other most highly
compensated executive officers of the Company who were serving as executive
officers at December 31, 2003.

`Long-Term
                                                                         Annual Compensation            Compensation
                                                                 ------------------------------------    ----------
                                                                                             Other       Securities
                                                                                             Annual      Underlying
Name and Principal Position                            Year      Salary ($)   Bonus ($)     Comp.($)   Options/SARs(#)
---------------------------                            ----      ----------   ----------   ----------    ----------
Stephen P. Glennon..................................   2003      $  279,583   $       --   $ 36,000(1)           --
   Chief Executive Officer                             2002      $   83,337   $  100,000   $ 53,110(2)      300,000
                                                       2001      $       24   $  250,000   $ 74,583(3)           --

Jay H. Memmott......................................   2003      $  265,636   $  275,000         --              --
   Chief Executive Officer and President,              2002      $  250,000   $  250,000         --              --
   Wilshire Credit Corporation                         2001      $  225,224   $  175,000         --         100,000

Bradley B. Newman...................................   2003      $  234,524   $  250,000         --              --
   Executive Vice President, Capital Markets           2002      $  225,000   $  250,000         --              --
                                                       2001      $  190,000   $  125,000         --         125,000

Mark H. Peterman....................................   2003      $  257,668   $  200,000         --              --
   Executive Vice President, Legal Counsel             2002      $  250,000   $  180,555         --              --
   and Secretary                                       2001      $  258,249   $   70,000         --          10,000

Joseph W. Kiley III.................................   2003      $  275,000   $  165,000         --              --
   Chief Executive Officer and President,              2002      $  200,000   $   80,000         --              --
   First Bank of Beverly Hills, F.S.B.                 2001      $  151,925   $  107,500         --         200,000
_______________`

(1)  Represents reimbursement for personal living expenses.
(2)  Includes $40,102 for personal living expenses and taxes.
(3)  Includes $60,487 for personal living expenses and taxes.

## Option/SAR Grants In Last Fiscal Year

No stock options were granted by the Company during the year ended December 31, 2003 to any of the named executive officers.

50

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## Aggregated Option/SAR Exercises In Last Fiscal Year And Fiscal Year-End Option/SAR Values

The  following  table  lists (i) the number  and value of shares  received  upon the  exercise  of options in 2003,  (ii) the
aggregate number of unexercised options at December 31, 2003, and (iii) the value of unexercised  in-the-money  options at December
31, 2003 for each of the named executive officers.  The Company has no outstanding SARs.

`Number of Securities          Value of Unexercised
                                                                 Underlying Unexercised       In-the-Money Options/SARs
                                  Shares                       Options/SARs at FY-End (#)          at FY-End ($)
                                 Acquired          Value       ---------------------------   ---------------------------
Name                          on Exercise (#)   Realized ($)   Exercisable   Unexercisable   Exercisable   Unexercisable
----                          ---------------   ------------   -----------   -------------   -----------   -------------
Stephen P. Glennon (1).......            --             --       1,250,000          25,000   $ 5,748,975   $      91,500
Jay H. Memmott...............            --             --         316,666          33,334     1,460,831         136,669
Bradley B. Newman (2)........       125,000     $  529,688          94,999          30,001       391,696         123,404
Mark H. Peterman.............       131,667        328,998              --           3,333            --          13,765
Joseph W. Kiley III..........            --             --         133,333          66,667       574,165         287,085
________________`

|(1) | In January 2004 Mr. Glennon acquired 1,250,000 shares upon the exercise of options for a realized value of $6,861,475.
|--- | ----------------------------------------------------------------------------------------------------------------------

|(2) | In January 2004 Mr. Newman acquired an additional 94,999 shares upon the exercise of options for a realized value of
       $386,946.
|--- | -------------------------------------------------------------------------------------------------------------------------------------

## Long Term Incentive Plan Awards In Last Fiscal Year

No long term incentive plan awards were made during the 2003 fiscal year to any of the named executive officers.

## Employment Arrangements

The Company's Chief  Executive  Officer,  Mr. Stephen P. Glennon,  received a salary of $100,000 for the period from March 1,
2002  through  February 28, 2003 and  $300,000  for the period from March 1, 2003  through  February 29, 2004  pursuant to a letter
agreement,  and he was  reimbursed  for certain  living  expenses  for those  periods.  Mr.  Glennon in March 2002 also was granted
300,000  stock options at a price equal to the fair market value of the  Company's  Common Stock on the date of grant.  The options
vested at the rate of 12,500 per month and had vested in full as of February 29, 2004. Mr. Glennon's  letter  agreement  expired on
February 29, 2004. On February 27, 2004,  the Company's  Board of Directors  extended Mr.  Glennon's  current  salary under his new
agreement through and including the anticipated closing of the sale of WCC in the second quarter of 2004.

The Company and the Bank entered into an Employment,  Confidentiality  and Contingent  Severance Agreement with Mr. Joseph W.
Kiley III,  effective  as of January  1, 2003 (the  "Kiley  Agreement").  The Kiley  Agreement  provides  that Mr.  Kiley  serve as
President  and Chief  Executive  Officer of the Bank  commencing  January 1, 2003.  Pursuant to the Kiley  Agreement,  Mr.  Kiley's
employment is for a term of twelve (12) months,  automatically  renewing for successive  periods of twelve months each,  unless, at
least 90 days before the  expiration  of such  twelve-month  period,  either the members of the board of directors of the Bank (the
"Board of Directors" or the "Board")  gives  written  notice of  non-renewal  to Mr.  Kiley,  or Mr. Kiley gives written  notice of
non-renewal  to the Bank.  Under the Kiley  Agreement,  Mr. Kiley  receives an annual base salary of  $275,000,  and is entitled to
participate in the Bank's  employee  benefit plans,  medical,  dental,  vision,  disability or insurance  programs,  if any, to the
extent offered to other officers of similar  position under the Bank's personnel  policies.  The Company and Mr. Kiley have entered
into (1) an Amended and  Restated  Incentive  Stock Option  Agreement  dated March 12, 2001 for 150,000  options and (2)  Incentive
Stock Option  Agreement dated October 2, 2001 for 50,000  options.  Mr. Kiley's rights to such stock options shall be determined by
the terms and conditions of said  agreements.  All stock options  granted under the Kiley Agreement are granted at a price equal to
the fair  market  value of the  Company's  Common  Stock on the date of grant.  Pursuant to the Kiley  Agreement,  in the event Mr.
Kiley's  employment is terminated upon the occurrence of an "Other Event of Termination"  (as defined in the Kiley  Agreement),  he
is entitled to an amount equal to his then annual base salary and to life, medical,  dental and disability  coverage  substantially
identical to the coverage  maintained  by the Bank or the Company for Mr. Kiley prior to his  termination  of employment at no cost
to him for a period  of one  year,  subject  to  certain  limitations.  Under the  Kiley  Agreement,  in the event of a "change  in
control"  (as defined in the Kiley  Agreement)  of the Bank or the  Company,  Mr. Kiley is entitled to an amount equal to two times
his then annual base salary. In addition, Mr. Kiley's stock options become immediately vested and exercisable.

51

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In October 2000,  the Company gave  change-in-control  agreements to Messrs.  Jay H. Memmott,  Mark H.  Peterman,  Russell T.
Campbell and Bradley B. Newman.  The Company  revised  portions of these  agreements  in April 2001,  June 2002 and December  2003.
These  agreements  provide that, in the event of a change in control of the Company or WCC, these  executives  would be entitled to
receive a severance  payment if within 120 days after a change in control,  their  employment  is  involuntarily  terminated by the
Company for any reason other than cause or death or  disability,  or they  voluntarily  terminate  their  employment  after certain
adverse changes in the terms of their  employment  ("Good Reason").  In addition,  these executives are entitled to their severance
payment if they terminate  their  employment  after the 120-day period,  whether or not they have been terminated  without cause or
voluntarily  terminate for Good Reason.  The amount of the severance payment for Mr. Campbell would be his annual base salary,  and
the amount of the  severance  payment for the other  executives  would be twice their annual base salary.  Pursuant to the terms of
the Stock Purchase  Agreement between the Company and Merrill Lynch Mortgage Capital Inc.  ("Merrill  Lynch"),  upon the closing of
the sale of WCC, the Company will have no further obligations under these change-in-control agreements.

In connection with the signing of the definitive agreement for the sale of WCC to Merrill Lynch, Messrs.  Memmott, Newman and
Peterman agreed to enter into employment  agreements with Merrill Lynch,  effective as of the closing of the sale of WCC, providing
for their continued employment by WCC following the closing. As part of their new employment agreements,  Messrs.  Memmott,  Newman
and Peterman have each agreed to forego the severance  payment to which he would otherwise be entitled under his  change-in-control
agreement,  and in consideration for their release of WFSG's severance payment  obligations and their efforts that have resulted in
the sale of WCC,  WFSG has  agreed to pay  bonuses at the  closing  to Messrs.  Memmott,  Newman  and  Peterman  in the  amounts of
$475,000,  $500,000 and  $200,000,  respectively.  Subsequent to the signing of the  definitive  agreement for the sale of WCC, Mr.
Campbell  agreed to continue his employment with WCC after the closing  pursuant to a new employment  agreement with Merrill Lynch,
pursuant  to which he also has  agreed  to  forego  the  severance  payment  to which he would  otherwise  be  entitled  under  his
change-in-control agreement.

Compensation Committee Report On Executive Compensation

The Compensation Committee report below shall not be deemed incorporated by reference by any general statement  incorporating
by reference this Annual Report on Form 10-K into any filing under the Securities  Act of 1933, as amended (the  "Securities  Act")
or under the  Securities  Exchange Act of 1934,  as amended (the  "Exchange  Act"),  except to the extent the Company  specifically
incorporates  this  information  by reference,  and shall not otherwise be deemed filed under the  Securities  Act or Exchange Act.
The  Compensation  Committee of the Board of Directors of the Company (the  "Committee")  is made up  exclusively  of  non-employee
directors.  The Committee  administers the executive  compensation programs of the Company. All actions of the Committee pertaining
to executive compensation are submitted to the Board of Directors for approval.

The Company's  executive  compensation  program is designed to attract,  retain,  and motivate high caliber executives and to
focus the interests of the executives on objectives that enhance  stockholder  value.  These goals are attained by emphasizing "pay
for  performance"  by having a portion of the  executive's  compensation  dependent upon business  results and by providing  equity
interests  in the  Company.  The  principal  elements of the  Company's  executive  compensation  program are base salary and stock
options.  In  addition,  the Company  anticipates  that it will  recognize  individual  contributions  as well as overall  business
results, using a discretionary bonus program.

Base Salary

Base  salaries for the  Company's  executives  are intended to reflect the scope of each  executive's  responsibilities,  the
success of the Company,  and contributions of each executive to that success.  Executive  salaries are adjusted gradually over time
and only as  necessary  to meet this  objective.  Increases  in base  salary  may be  moderated  by other  considerations,  such as
geographic or market data, industry trends or internal fairness within the Company.

Bonuses

Annual  bonuses were paid by the Company and the Bank for 2003 based in part upon a 2003 bonus formula and the  discretion of
the  Committee  and the  Bank's  board of  directors.  The amount of the annual  bonuses  paid to  executives  by the  Company  was
determined  by the Committee  and approved by the  Company's  board of directors  and the amount of the annual  bonuses paid by the
Bank was  determined  by the Bank's board of  directors.  Annual  bonuses paid to other  employees  were based on their  individual
contributions towards meeting the overall objectives of the Company.

52

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Incentive Stock Option Plans

The  Company  adopted a stock  option  plan,  the 1999  Equity  Participation  Plan,  on  December  2, 1999.  The 1999 Equity
Participation  Plan  permits  the  Company to grant  incentive  stock  options  ("ISOs"),  non-statutory  stock  options  ("NSOs"),
restricted stock and stock appreciation rights (collectively  "Awards") to employees,  directors and consultants of the Company and
subsidiaries  of the  Company.  In June 2000 the Plan was  amended  to  increase  the number of shares  reserved  for  issuance  by
1,200,000  shares of common stock to an aggregate of 4,000,000  shares,  and to allow any participant in the Plan to receive grants
of options or other awards with respect to up to  1,000,000  shares of common stock per year.  In January 2001 the Plan was further
amended to revise the  definition  of "change in control" in those  provisions of the Plan that permit  accelerated  vesting of the
options in the event of a change in control,  and in April 2001,  the Plan was amended to provide that all options  would vest upon
certain  changes  in control  of the  Company or the Bank.  In March 2002 the Board  passed a  resolution  providing  that  options
granted after January 1, 2002 would not automatically  include a provision for immediate  vesting upon a change in control,  unless
otherwise  determined  by the  Committee.  In December  2003 the Board passed a resolution  providing  that all options  granted to
employees of WCC will immediately vest upon a change in control of WCC.

The option  exercise  price of both ISOs and NSOs may not be less than the fair  market  value of the  shares  covered by the
option on the date the  option is  granted.  The  Committee  may also  grant  Awards of  restricted  shares of Common  Stock.  Each
restricted  stock Award would  specify the number of shares of Common  Stock to be issued to the  recipient,  the date of issuance,
any  consideration  for such shares and the  restrictions  imposed on the shares  (including  the conditions of release or lapse of
such  restrictions).  The Committee may also grant Awards of stock  appreciation  rights. A stock  appreciation  right entitles the
holder to receive from the Company,  in cash or Common Stock,  at the time of exercise,  the excess of the fair market value at the
date of exercise of a share of Common Stock over a specified  price fixed by the  Committee in the Award,  multiplied by the number
of shares as to which the right is being  exercised.  The  specified  price fixed by the  Committee  will not be less than the fair
market value of shares of Common Stock at the date the stock appreciation right was granted.

On June 25, 2002, the Company adopted a new stock option plan, the 2002 Equity  Participation  Plan,  which  authorizes up to
1,000,000  shares of Company common stock for issuance.  Under the 2002 Equity  Participation  Plan, the Company may grant ISOs and
NSOs,  and also may grant or sell shares of common stock of the Company to  employees,  consultants  and  directors of the Company,
the Bank or any other  subsidiary  of the Company.  The terms of the 2002 Equity  Participation  Plan with respect to the granting,
vesting and exercise of stock options are substantially the same as those under the 1999 Equity Participation Plan.

53

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CEO Compensation

From April 1, 2000 to February 28, 2002 Mr. Glennon agreed to forego  substantially  all of his cash compensation for options
to acquire  575,000 shares of the Company's  common stock.  The purpose of this  arrangement was to improve the Company's cash flow
and to provide added  incentive for high levels of performance  and for unusual efforts to increase the earnings and performance of
the Company.  Mr. Glennon's subsequent  employment  agreement,  while providing for a base salary,  continued to provide incentives
for improving the Company's  earnings and shareholder  value, as the agreement  granted an additional  300,000 stock options at the
current  market  price.  The  Committee  believed  that  these  arrangements  were in the best  interests  of the  Company  and its
stockholders, as the value of Mr. Glennon's compensation was directly aligned with the financial performance of the Company.

| | COMPENSATION COMMITTEE
| | ----------------------
| | Daniel A. Markee      
| | Howard Amster         
| | Robert M. Deutschman  
| | Robert H. Kanner      
| | Edmund M. Kaufman     

Compensation Committee Interlocks and Insider Participation

Messrs. Markee, Amster, Deutschman,  Kanner and Kaufman served on the Compensation Committee during 2003. No Committee member
was, during the year ended December 31, 2003, an officer or employee of the Company or any of its subsidiaries.

Performance Graph

The following  Performance  Graph covers the period  beginning  July 7, 1999 when the  Company's  new Common Stock  commenced
trading,  through  December 31,  2003.  The graph  compares  the  performance  of the  Company's  Common Stock to the S&P 500 and a
Financial Services Index ("FSI").

54

---

`2003 Measurement Period(1)(2)

                                       July 7,     December 31,   December 31,   December 31,   December 31,   December 31,
                                        1999           1999           2000           2001           2002           2003
                                    ------------   ------------   ------------   ------------   ------------   ------------
  Company........................   $   100.00     $    39.29     $    35.71     $    58.57     $    94.29     $   171.43
  FSI(3).........................       100.00          87.95          74.40          94.53          69.55          93.09
  S&P 500........................       100.00         105.26          94.59          82.25          63.03          79.66
_______________`

|(1) | Assumes all distributions to stockholders are reinvested on the payment dates.
|--- | ------------------------------------------------------------------------------

|(2) | Assumes $100 invested on July 7, 1999 in the Company's Common Stock, the S&P 500 Index and the FSI.
|--- | ---------------------------------------------------------------------------------------------------

|(3) | The companies  included in the FSI were Advanta  Corporation,  American Business  Financial  Services Inc.,  American Express
Company, CIT Group Inc., Resource America Inc. and Ocwen Financial Corporation.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

## ITEM 12. Security Ownership of Certain Beneficial Owners and Management

The shares of common stock constitute the only outstanding  class of voting  securities of the Company.  As of March 1, 2004,
there were 20,398,822 shares of common stock outstanding and entitled to vote and approximately 51 stockholders of record.

The following table shows, as of March 1, 2004, the beneficial  ownership of common stock with respect to (i) each person who
was  known by the  Company  to own  beneficially  more than 5% of the  outstanding  shares of  common  stock,  (ii) each  director,
(iii) each named executive officer, and (iv) all directors and executive officers as a group.

`Amount and Nature of
                                                                              Beneficial              Percent of
Name, Title and Address of Beneficial Owner                                 Ownership (1)               Class
--------------------------------------------                                -------------               -----
Capital Research and Management......................................         3,959,160                  19.4%
   333 South Hope Street, 55th Floor
   Los Angeles, CA 90071
Directors and executive officers:
Larry B. Faigin (2)..................................................           164,548 (3)                 *
Howard Amster........................................................         2,545,997 (4)              12.5%
   23811 Chagrin Blvd. #200
   Beachwood, OH 44122
Robert M. Deutschman (2) ............................................           171,748 (5)                 *
Stephen P. Glennon (2)...............................................         1,275,000 (6)               6.2%
Robert H. Kanner.....................................................         1,881,666 (4)               9.2%
   3830 Kelley Ave
   Cleveland, OH 44114
Edmund M. Kaufman (2)................................................           172,698 (7)                 *
Daniel A. Markee (2).................................................           527,914 (8)               2.6%
Joseph W. Kiley III (2)..............................................           183,333 (9)                 *
Jay H. Memmott (2)...................................................           316,666 (10)              1.5%
Bradley B. Newman (2)................................................           219,999                   1.1%
Mark H. Peterman (2).................................................           131,667                     *
All directors and executive officers as a group (11 persons).........         7,591,236 (11)             35.8%
________________`

55

---

|(1)  | Amounts include stock options vesting within 60 days of March 1, 2004.                                                                                                                                                                                                                                                               
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2)  | The address for this stockholder is c/o Wilshire Financial Services Group Inc., 14523 SW Millikan Way, Suite 200,
Beaverton, OR 97005.                                                                                                                                                                                               
|(3)  | Includes 39,998 shares of common stock which may be acquired upon the exercise of options.                                                                                                                                                                                                                                           
|(4)  | Includes 26,666 shares of common stock which may be acquired upon the exercise of options.                                                                                                                                                                                                                                           
|(5)  | Includes 69,998 shares of common stock which may be acquired upon the exercise of options.                                                                                                                                                                                                                                           
|(6)  | Includes 25,000 shares of common stock which may be acquired upon the exercise of options.                                                                                                                                                                                                                                           
|(7)  | Includes 29,998 shares of common stock which may be acquired upon the exercise of options.                                                                                                                                                                                                                                           
|(8)  | Includes 69,998 shares of common stock which may be acquired upon the exercise of options. Also includes 441,666 shares
           owned through Forterra-Wilshire Partners, LLC ("Forterra-Wilshire"). Mr. Markee is the Managing Partner of
           Forterra-Wilshire and owns a 2.5% interest in the limited-liability company.
|(9)  | Includes 183,333 shares of common stock which may be acquired upon the exercise of options.                                                                                                                                                                                                                                          
|(10) | Includes 316,666 shares of common stock which may be acquired upon the exercise of options.                                                                                                                                                                                                                                          
|(11) | Includes 788,323 shares of common stock which may be acquired upon the exercise of options.                                                                                                                                                                                                                                          

* Less than 1%.

## ITEM 13. Certain Relationships and Related Transactions

None.

56

---

## ITEM 14.     Principal Accountant Fees and Services

## Principal Accounting Firm Fees

Aggregate  fees billed to the  Company  for the fiscal  years ended  December  31, 2003 and 2002 by the  Company's  principal
accounting  firm,  Deloitte  & Touche  LLP,  the  member  firms of  Deloitte  Touche  Tohmatsu,  and  their  respective  affiliates
(collectively, "Deloitte & Touche"), were as follows:

`Fiscal year ended
                                                                       December 31,
                                                                ---------------------------
                                                                    2003           2002
                                                                ------------   ------------
                                                                   (Dollars in thousands)
  Audit fees................................................    $        407   $        403
  Audit-related fees (a)....................................              89            164
                                                                ------------   ------------
        Total audit and audit related fees..................             496            567

  Tax fees (b)..............................................             472            397
  All other fees............................................              --             --
                                                                ------------   ------------
        Total fees..........................................    $        968   $        964
                                                                ============   ============`

|(a) | Includes fees for audits of subsidiaries, audits of benefit plans, and regulatory compliance audits.
|--- | ----------------------------------------------------------------------------------------------------

|(b) | Includes fees for tax compliance and tax consulting services, including tax planning for the Company and WCC, tax research,
       and analysis of the inventory of deferred tax assets.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In considering the nature
of the services provided by Deloitte & Touche, the Audit Committee
determined that such services are compatible with the provision of independent
audit services. The Audit Committee discussed these services with Deloitte &
Touche and the Companys management to determine that they are permitted
under the rules and regulations concerning auditor independence promulgated by
the U.S. Securities and Exchange Commission (the SEC) to implement
the Sarbanes-Oxley Act of 2002, as well as the American Institute of Certified
Public Accountants.

## Pre-Approval
Policy

The
services performed by Deloitte & Touche in 2003 were pre-approved in
accordance with the pre-approval policy and procedures adopted by the Audit
Committee. This policy describes the permitted audit, audit-related, tax, and
other services (collectively, the Disclosure Categories) that
Deloitte & Touche may perform. The policy requires that prior to the
beginning of each fiscal year, a description of the services (the Service
List) expected to be performed by Deloitte & Touche in each of the
Disclosure Categories in the following fiscal year be presented to the Audit
Committee for approval.

Any
requests for audit, audit-related, tax, and other services not contemplated on
the Service List must be submitted to the Audit Committee for specific
pre-approval and may not commence until such approval has been granted.
Normally, pre-approval is provided at regularly scheduled meetings. However, the
Audit Committee may delegate its duties to pre-approve auditing services and
permitted non-audit services to its chairman or one or more other Audit
Committee members. The chairman or other Audit Committee member(s) must update
the Audit Committee at the next regularly scheduled meeting of any services that
were granted specific pre-approval.

In
addition, although not required by the rules and regulations of the SEC, the
Audit Committee generally requests an estimate of the maximum fees associated
with each proposed service on the Service List and any services that were not
originally included on the Service List. Providing an estimate of the maximum
fees for a service incorporates appropriate oversight and control of the
Companys relationship with Deloitte & Touche, while permitting the
Company to receive immediate assistance from Deloitte & Touche when time is
of the essence.

57

---

On
a quarterly basis, the Audit Committee reviews the status of services and fees
incurred year-to-date against the original Service List and the forecast of
remaining services and fees for the fiscal year.

The
policy contains a de minimis provision that operates to provide retroactive
approval for permissible non-audit services under certain circumstances. The
provision allows for the pre-approval requirement to be waived if all of the
following criteria are met:

|1. | The service is not an audit, review or other attest service;                                                                                                                                                         
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2. | The aggregate  amount of all such services  provided  under this  provision  does not exceed the lesser of $50,000.00 or
           five percent (5%) of total fees paid to Deloitte & Touche in a given fiscal year;
|3. | Such services were not identified at the time of the engagement to be non-audit services;                                                                                                                            
|4. | Such services are promptly  brought to the attention of the Audit  Committee and approved by the Audit  Committee or its
           designee; and                                                                    
|5. | The service and fee are specifically disclosed in the Proxy Statement as meeting the de minimis requirements.                                                                                                        

# PART IV

## ITEM 15.
Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) Financial Statements

See Index to Financial Statements immediately following Exhibit Index.

(b) Reports on Form 8-K:

| | Current
Report on Form 8-K dated November 12, 2003, reporting the Companys
operating results for the quarter ended September 30, 2003.
| | ---------------------------------------------------------------------------------------------------------------------------------------

| | Current
Report on Form 8-K dated January 16, 2004, reporting that the Company had
entered into an agreement to sell its wholly-owned mortgage servicing
subsidiary, Wilshire Credit Corporation, to Merrill Lynch Mortgage Capital Inc.,
a division of Merrill Lynch & Co., New York, NY.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Current
Report on Form 8-K dated March 5, 2004, reporting that the Companys
application for listing of its common stock on the Nasdaq National Market had
been approved and that trading would commence on March 10, 2004.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Current
Report on Form 8-K dated March 30, 2004, reporting the Companys earnings
results for the year ended December 31, 2003.
| | -------------------------------------------------------------------------------------------------------------------------------

(c) Exhibits

See
Exhibit Index immediately following the signature page.

58

---

## INDEX TO
FINANCIAL STATEMENTS

`Page
                                                                                    ----
Wilshire Financial Services Group Inc. and Subsidiaries

Independent Auditors' Report....................................................     F-2

Consolidated Financial Statements:

      Consolidated Statements of Financial Condition
          December 31, 2003 and 2002 (as restated)..............................     F-3

      Consolidated Statements of Operations
         Years ended December 31, 2003, 2002 and 2001...........................     F-4

      Consolidated Statements of Stockholders' Equity
         Years ended December 31, 2003, 2002 and 2001 (as restated).............     F-5

      Consolidated Statements of Cash Flows
         Years ended December 31, 2003, 2002 and 2001...........................     F-6

      Notes to Consolidated Financial Statements................................     F-8`

F-1

---

# INDEPENDENT
AUDITORS REPORT

To the Board of Directors and Stockholders of
Wilshire Financial Services Group Inc.
Beaverton, Oregon

We have audited the
accompanying consolidated statements of financial condition of Wilshire
Financial Services Group Inc. and Subsidiaries (the Company) as of
December 31, 2003 and 2002, and the related consolidated statements of
operations, stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2003. These financial statements are the
responsibility of the Companys management. Our responsibility is to
express an opinion on these 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 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 Wilshire Financial Services Group Inc. and Subsidiaries as
of December 31, 2003 and 2002, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2003 in
conformity with accounting principles generally accepted in the United States of
America.

As discussed in Note 10 to
the consolidated financial statements, in 2002 the Company changed its method of
accounting for goodwill to conform with Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets.

As discussed in Notes 1 and 25,
the accompanying 2002 and 2001 consolidated financial statements have been
restated.

DELOITTE & TOUCHE LLP

Portland, Oregon
April 14, 2004

F-2

---

# WILSHIRE
FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in thousands)

`December 31,
                                                                                       ---------------------------
                                                                                           2003           2002
                                                                                       ------------   ------------
                                              ASSETS                                                  (As Restated,
                                                                                                       see Note 25)

Cash and cash equivalents ...........................................................  $     18,739   $     15,981
Government agency mortgage-backed securities available for sale, at fair value ......       161,083        211,082
AAA mortgage-backed securities available for sale, at fair value ....................        62,160         48,320
Other mortgage-backed securities available for sale, at fair value ..................         1,069          2,133
Investment securities available for sale, at fair value .............................        22,086         11,962
Investment securities held to maturity, at amortized cost (fair value of $9,754) ....         9,607             --
Loans, net of allowance for loan losses of $6,735 and $7,980 ........................       610,807        486,667
Discounted loans, net of allowance for loan losses of $32,041 and $39,975 ...........         3,817          5,829
Stock in Federal Home Loan Bank of San Francisco, at cost ...........................        12,767         10,808
Real estate owned, net ..............................................................           267          1,101
Leasehold improvements and equipment, net ...........................................           554          1,514
Accrued interest receivable .........................................................         4,215          4,051
Deferred tax asset, net .............................................................        18,054          2,966
Purchased mortgage servicing rights, net ............................................           250            713
Receivables from other loan servicers ...............................................           770            381
Intangible assets, net ..............................................................         3,442          3,701
Prepaid expenses and other assets ...................................................         2,897          2,992
Assets of subsidiary held for sale ..................................................        42,698         33,387
                                                                                       ------------   ------------
            TOTAL ...................................................................  $    975,282   $    843,588
                                                                                       ============   ============

                               LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
      Noninterest-bearing deposits ..................................................  $      4,175   $      3,659
      Interest-bearing deposits .....................................................       469,234        392,122
      Short-term borrowings .........................................................        88,000         91,870
      Accounts payable and other liabilities ........................................         3,690          6,380
      FHLB advances .................................................................       249,337        216,000
      Long-term investment financing ................................................           681          2,133
      Junior subordinated notes payable to trust ....................................        20,619             --
      Trust preferred securities ....................................................            --         20,000
      Investor participation liability ..............................................         1,169          1,116
      Liabilities of subsidiary held for sale .......................................        12,894         10,285
                                                                                       ------------   ------------
            Total liabilities .......................................................       849,799        743,565
                                                                                       ------------   ------------


COMMITMENTS AND CONTINGENCIES (NOTE 15)

STOCKHOLDERS' EQUITY:
      Preferred stock, $0.01 par value, 10,000,000 shares authorized, 0 shares
         outstanding ................................................................            --             --
      Common stock, $0.01 par value, 90,000,000 shares authorized,
         24,491,703 and 23,820,874 shares issued (including treasury shares of
         5,626,212) .................................................................       136,363        114,924
      Treasury stock, 5,626,212 shares, at cost .....................................       (15,106)       (15,106)
      Retained earnings (accumulated deficit) .......................................         3,791         (3,096)
      Accumulated other comprehensive income ........................................           435          3,301
                                                                                       ------------   ------------
            Total stockholders' equity ..............................................       125,483        100,023
                                                                                       ------------   ------------
            TOTAL ...................................................................  $    975,282   $    843,588
                                                                                       ============   ============`

See notes to consolidated financial statements

F-3

---

# WILSHIRE
FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except share data)

`Year Ended December 31,
                                                                                           ----------------------------------------
                                                                                               2003          2002          2001
                                                                                           ------------  ------------  ------------
INTEREST INCOME:
       Loans ............................................................................. $     34,243  $     38,054  $     49,896
       Mortgage-backed securities ........................................................       10,190        13,522         4,265
       Securities and federal funds sold .................................................        1,103         1,139         2,268
                                                                                           ------------  ------------  ------------
         Total interest income ...........................................................       45,536        52,715        56,429
                                                                                           ------------  ------------  ------------
INTEREST EXPENSE:
       Deposits ..........................................................................       11,315        15,683        24,914
       Borrowings ........................................................................       12,370        12,939         9,996
                                                                                           ------------  ------------  ------------
         Total interest expense ..........................................................       23,685        28,622        34,910
                                                                                           ------------  ------------  ------------
NET INTEREST INCOME ......................................................................       21,851        24,093        21,519
(RECAPTURE OF) PROVISION FOR LOSSES ON LOANS .............................................         (539)          255        (1,801)
                                                                                           ------------  ------------  ------------
NET INTEREST INCOME AFTER (RECAPTURE OF) PROVISION FOR
   LOSSES ON LOANS .......................................................................       22,390        23,838        23,320
                                                                                           ------------  ------------  ------------
OTHER (LOSS) INCOME:
       Loan fees and charges .............................................................          110           127         1,981
       Market valuation losses and impairments ...........................................         (352)       (3,712)         (533)
       (Loss) gain on sales of loans .....................................................          (66)          623           915
       Gain (loss) on sale of securities .................................................          249         2,258          (262)
       Real estate owned, net ............................................................         (204)           47           (25)
       Bankcard income, net ..............................................................           --            --         2,286
       Gain on sale of Bankcard operations ...............................................           --            --         5,118
       Investor participation interest ...................................................         (207)         (834)         (297)
       Other income (loss), net ..........................................................          334          (112)       (1,072)
                                                                                           ------------  ------------  ------------
         Total other (loss) income .......................................................         (136)       (1,603)        8,111
                                                                                           ------------  ------------  ------------
OTHER EXPENSES:
       Compensation and employee benefits ................................................        6,349         6,651        10,360
       Professional services .............................................................        4,619         4,133         4,536
       Occupancy .........................................................................          804         1,079         1,077
       FDIC insurance premiums ...........................................................          415           420           703
       Data processing ...................................................................          457           164           436
       Communication .....................................................................          207           307           423
       Insurance .........................................................................          583           501           626
       Depreciation ......................................................................          692         1,250         1,488
       Amortization of intangibles .......................................................          259           258           561
       Provision for litigation claims ...................................................           --         3,600            --
       Other general and administrative expense ..........................................        1,938         2,454         1,962
                                                                                           ------------  ------------  ------------
         Total other expenses ............................................................       16,323        20,817        22,172
                                                                                           ------------  ------------  ------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX
    PROVISION ............................................................................        5,931         1,418         9,259
INCOME TAX PROVISION .....................................................................        2,539           534         3,000
                                                                                           ------------  ------------  ------------
INCOME FROM CONTINUING OPERATIONS ........................................................        3,392           884         6,259
                                                                                           ------------  ------------  ------------
INCOME (LOSS) FROM OPERATIONS OF SUBSIDIARY HELD FOR SALE, NET OF INCOME TAX PROVISION OF
   $2,231 (2003), $191 (2002) AND $0 (2001) ..............................................        3,495         1,764        (1,294)
MINORITY INTEREST IN SUBSIDIARY HELD FOR SALE ............................................           --          (686)          647
                                                                                           ------------  ------------  ------------
INCOME (LOSS) FROM OPERATIONS OF SUBSIDIARY HELD FOR SALE,
    EXCLUDING MINORITY INTEREST ..........................................................        3,495         1,078          (647)
                                                                                           ------------  ------------  ------------
NET INCOME ............................................................................... $      6,887  $      1,962  $      5,612
                                                                                           ============  ============  ============

       Earnings (loss) per share - Basic:
         Income from continuing operations................................................ $       0.18  $       0.05  $       0.31
         Discontinued operations..........................................................         0.19          0.06         (0.03)
                                                                                           ------------  ------------  ------------
         Net income....................................................................... $       0.37  $       0.11  $       0.28
                                                                                           ============  ============  ============

       Earnings (loss) per share - Diluted:
         Income from continuing operations................................................ $       0.17  $       0.04  $       0.30
         Discontinued operations..........................................................         0.17          0.06         (0.03)
                                                                                           ------------  ------------  ------------
         Net income....................................................................... $       0.34  $       0.10  $       0.27
                                                                                           ============  ============  ============

         Weighted average number of shares - Basic........................................   18,508,892    17,142,561    20,138,015
         Weighted average number of shares - Diluted......................................   20,544,033    18,947,237    21,176,069`

See notes to consolidated financial statements

F-4

---

# WILSHIRE
FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES

# CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY

(Dollars in
thousands, except share data)

`(Accumulated   Accumulated
                               Preferred Stock     Common Stock         Treasury Stock       Deficit)        Other
                                ------------- --------------------- -----------------------  Retained   Comprehensive
                                Shares Amount   Shares      Amount      Shares     Amount    Earnings       Income         Total
                                ------ ------ ----------- --------- -----------  ----------  ---------   -------------  ---------
BALANCE, January 1, 2001,
   as originally reported.....      --     --  20,035,458  $ 96,516          --  $       --  $(10,670)   $         749  $  86,595
Prior period adjustments
   (See Note 25)..............                                  567                                                           567
                                ---------------------------------------------------------------------------------------------------
BALANCE, January 1, 2001 (as
   restated, see Note 25).....      --     --  20,035,458    97,083          --          --   (10,670)             749     87,162
   Comprehensive income:
     Net income...............                                                                  5,612                       5,612
     Unrealized holding gains
       on available for sale
       securities - net of tax
       expense of $143 (1)....                                                                                     204        204
                                                                                                                        ---------
   Total comprehensive income.                                                                                              5,816
   Tax benefit from utilization
     of pre-reorganizational
     Net Operating Losses
     (Note 14)................                                8,683                                                         8,683
   Exercise of stock options..                    314,000       331                                                           331
   Treasury stock acquired....                                       (4,168,854)    (10,005)                              (10,005)
                                ---------------------------------------------------------------------------------------------------
BALANCE, December 31, 2001
   (as restated, see Note 25).      --     --  20,349,458   106,097  (4,168,854)    (10,005)   (5,058)             953     91,987
   Comprehensive income:
     Net income...............                                                                  1,962                       1,962
     Unrealized holding gains
       on available for sale
       securities - net of tax
       expense of $1,851 (2)..                                                                                   2,490      2,490
     Unrealized loss on
       interest-rate swap -
       net of tax benefit of
       $101 (Note 15).........                                                                                    (142)      (142)
                                                                                                                        ---------
   Total comprehensive income.                                                                                              4,310
   Tax benefit from utilization
     of pre-reorganizational
     Net Operating Losses
     (Note 14)................                                  815                                                           815
   Exercise of stock options..                     75,000        96                                                            96
   Conversion of subordinated
     debentures...............                  3,396,416     7,690                                                         7,690
   Receipt of income tax
     refund related to pre-
     reorganizational income
     (Note 14)................                                  226                                                           226
   Treasury stock acquired....                                       (1,457,358)     (5,101)                               (5,101)
                                ---------------------------------------------------------------------------------------------------
BALANCE, December 31, 2002
   (as restated, see Note 25).      --     --  23,820,874   114,924  (5,626,212)    (15,106)   (3,096)           3,301    100,023
   Comprehensive income:
     Net income...............                                                                  6,887                       6,887
     Unrealized holding losses
       on available for sale
       securities - net of tax
       benefit of $2,073 (3)..                                                                                  (2,859)    (2,859)
     Unrealized loss on
       interest-rate swap -
       net of tax benefit
       of $7 (Note 15)........                                                                                      (7)        (7)
                                                                                                                        ---------
   Total comprehensive income.                                                                                              4,021
   Tax benefit from recognition
     of pre-reorganizational
     deferred tax assets
     (Note 14)................                               19,802                                                        19,802
   Exercise of stock options..                    670,829       862                                                           862
   Tax benefit from adjustment
     to pre-reorganizational
     Net Operating Losses
     (Note 14)................                                  775                                                           775
                                ---------------------------------------------------------------------------------------------------
BALANCE, December 31, 2003....      -- $   --  24,491,703 $ 136,363  (5,626,212)  $ (15,106) $  3,791    $         435  $ 125,483
                                ====== ====== =========== ========= ===========   ========== =========   =============  =========`

(1)        Includes reclassification adjustment for gain included in net income of $176, net of tax expense of $127.
        (2)        Includes reclassification adjustment for gain included in net income of $1,321, net of tax expense of $937.
        (3)        Includes reclassification adjustment for gain included in net income of $144, net of tax expense of $105.

See notes to consolidated financial statements

F-5

---

# WILSHIRE
FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

`Year Ended December 31,
                                                                                     ------------------------------------------
                                                                                         2003           2002           2001
                                                                                     ------------   ------------   ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
      Net income .................................................................   $      6,887   $      1,962   $      5,612
      (Income) loss from operations of subsidiary held for sale, net of taxes
         and minority interest....................................................         (3,495)        (1,078)           647
                                                                                     ------------   ------------   ------------
      Income from continuing operations...........................................          3,392            884          6,259
      Adjustments to reconcile income from continuing operations to net
         cash provided by operating activities:
            Market valuation losses and impairments ..............................            352          3,712             --
            (Recapture of) provision for estimated losses on loans ...............           (539)           421         (1,784)
            Provision for losses on real estate owned ............................            198             32             49
            Change in valuation allowance for mortgage servicing rights ..........           (481)         1,060          1,552
            Depreciation and amortization ........................................          1,731          2,006          2,429
            Tax effect from utilization of net operating loss carryforward........          2,467            815          4,183
            Gain on sale of real estate owned ....................................            (41)           (61)           (17)
            (Gain) loss on disposal of equipment .................................             (9)            49             44
            Gain on sale of loans ................................................             (9)        (2,527)        (1,475)
            (Gain) loss on sale of securities ....................................           (249)        (2,258)           262
            Gain on sale of mortgage servicing rights ............................             --             --           (414)
            Amortization of discounts and deferred fees ..........................          3,354          3,481            451
            Amortization of mortgage servicing rights ............................          5,326          3,617          5,847
            Federal Home Loan Bank stock dividends ...............................           (514)          (533)          (453)
            Minority interest in WCC .............................................             --            686           (647)
            Other ................................................................             --             36             --
            Change in:
              Servicer advance receivables .......................................         (1,937)        (1,656)           797
              Service fees receivable ............................................           (661)           766           (902)
              Accrued interest receivable ........................................           (166)           147            (57)
              Receivables from other loan servicers ..............................           (311)         1,326          1,373
              Prepaid expenses and other assets ..................................          1,970            440          3,024
              Accounts payable and other liabilities .............................           (546)        (2,727)        (2,903)
              Investor participation liability ...................................             26            818            528
            Net cash (provided by) used in operating activities of subsidiary
                 held for sale....................................................         (3,906)        (9,235)         1,188
                                                                                     ------------   ------------   ------------
            Net cash provided by operating activities of continuing operations....          9,447          1,299         19,334
                                                                                     ------------   ------------   ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
       Purchase of loans .........................................................        (86,928)       (74,689)      (150,137)
       Loan repayments ...........................................................        161,984        185,257        233,314
       Loan originations .........................................................       (206,042)       (70,754)       (74,026)
       Proceeds from sale of loans ...............................................          8,068             --         32,101
       Purchase of discounted loans ..............................................        (30,099)           (10)       (15,515)
       Proceeds from sale of discounted loans ....................................         30,308          7,395          7,337
       Purchase of mortgage-backed securities available for sale .................       (129,372)      (281,186)       (94,535)
       Repayments of mortgage-backed securities available for sale ...............        150,585         60,483         26,626
       Proceeds from sale of mortgage-backed securities available for sale........          9,436         78,540          1,271
       Purchase of investment securities available for sale ......................        (20,458)       (13,731)        (8,000)
       Proceeds from sale of investment securities available for sale ............             --         10,599             --
       Purchases of FHLB stock ...................................................         (1,445)          (800)        (2,407)
       Purchases of real estate owned ............................................           (601)           (67)            --
       Proceeds from sale of real estate owned ...................................          1,435          1,432          3,054
       Purchases of leasehold improvements and equipment .........................         (1,532)        (2,024)        (1,285)
       Proceeds from sale of leasehold improvements and equipment ................             21             44            166
       Purchase of mortgage servicing rights .....................................         (8,647)           (80)       (12,124)
       Proceeds from sale of mortgage servicing rights ...........................              2            377          1,210
       Purchase of minority interest in WCC ......................................             --        (12,000)            --
       Net cash used in (provided by) investing activities of subsidiary held
              for sale............................................................         10,091         (3,308)         8,170
                                                                                     ------------   ------------   ------------
            Net cash used in investing activities of continuing operations........       (113,194)      (114,522)       (44,780)
                                                                                     ------------   ------------   ------------`

See notes to consolidated financial statements

F-6

---

# WILSHIRE
FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

`Year Ended December 31,
                                                                                     ------------------------------------------
                                                                                         2003           2002           2001
                                                                                     ------------   ------------   ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
       Net increase (decrease) in deposits .......................................   $     77,628   $    (43,688)  $      4,396
       Proceeds from FHLB advances ...............................................        177,337        104,000         70,500
       Repayments of FHLB advances ...............................................       (144,000)       (77,500)       (13,000)
       (Decrease) increase in short-term borrowings ..............................         (3,870)        81,900            847
       Proceeds from long-term financing .........................................          5,677          2,444         20,567
       Repayments of long-term financing .........................................         (5,928)       (12,634)        (7,727)
       Issuance of convertible subordinated debentures ...........................             --          7,690             --
       Issuance of trust preferred securities ....................................             --         20,000             --
       Issuance of common stock ..................................................            862             96            331
       Purchase of treasury stock ................................................             --         (5,101)       (10,005)
       Net cash (provided by) used in financing activities of subsidiary held
           for sale...............................................................         (1,201)        12,604         (9,621)
                                                                                     ------------   ------------   ------------
              Net cash provided by financing activities of continuing operations..        106,505         89,811         56,288
                                                                                     ------------   ------------   ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .............................          2,758        (23,412)        30,842
CASH AND CASH EQUIVALENTS:
       Beginning of year .........................................................         15,981         39,393          8,551
                                                                                     ------------   ------------   ------------
       End of year ...............................................................   $     18,739   $     15,981   $     39,393
                                                                                     ============   ============   ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
   INFORMATION--Cash paid during the year for:
       Interest ..................................................................   $     22,175   $     29,288   $     33,052
       Income taxes, net .........................................................          1,490            496            625
NONCASH INVESTING ACTIVITIES:
       Additions to real estate owned acquired in settlement of loans ............            738          1,706          1,963
       Transfer of securities classified as available for sale to held to maturity          9,594             --             --
NONCASH FINANCING ACTIVITIES:
       Conversion of subordinated debentures into common stock ...................             --          7,690             --
       Release of valuation allowance related to pre-reorganizational net
           operating losses.......................................................         17,335             --          4,500`

See notes to consolidated financial statements

F-7

---

# WILSHIRE
FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES

# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

(Dollars in thousands, except per-share amounts)

## 1. NATURE OF
OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature
of OperationsWilshire Financial Services Group Inc. (WFSG
or the Company) conducts its operations primarily through non-bank
subsidiaries, Wilshire Credit Corporation (WCC) and Wilshire Funding
Corporation (WFC), and through a third-tier subsidiary savings bank,
First Bank of Beverly Hills, F.S.B. (FBBH or the Bank).

In
January 2004, the Company entered into an agreement to sell WCC to Merrill Lynch
Mortgage Capital Inc., a division of Merrill Lynch & Co. See Note 2 for a
further discussion of the sale of WCC.

WCC
conducts a full-service mortgage loan servicing business, specializing in the
servicing of labor-intensive mortgage pools. WFC conducts an investment and
co-investment business with institutional investors where such investments align
the Companys interests with those of such institutional investors and
provide operating leverage for the servicing operations of WCC. The Bank is
engaged in a banking business focused primarily on niche lending products,
including commercial and multi-family real estate lending. Until June 2001, the
Bank also conducted a Visa and Mastercard processing business and operated a
mortgage banking subsidiary, George Elkins Mortgage Banking (GEMB).
Effective June 30, 2001, the Bank disposed of these two divisions.

Administrative
headquarters of the Company, WCC and WFC are located in Beaverton, Oregon. The
Bank, a federally chartered savings institution regulated by the Office of
Thrift Supervision (OTS), conducts its operations through a branch
and a lending office in Southern California.

Principles
of ConsolidationWFSG was incorporated in 1996 to be the holding
company for Wilshire Acquisitions Corporation (WAC), which is the
holding company for the Bank. WFSG formed certain non-bank subsidiaries,
including WFC, and completed an initial public offering of common stock and a
public debt offering in the fourth quarter of 1996. Intercompany accounts have
been eliminated in consolidation.

Effective
May 31, 1999, as part of its restructuring under Chapter 11 of the U.S.
Bankruptcy Code, the Company acquired a majority (50.01%) interest in its loan
servicing subsidiary, WCC. The 49.99% interest not held by the Company is
reflected as Minority interest in subsidiary held for sale in the
Companys consolidated statements of operations for the year ended December
31, 2001 and for the period from January 1, 2002 through September 30, 2002. In October 2002, pursuant to a litigation settlement agreement (see
Note 3), WFSG purchased the remaining 49.99% minority interest in WCC.
Consequently, for periods subsequent to September 30, 2002, the Companys
consolidated financial statements reflect all of the accounts and operating
results of WCC and no longer contain an adjustment for minority interest.

WCC
and WFC conduct certain activities with a lender which has participation
interests in the returns generated by the assets that serve as collateral for
the loans. The accompanying consolidated financial statements include all of the
accounts of these joint ventures. The share of these activities held by this
lender is reflected as Investor Participation in the Companys
consolidated statements of financial condition, operations and cash flows.

Fresh-Start
Reporting-The Company accounted for its 1999 reorganization in accordance
with the American Institute of Certified Public Accountants Statement of
Position 90-7, Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code (SOP 90-7), which resulted in the creation of a
new entity for financial reporting purposes. Pursuant to SOP 90-7, the Company
adopted fresh-start reporting, whereby the carrying values of its
assets and liabilities were adjusted to reflect their estimated fair values as
of the May 31, 1999 effective date. The Company amortizes the fresh-start
adjustments on a monthly basis over the expected remaining life of the related
assets and liabilities.

Use
of Estimates in the Preparation of the Consolidated Financial
StatementsThe preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements.
Significant estimates include allowances for loan losses, valuation allowances
for real estate owned, purchased mortgage servicing rights and net deferred tax
assets, the determination of fair values of certain financial instruments for
which there is not an active market, the evaluation of other than temporary
impairment in the market values of investment securities and other assets, and
the selection of yields utilized

F-8

---

# WILSHIRE
FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES

# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per-share amounts)

to recognize interest
income on certain mortgage-backed securities. Estimates and assumptions also
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.

Stock-Based
CompensationThe Company has two stock-based employee compensation
plans, the 1999 Equity Participation Plan and the 2002 Equity Participation
Plan, pursuant to which stock options have been granted to its directors and
certain employees. The Company accounts for these plans under the recognition
and measurement principles of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations. No
stock-based employee compensation cost is reflected in net income, as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. Had compensation
expense for the Companys Equity Participation Plans been determined based
on the fair value at the grant date consistent with the methods of Statement of
Financial Accounting Standards (SFAS) No. 123, the Companys
net income and earnings per share for the years ended December 31, 2003, 2002
and 2001 would have been reduced to the pro-forma amounts indicated below.

`Year Ended December 31,
                                                                                    ------------------------------------------
                                                                                        2003           2002           2001
                                                                                    ------------   ------------   ------------
   Net income to common shareholders:
       As reported................................................................  $      6,887   $      1,962   $      5,612
       Less: Total stock-based compensation expense determined under
             fair value-based method for all awards, net of related tax effects...           493            581            412
                                                                                    ------------   ------------   ------------
       Pro-forma..................................................................  $      6,394   $      1,381   $      5,200
                                                                                    ============   ============   ============
   Net income per common and common share equivalent:
       Basic earnings per share:
             As reported..........................................................  $       0.37   $       0.11   $       0.28
             Pro-forma............................................................          0.35           0.08           0.26
       Diluted earnings per share:
             As reported..........................................................  $       0.34   $       0.10   $       0.27
             Pro-forma............................................................          0.31           0.07           0.25`

The
pro-forma amounts for 2002 and 2001 above have been restated to reflect the tax
effects of the hypothetical compensation expense deduction. Previously, the Company reported pro-forma net income of $1,167 and $4,980, respectively, for the years ended December 31, 2002 and 2001.  Pro-forma
 basic earnings per share, as previously reported, was $0.07 and $0.25, respectively, and pro-forma diluted earnings per share, as previously
reported, was $0.06 and $0.24, respectively, for the years ended December 31, 2002 and 2001.

There
were no options granted during the years ended December 31, 2003, 2002 or 2001
with exercise prices below the market value of the stock at the grant date. The
weighted average fair values of options granted during the years ended December
31, 2003, 2002 and 2001 were $0.80, $1.06, and $0.77, respectively. Fair values
were estimated using the Black-Scholes option-pricing model with the following
weighted average assumptions used: no dividend yield, expected volatility of 16%
(2003), 41% (2002) and 40% (2001), risk-free interest rate of 2.8% (2003), 2.9%
(2002) and 4.3% (2001), and expected lives of five years.

Cash
and Cash EquivalentsFor purposes of reporting financial condition and
cash flows, cash and cash equivalents include cash and due from banks, federal
funds sold, and securities with original maturities less than 90 days.

Mortgage-Backed
and Other Securities The Companys securities portfolios consist
of mortgage-backed and other debt securities that are classified as held to
maturity and available for sale. Securities are classified as held to maturity
when management has the ability and the positive intent to hold the securities
to maturity. Securities classified as held to maturity are carried at their cost
basis, adjusted for the amortization of premiums and accretion of discounts
using a method that approximates the interest method. Holding losses on
securities classified as held to maturity that are determined by management to be other than temporary are recorded as market valuation
losses and impairments in the consolidated statements of operations. Securities
not classified as held to maturity are classified as available for sale.
Securities classified as available for sale are reported at their fair market
values with unrealized holding gains and losses on securities reported, net of
tax, when applicable, as a separate component of accumulated other comprehensive
income in stockholders equity. Holding losses on securities classified as
available for sale that are determined by management to be other than temporary
in nature are reclassified from the unrealized holding losses included in
accumulated other comprehensive income to current operations. Realized gains and
losses from the sales of available for sale securities are reported separately
in the Consolidated Statements of Operations and are calculated using the
specific identification method.

F-9

---

# WILSHIRE
FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES

# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per-share amounts)

Loans
and Discounted Loans, and Allowance for Loan LossesLoans at the
Companys banking subsidiary are presented in the Consolidated Statements
of Financial Condition net of unamortized deferred origination fees and costs
and net of allowance for loan losses. Deferred fees and costs are recognized in
interest income over the terms of the loans using a method that approximates the
interest method. Interest income is recognized on an accrual basis.

The
Company evaluates commercial and multi-family real estate loans (whether
purchased or originated and whether classified as loans or discounted loans) for
impairment. Commercial and multi-family real estate loans are considered to be
impaired, for financial reporting purposes, when it is probable that the Company
will be unable to collect all principal or interest when due. Specific valuation
allowances are established, either at acquisition or through provisions for
losses, for impaired loans based on the fair value of the underlying real estate
collateral or the present value of anticipated cash flows.

The
Company evaluates single-family real estate, consumer and other smaller balance,
homogeneous loans for impairment on a collective basis. Management evaluates
these loans for impairment by comparing managements estimate of net
realizable value to the net carrying value of the portfolios.

All
specific and general valuation allowances established for pools of loans and
discounted loans are recorded in the allowance for loan losses. The allowance
for each pool is decreased by the amount of loans charged off and is increased
by the provision for estimated losses on loans and recoveries of previously
charged-off loans. The allowance for each pool is maintained at a level believed
adequate by management to absorb probable losses. Managements
determination of the adequacy of the allowance is based on a number of factors,
including, but not limited to, the following: the Companys historical and
recent loss experience in its portfolios; the volume, severity and trend of
non-performing assets; the extent to which refinances or loan modifications are
made to maintain loans in a current status; known deterioration in credit
concentrations or certain classes of loans; loan to value ratios of real estate
secured loans; risks associated with specific types of collateral; the quality
and effectiveness of the lending policy, loan purchase policy, internal asset
review policy, charge-off, collection and recovery policies; current conditions
in the general and local economies which might affect the collectability of the
loan; anticipated changes in the composition or volume of the portfolio; and
reasonableness standards in accordance with regulatory agency policies.

It
is the Companys policy to establish an allowance for uncollectible
interest on loans that are past due more than 90 days, or sooner when, in the
judgment of management, the probability of collection of interest is deemed to
be insufficient to warrant further accrual. Upon such a determination, those
loans are placed on non-accrual status and deemed to be non-performing. When a
loan is placed on non-accrual status, previously accrued but unpaid interest is
reversed by a charge to interest income.

Prior
to the Companys June 1999 reorganization, its principal non-Bank business
involved acquiring performing, sub-performing and non-performing loan
portfolios, for prices generally at or below face value (i.e., unpaid principal
balances plus accrued interest). Nonperforming loans (discounted
loans) are generally acquired at deep discounts to face value and are
recorded as Discounted loans, net in the Consolidated Statements of Financial
Condition.

Discounted
loans are carried net of unaccreted discount and allowance for loan losses
established for those loans. Unaccreted discounts represent the portion of the
difference between the purchase price and the principal face amount on specific
loans that is available for accretion to interest income. The allowance for loan
losses includes valuation allowances for estimated losses against the cost of
the loans that are established at acquisition and for subsequent valuation
adjustments that are provided for through current period earnings and are based
on discounted future cash flows or the fair value of the underlying real estate
collateral for collateral dependent loans. If total cash received on a pool of
loans exceeds original estimates, excess specific valuation allowances are
recorded as additional discount accretion on the cost-recovery method. The
allocated specific valuation allowances are included in the allowance for loan
losses.

Purchased
Mortgage Servicing RightsPurchased Mortgage Servicing Rights (PMSRs)
are reported at the lower of amortized cost or fair value. At the time a
servicing portfolio is acquired, the Company capitalizes the purchase price of
the PMSRs. Subsequently, the Company amortizes such costs on a monthly basis in
proportion to and over the period of the estimated future net servicing
revenues.

F-10

---

On
a quarterly basis, the Company evaluates PMSRs for impairment. PMSRs are
stratified based on the predominant risk characteristics of the underlying
financial assets. The fair value of the PMSRs is then determined by estimating
the present value of expected future cash flows, using a discount rate that is
considered commensurate with the risks involved. The amounts and timing of the
cash flows are estimated after considering various economic factors including
prepayment speeds, delinquency, default assumptions and related servicing costs.
The amount, if any, by which the amortized cost exceeds the fair value is
recorded as an impairment and recognized through a valuation allowance.

Intangible
Assets, netIntangible assets consist of goodwill and core deposit
intangibles at FBBH. The Company evaluates intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable.

Real
Estate OwnedReal estate acquired in settlement of loans or purchased
directly is held for sale and is originally recorded at the lower of fair value
less estimated costs to sell, the carrying value of the underlying loan, or
purchase price, respectively. Any excess of net loan cost basis over the fair
value less estimated selling costs of real estate acquired through foreclosure
is charged to the allowance for loan losses. Any subsequent operating expenses
or income, reductions in estimated fair values, as well as gains or losses on
disposition of such properties, are recorded in current operations.

Leasehold
Improvements and EquipmentOffice leasehold improvements and equipment
are stated at cost, less accumulated depreciation and amortization, computed on
the straight-line method over the estimated useful lives of the assets, which
currently range from one to seven years. Leasehold improvements are amortized
over the lives of the respective leases or the service lives of the
improvements, whichever is shorter.

Servicer
Advance Receivables, netIn the normal course of performing loan
servicing activities, WCC makes servicer advances to various unrelated third
parties which represent (1) impound payments on behalf of borrowers, (2)
scheduled remittances of principal and interest on certain securitizations, and
(3) loan collection costs on securitizations and other servicing arrangements.

Derivatives
and Hedging TransactionsAs part of the Banks interest rate
management process, the Bank may enter into interest rate swaps and other
financial instruments in order to mitigate the impact of rising interest rates
on the cost of its short-term borrowings and market value of its portfolio
securities. The Bank does not use derivatives to speculate on interest rates.

The
Company adopted SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended, on January 1, 2001. Under SFAS No. 133,
all derivatives are recorded at fair value and presented as either assets or
liabilities on the Companys balance sheets. At December 31, 2003 and 2002,
the Companys outstanding interest rate swap qualifies as a cash flow hedge
and is deemed to be a fully effective hedge under SFAS No. 133. Changes in fair
values of the swap are not reflected in current earnings, but reflected in
accumulated other comprehensive income. Currently, the fair value of the
interest rate swap is determined by values obtained from outside independent
sources. If the Company were to change current or anticipated borrowings so that
they were no longer appropriately matched to the swap agreement, the agreement
might no longer qualify for hedge accounting treatment. In that case, changes in
its fair value would affect net income.

Income
TaxesThe provision for income taxes is based on income recognized for
financial statement purposes. The Company and its eligible subsidiaries file a
consolidated U.S. federal income tax return. WCC, which is consolidated for
financial reporting purposes, was not eligible to be included in WFSGs
consolidated federal income tax return for tax years through the year ended
December 31, 2001 because it did not meet the required ownership threshold of
80% (the Companys economic interest was 50.01%). As a result of the
purchase of WCCs minority interest described above, WCCs operations
for periods subsequent to September 30, 2002 will be included in the
Companys consolidated tax return, since WFSG now owns 100% of WCC.

F-11

---

Income
taxes are accounted for using the asset and liability method. Under this method,
a deferred tax asset or liability is determined based on the enacted tax rates
which will be in effect when the differences between the financial statement
carrying amounts and tax basis of existing assets and liabilities are expected
to be reported in the Companys income tax returns. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date. Valuation allowances are established to reduce the
net carrying amount of deferred tax assets if it is determined to be more likely
than not that all or some portion of the potential deferred tax asset will not
be realized.

The
Company and its subsidiaries have entered into a tax sharing agreement under
which the tax liability is to be allocated pro rata among entities that would
have paid tax if they had filed separate income tax returns. In addition, those
entities reimburse loss entities pro rata for the reduction in tax liability as
a result of their losses. The OTS has presently limited the amount of the
Banks tax payments to the lesser of (1) the Banks stand-alone tax
liability and (2) the total tax payments made by the Company.

Bankcard
OperationsBankcard income, net, includes merchant discounts and
transaction fees for processing Visa® and Mastercard® transactions and
is offset by bankcard expense consisting primarily of fees paid to the
Companys third-party processors and interchange fees paid to card-issuing
banks. Other direct and indirect costs of Bankcard operations are included in
various other categories of expenses and are not specifically allocated
separately from other operating expenses of the Company. The Bankcard division
was sold effective June 30, 2001.

Earnings
per ShareBasic earnings per share (EPS) excludes dilution
and is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if the Companys
outstanding stock option contracts were exercised and resulted in the issuance
of common stock that then shared in the earnings of the Company.

New
Accounting Pronouncements In December 2002, the FASB issued
SFAS No. 148, Accounting for Stock-Based CompensationTransition and
Disclosurean Amendment of FASB Statement No. 123 (SFAS No. 123).
SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures 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
transition guidance and annual disclosure provisions of SFAS No. 148 are
effective for fiscal years beginning after December 15, 2002, with early
adoption permitted. The interim disclosure provisions are effective for
financial reports containing financial statements for interim periods beginning
after December 15, 2002. The Company continues to apply the disclosure-only
provisions of SFAS No. 123 and therefore the adoption of SFAS No. 148 did not
have a material impact on its financial position or results of operations.

In
November 2002, the FASB issued FASB Interpretation No. 45 (FIN No.
45),Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others.
FIN No. 45 is an interpretation of FASB Statements No. 5, 57 and 107 and
rescinds FIN No. 35. This Interpretation elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. The disclosure
requirements in this Interpretation are effective for financial statements of
interim or annual periods ending after December 15, 2002, and the accounting for
guarantees is applicable to any guarantees issued subsequent to December 31,
2002. The adoption of FIN 45 did not have a material impact on the Companys financial
position or results of operations.

In
January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46)
(revised December 2003), Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51". FIN 46 requires certain variable interest
entities (VIEs) to be consolidated by the primary beneficiary of the entity if
the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is effective for all new VIEs created or
acquired after January 31, 2003. For VIEs created or acquired prior to February
1, 2003, the provisions of FIN 46 are effective with the first period ending
after December 15, 2003. The Company adopted FIN 46 effective December 31, 2003
and, accordingly, no longer consolidates the VIE which was created in July 2002
for the issuance of trust preferred subordinated debt (see Note 13). The
Companys equity investment in the VIE of $619 is included in other assets
in the accompanying consolidated statement of financial condition. The adoption
of FIN 46 has not had a material impact on the Companys financial position
or results of operations.

F-12

---

In
December 2003, the FASB issued SFAS No. 132 (revised 2003),
Employers Disclosures about Pensions and Other Postretirement
Benefitsan amendment of FASB Statements No. 87, 88, and 106. This
revision of SFAS No. 132 retains the disclosure requirements contained in the
original SFAS No. 132, which was issued in February 1998. It requires additional
disclosures to those in the original SFAS No. 132 about the assets, obligations,
cash flows, and net periodic benefit cost of defined benefit pension plans and
other defined benefit postretirement plans. The required information should be
provided separately for pension plans and for other postretirement benefit
plans. This Statement is effective for fiscal years ending after December 15,
2003 and, for interim-period disclosures, for quarters beginning after December
15, 2003. The adoption of SFAS No. 132 (revised 2003) has not had a material
impact on the Companys financial position or results of operations.

In
December 2003, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants (AICPA) issued Statement of Position
No. 03-3 (SOP 03-3),Accounting for Certain Loans or Debt
Securities Acquired in aTransfer. 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 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 beginning in 2005, the Company does not believe that
the adoption of SOP 03-3 will have a significant effect on the Companys
financial condition or results of operations.

ReclassificationsCertain
items in the consolidated financial statements for 2002 and 2001 were
reclassified to conform to the 2003 presentation, none of which affect
previously reported net income.

F-13

---

## 2. SALE OF
WILSHIRE CREDIT CORPORATION

On
January 16, 2004 WFSG entered into an agreement to sell WCC, the Companys
wholly-owned mortgage servicing subsidiary, to Merrill Lynch Mortgage Capital
Inc. WCC was formed in 1999 pursuant to the Companys reorganization, and
comprises WFSGs Loan Servicing Operations business segment. As of December
31, 2003, WCC serviced approximately $6.4 billion principal balance of loans for
more than 500 individual and institutional investors and governmental agencies.

The
sale agreement provides that WFSG will receive a cash purchase price of
approximately $52 million before transaction fees and expenses. Although the
purchase price is subject to adjustment based on the net asset value reflected
on WCCs closing date balance sheet, the Company expects to realize a
substantial gain on this sale. Closing is expected to occur in the second
quarter of 2004 and is subject to various customary conditions, including the
receipt of regulatory approvals.

WCC
is accounted for as a disposal group held for sale in accordance with SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets.
Accordingly, the assets and liabilities of WCC have each been combined and
presented as separate captions on the Consolidated Statements of Financial
Condition. In addition, WCCs results of operations have been removed from
the Companys results from continuing operations on the Consolidated
Statements of Operations, and have been presented separately in a single caption
as Income (loss) from operations of subsidiary held for sale.

The
following is summarized financial information for WCC:

`December 31,   December 31,
                                                                                 2003           2002
                                                                             ------------   ------------
         ASSETS:
         Cash and cash equivalents .......................................   $        109   $      1,598
         Discounted loans, net ...........................................            522            801
         Leasehold improvements and equipment, net .......................          2,602          1,594
         Servicer advance receivables, net ...............................         22,972         21,035
         Purchased mortgage servicing rights, net ........................          8,519          4,256
         Other assets ....................................................          7,974          4,103
                                                                             ------------   ------------
             Total assets ................................................   $     42,698   $     33,387
                                                                             ============   ============

         LIABILITIES:
         Short-term borrowings and investment financing ..................   $      3,352   $      2,151
         Other liabilities ...............................................          9,542          8,134
                                                                             ------------   ------------
              Total liabilities ..........................................   $     12,894   $     10,285
                                                                             ============   ============`

Results
of operations for WCC were as follows:

`Year Ended December 31,
                                                                             ------------------------------------------
                                                                                 2003           2002           2001
                                                                             ------------   ------------   ------------

    Interest income ......................................................   $         70   $        302   $      1,194
    Interest expense .....................................................            614            639            785
                                                                             ------------   ------------   ------------
    Net interest (expense) income ........................................           (544)          (337)           409
    Provision for loan losses ............................................             --            166             17
                                                                             ------------   ------------   ------------
    Net interest (expense) income after provision for loan losses ........           (544)          (503)           392
    Servicing income(1) ..................................................         35,342         26,786         18,453
    Other income .........................................................            616          1,740          2,018
    Compensation and employee benefits expense ...........................         22,669         18,747         14,500
    Other expenses .......................................................          7,019          7,321          7,657
                                                                             ------------   ------------   ------------
    Income (loss) before income taxes ....................................          5,726          1,955         (1,294)
    Income tax provision .................................................          2,231            191             --
                                                                             ------------   ------------   ------------
    Net income (loss) ....................................................   $      3,495   $      1,764   $     (1,294)
                                                                             ============   ============   ============`

F-14

---

|(1) | WCC's servicing income for the year ended December 31, 2003 includes an adjustment of $1.3 million that was recorded in
           the third quarter. This increase represents recoveries of excess deposits pursuant to the clarification and retroactive
           application of certain servicing agreements.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Following
is a summary of WCCs loan servicing portfolio by type of loan:

`December 31,
                                          ------------------------------------------
                                              2003           2002           2001
                                          ------------   ------------   ------------
    Single-family residential .........   $  5,973,070   $  3,668,401   $  3,020,267
    Multi-family residential ..........        116,119        121,908        141,297
    Commercial real estate ............        289,629        218,976        192,275
    Consumer and other ................         71,135         78,880         90,497
                                          ------------   ------------   ------------
         Total (2) ....................   $  6,449,953   $  4,088,165   $  3,444,336
                                          ============   ============   ============`

|(2) | WCC's  servicing  portfolio at December 31, 2003 and 2002 also  included  approximately  $0.3 billion  unpaid  principal
           balance of non-performing consumer loans in addition to those presented above.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

## 3. SETTLEMENT
OF LITIGATION

On
May 13, 2002, the Company entered into an agreement to resolve all issues with
all of the plaintiffs in litigation arising from the financial collapse of
Capital Consultants LLC (CCL). All parties have completed all of
their obligations under the settlement agreement, including the Companys
purchase of the 49.99% minority interest in WCC in October 2002. The execution
of the settlement agreement does not affect WFSGs complete denial of all
such claims. Management, after consultation with legal counsel, believes that
this litigation will be dismissed in the next few months.

In
2002, the Company recorded a $3.6 million provision for estimated expenses and
losses in connection with the settlement, $0.6 million in related charges, and
approximately $0.55 million in legal fees and expenses, net of insurance
reimbursement, associated with finalizing and implementing this settlement. The
settlement is expected to eliminate most of the Companys future costs
arising from the financial collapse of CCL. However, the Company does expect to
incur additional expenses in connection with legal costs for a prior officer
arising from the events that gave rise to the litigation. The Company incurred
approximately $2.5 million and $1.7 million, respectively, of such costs for
former officers for the years ended December 31, 2003 and 2002.

In
June 2001, the Bank sold its Bankcard Division to iPayment Holdings, Inc. for a
purchase price of approximately $5.8 million, with possible additional payments
totaling $0.4 million. The Bank filed a lawsuit for payment of part of the
purchase price, and iPayment, in September 2002, filed a cross-complaint against
the Bank for fraud, breach of contract and negligent misrepresentation. iPayment
claimed damages for the difference in the purchase price due to the allegedly
decreased value of a portion of the merchant portfolio; chargebacks resulting
from merchant fraud that iPayment is liable to pay, and will not be able to
recover, from the merchant totaling between $5 to $6 million; and
attorneys fees and punitive damages. Without any admission of liability,
the parties in February 2004 settled the case for $0.4 million to be paid by the
Bank to iPayment, in addition to a mutual release and additional indemnification
protection for the Bank. This settlement has been reflected in the
Companys consolidated statement of operations for the year ended December
31, 2003.

## 4. MARKET
VALUATION LOSSES AND IMPAIRMENTS

The
Company evaluates, on an ongoing basis, the carrying value of its securities
portfolio. To the extent differences between the book bases of the securities
accounted for as available-for-sale and their current market values are deemed
to be temporary in nature, such unrealized gains or losses are reflected
directly in stockholders equity as accumulated other comprehensive income.
Impairments that are deemed to be other than temporary are charged to income as
market valuation losses and impairments. In evaluating impairments as other than
temporary, the Company considers the magnitude and trend in the decline of the
market value of securities, the Companys ability to collect all amounts
due according to the contractual terms and the Companys expectations at
the time of purchase.

F-15

---

The
Company recorded market valuation losses and impairments of approximately $0.4
million for the year ended December 31, 2003 related to certain other assets.
For the year ended December 31, 2002, market valuation losses and impairments
totaled $3.7 million. Approximately $3.6 million of these write-downs related to
three interest-only federal agency-guaranteed mortgage-backed securities (I/Os)
which the Bank purchased in 2002 as a hedge against possible increases in
interest rates. However, as rates continued to decrease throughout 2002, the
I/Os declined significantly in value. Since this impairment was deemed to be
other than temporary, the write-downs were reflected as market valuation
losses and impairments in the accompanying statements of operations, and
not as a reduction to stockholders equity. In August 2002 the Bank sold
two of the I/Os for an additional loss of approximately $0.1 million. In the
fourth quarter of 2002, the remaining I/O recovered in value, and the Bank sold
the security for a realized gain of approximately $0.8 million. The realized
gains and losses on sale are included in the net gain on sales of securities in
the accompanying consolidated statements of operations. For the year ended
December 31, 2001, the Company recorded $0.5 million in impairment charges
related to certain miscellaneous investments.

F-16

---

## 5. SECURITIES

The
amortized cost, fair value and gross unrealized gains and losses on
mortgage-backed and other investment securities as of December 31, 2003 and 2002
are shown below. Fair market value estimates were obtained using discounted
cash-flow models or from independent parties.

`Gross          Gross        Estimated
                                                               Amortized      Unrealized     Unrealized    Fair Market
                                                                  Cost          Gains          Losses         Values
                                                              ------------   ------------   ------------   ------------
      December 31, 2003
      Available-for-sale:
         Government agency mortgage-backed securities .....   $    160,132   $      1,117   $        166   $    161,083
         AAA mortgage-backed securities ...................         62,601            130            571         62,160
         Other mortgage-backed securities .................            218            863             12          1,069
         Agency debt securities ...........................         10,114             70             --         10,184
         Trust preferred securities .......................          8,000             40             --          8,040
         Mutual funds .....................................          3,750            112             --          3,862
                                                              ------------   ------------   ------------   ------------
               Total available for sale ...................        244,815          2,332            749        246,398
                                                              ------------   ------------   ------------   ------------
      Held-to-maturity:
         Agency securities ................................          9,607            147             --          9,754
                                                              ------------   ------------   ------------   ------------
               Total ......................................   $    254,422   $      2,479   $        749   $    256,152
                                                              ============   ============   ============   ============


                                                                                Gross          Gross        Estimated
                                                               Amortized      Unrealized     Unrealized    Fair Market
                                                                  Cost          Gains          Losses         Values
                                                              ------------   ------------   ------------   ------------
      December 31, 2002
      Available-for-sale:
         Government agency mortgage-backed securities .....   $    207,802   $      3,280   $         --   $    211,082
         AAA mortgage-backed securities ...................         47,698            622             --         48,320
         Other mortgage-backed securities .................            317          1,834             18          2,133
         Trust preferred securities .......................          8,000             20             --          8,020
         Mutual funds .....................................          3,750            192             --          3,942
                                                              ------------   ------------   ------------   ------------
                Total available for sale...................   $    267,565   $      5,949   $         17   $    273,497
                                                              ============   ============   ============   ============`

The
following table shows the gross unrealized losses and fair value of the
Companys investments, aggregated by investment category and 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
                                  ------------   ------------   ------------   ------------   ------------   ------------
Government agency
   mortgage-backed
   securities..................   $     29,024            166   $         --   $         --   $     29,024   $        166
AAA and other mortgage-backed
   securities..................         23,477            583             --             --         23,477            583
                                  ------------   ------------   ------------   ------------   ------------   ------------
         Total.................   $     52,501   $        749   $         --   $         --   $     52,501   $        749
                                  ============   ============   ============   ============   ============   ============`

F-17

---

As
of December 31, 2003, the Company had no securities maturing in less than one
year, $10,184 fair value and $10,114 unamortized cost of securities maturing in
over one year through five years, $7,825 fair value and $7,774 unamortized cost
of securities maturing in over five years through ten years, and approximately
$238,143 fair value and $236,534 unamortized cost of securities maturing after
ten years. However, the Company expects to receive payments on its securities
over periods considerably shorter than their contractual maturities.

The
Company received proceeds of $9,436, $89,139 and $1,271, respectively, on sales
of available-for-sale securities during the years ended December 31, 2003, 2002
and 2001. Gains and losses from sales of available-for-sale securities were $249
and $0, respectively, for the year ended December 31, 2003; $2,468 and $210,
respectively, for the year ended December 31, 2002; and $0 and $262,
respectively, for the year ended December 31, 2001.

At
December 31, 2003 and 2002, securities with carrying values of $242,454 and
$183,771, respectively, and market values of $243,033 and $186,542,
respectively, were pledged to secure short-term borrowings, FHLB advances and
public deposits.

In
September 2003, the Bank transferred two agency securities from the
available-for-sale classification to the held-to-maturity classification. At the
date of transfer, the two agency securities had an aggregate par value and
unrealized loss of approximately $10.2 million and $595, respectively. The
unrealized loss of $595 was recorded as a discount and is being amortized to
income over the life of the securities. The unrealized loss, net of taxes, is
included in other comprehensive income.

## 6. LOANS AND
DISCOUNTED LOANS

The
following is a summary of each loan category by type as of December 31, 2003 and
2002:

`December 31,
                                                              ---------------------------
                                                                  2003           2002
                                                              ------------   ------------
      Loans
      Real estate loans:
          One to four units ...............................   $     71,031   $    119,539
          Over four units .................................        231,374        171,974
          Commercial ......................................        311,457        194,423
                                                              ------------   ------------
          Total loans secured by real estate ..............        613,862        485,936
      Consumer and other loans ............................          1,043          5,896
                                                              ------------   ------------
                                                                   614,905        491,832
      Add:  Premium on purchased loans and deferred fees ..          2,637          2,815
      Less:  Allowance for loan losses ....................         (6,735)        (7,980)
                                                              ------------   ------------
                                                              $    610,807   $    486,667
                                                              ============   ============`

F-18

---

`December 31,
                                                         ---------------------------
                                                             2003           2002
                                                         ------------   ------------
      Discounted Loans
      Real estate loans:
          One to four units ..........................   $      2,229   $      3,025
          Over four units ............................              1            238
          Commercial .................................            817            980
          Land .......................................             62             97
                                                         ------------   ------------
          Total loans secured by real estate .........          3,109          4,340
      Consumer and other loans .......................         32,969         41,857
                                                         ------------   ------------
                                                               36,078         46,197
      Less:
          Discounts on purchased loans ...............           (220)          (393)
          Allowance for loan losses ..................        (32,041)       (39,975)
                                                         ------------   ------------
                                                         $      3,817   $      5,829
                                                         ============   ============`

As
of December 31, 2003 and 2002, loans with adjustable rates of interest were
$492,392 and $353,665, respectively, and loans with fixed rates of interest were
$158,591 and $184,364, respectively. Adjustable-rate loans are generally indexed
to U.S. Treasury Bills, the FHLBs Eleventh District Cost of Funds Index,
LIBOR or Prime and are subject to limitations on the timing and extent of
adjustment. Most loans adjust within six months of changes in the index.

At
December 31, 2003 and 2002, loans with unpaid principal balances of
approximately $279,746 and $291,272, respectively, were pledged to secure credit
line borrowings and repurchase agreements included in short-term borrowings (see
Note 12).

Activity
in the allowance for loan losses is summarized as follows:

`Year Ended December 31,
                                                              ------------------------------------------
                                                                  2003           2002           2001
                                                              ------------   ------------   ------------
Balance, beginning of year .................................  $     47,955   $     50,454   $    221,484
Allocations of purchased reserves:
      at acquisition .......................................            --             --          4,393
      at disposition .......................................            --             --       (173,122)
Net change pursuant to fresh-start reporting ...............           (71)          (114)          (113)
Charge-offs ................................................        (8,637)        (2,824)          (894)
Recoveries .................................................            68            184            507
(Recapture of) provision for losses on loans ...............          (539)           255         (1,801)
                                                              ------------   ------------   ------------
Balance, end of year .......................................  $     38,776   $     47,955   $     50,454
                                                              ============   ============   ============`

At
December 31, 2003 and 2002, the Company had impaired loans totaling $9,064 and
$17,746, respectively, and had recorded specific valuation allowances to measure
the impairments of those loans totaling $2,333 and $2,555, respectively. The
average unpaid principal balances of impaired loans during the years ended
December 31, 2003, 2002 and 2001 were $13,878, $20,273, and $28,214,
respectively. Interest income recognized on impaired loans during 2003, 2002 and
2001 was $517, $1,160, and $1,354, respectively, based on cash payments. These
amounts exclude consideration of single-family residential and other loan pools
evaluated for impairment on a pooled basis.

The
Bank has a geographic concentration of mortgage loans in the western United
States, primarily in southern California. The five states with the greatest
concentration of the Banks loans were California, Nevada, Colorado,
Arizona, and Oregon, which had $420.0 million, $32.8 million, $21.3 million,
$21.1 million, and $17.3 million principal amount of loans, respectively, at
December 31, 2003. The five states with the greatest concentration of the
Companys Discounted Loans were Florida, Texas, Oregon, California, and
Maryland, which had $7.4 million, $4.0 million, $2.6 million, $2.6 million and
$2.2 million principal amount of loans, respectively, at December 31, 2003.

F-19

---

Managements
estimates are utilized to determine the adequacy of the allowance for loan
losses. Estimates are also involved in determining the ultimate recoverability
of purchased loans and, consequently, the pricing of purchased loans. These
estimates are inherently uncertain and depend on the outcome of future events.
Although management believes the levels of the allowance as of December 31, 2003
and 2002 are adequate to absorb losses inherent in the loan portfolio, changes
in interest rates, various other economic factors and regulatory requirements
may result in increasing levels of losses. Those losses will be recognized if
and when these events occur.

## 7. REAL ESTATE
OWNED

Real
estate owned consists of property that was obtained through foreclosure or was
purchased directly, and is reported at the lower of its fair value less
estimated costs to sell, the net carrying value of the underlying loan, or the
acquisition cost. Activity in real estate owned is as follows for the years
indicated:

`Year Ended December 31,
                                               ---------------------------
                                                   2003           2002
                                               ------------   ------------
    Balance, beginning of year .............   $      1,101   $        677
    Foreclosures ...........................            738          1,706
    Sales and exchanges, net................         (1,394)        (1,250)
    Provision for losses ...................           (178)           (32)
                                               ------------   ------------
    Balance, end of year ...................   $        267   $      1,101
                                               ============   ============`

Activity in the valuation
allowance on real estate owned is summarized as follows:

`Year Ended December 31,
                                               ---------------------------
                                                   2003           2002
                                               ------------   ------------
    Balance, beginning of year .............   $         83   $        328
    Allocations of purchased reserves:
          at acquisition ...................             --            476
          at disposition ...................            (31)          (721)
    Charge-offs ............................           (164)           (32)
    Provision for losses ...................            178             32
                                               ------------   ------------
    Balance, end of year ...................   $         66   $         83
                                               ============   ============`

Real
estate owned with a net carrying value of $62 at December 31, 2002
collateralized short-term borrowings (see Note 12). There was no pledged real
estate owned at December 31, 2003.

## 8. LEASEHOLD
IMPROVEMENTS AND EQUIPMENT

Leasehold
improvements and equipment consist of the following:

`December 31,
                                                         ---------------------------
                                                             2003           2002
                                                         ------------   ------------
    Leasehold improvements ...........................   $        475   $        461
    Furniture and equipment ..........................          4,730          7,817
                                                         ------------   ------------
    Total cost .......................................          5,205          8,278
    Accumulated depreciation and amortization ........         (4,651)        (6,764)
                                                         ------------   ------------
                                                         $        554   $      1,514
                                                         ============   ============`

F-20

---

## 9. PURCHASED
MORTGAGE SERVICING RIGHTS

The
balances of the Companys purchased mortgage servicing rights as of
December 31, 2003 and 2002, and changes during the years then ended, were
as follows:

`Year Ended December 31,
                                                                   ---------------------------
                                                                       2003           2002
                                                                   ------------   ------------
    Purchased mortgage servicing rights, beginning of year .....   $        713   $      2,007
    Purchases of mortgage servicing rights .....................             --             --
    Amortization ...............................................           (639)          (923)
    Impairment recovery (charge) ...............................            176           (371)
                                                                   ------------   ------------
    Purchased mortgage servicing rights, end of year ...........   $        250   $        713
                                                                   ============   ============`

The
changes in the Companys valuation allowance for impairment of PMSRs are as
follows for the years indicated:

`Year Ended December 31,
                                                                   ---------------------------
                                                                       2003           2002
                                                                   ------------   ------------
    Balance, beginning of year .................................   $       (642)  $       (271)
    Other than temporary impairment.............................            394             --
    Recovery of (addition for) impairment ......................            176           (371)
                                                                   ------------   ------------
    Balance, end of year .......................................   $        (72)  $       (642)
                                                                   ============   ============`

The
Company evaluates PMSRs for impairment by stratifying PMSRs based on the
predominant risk characteristics of the underlying financial assets. At December
31, 2003 and 2002, the fair values of the Companys PMSRs totaled $290 and
$952, respectively. These values were determined using discount rates of 12-15%
and prepayment rate assumptions (CPR) ranging from 36% to 63% (2003)
and 35% to 55% (2002).

For
the year ended December 31, 2003, the Company recorded other than temporary impairment of PMSRs of $394, which reduced
both the gross carrying value of the PMSRs and the PMSRs valuation allowance.  The amount of the other than
temporary impairment was determined by selecting an appropriate interest rate shock to estimate the amount of the
PMSRs fair value that the Company might expect to recover in the foreseeable future.  To the extent that the
gross carrying value of the PMSRs exceeded the estimated recoverable amount, that portion of the gross carrying value
was written off as an other than temporary impairment.  Although the writedown had no impact on the Company's results of operations
or financial condition, it did reduce the gross carrying value of the PMSRs, which is used as the basis for PMSR amortization.

At
December 31, 2003 and 2002, the key economic assumptions used in valuing the
Companys PMSRs, and the sensitivity of the PMSRs fair values to 10%
and 20% adverse changes in such assumptions, were as follows:

`December 31,
                                                                 ---------------------------
                                                                     2003           2002
                                                                 ------------   ------------
           Fair value of capitalized PMSRs...................     $     290      $     952
           CPR...............................................         36-63%         35-55%
             Impact on fair value of 10% adverse change......           (37)          (133)
             Impact on fair value of 20% adverse change......           (69)          (248)
           Future cash flows discounted at...................         12-15%         12-15%
             Impact on fair value of 10% adverse change......            (5)           (19)
             Impact on fair value of 20% adverse change......           (10)           (37)`

These
sensitivities are hypothetical and should be used with caution. As the amounts
indicate, changes in fair value based on a variation in assumptions generally
cannot be extrapolated because the relationship of the change in assumption to
the change in fair value may not be linear. Also, in this table the effect of a
variation in a particular assumption on the fair value of the retained interest
is calculated without changing any other assumption. In reality, however,
changes in one factor may result in changes in another, which might magnify or
counteract the sensitivities.

F-21

---

## 10. INTANGIBLE
ASSETS

In
June 2000, the Bank acquired a branch location and recorded goodwill of $3,393
and a core deposit intangible of $1,294. Through December 31, 2001, the goodwill
was amortized on a straight-line basis over an estimated useful life of 15
years. In January 2002 the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets, and, as a result, no longer amortizes goodwill,
but tests it at least annually for impairment. The Company will continue to
amortize the core deposit intangible over an estimated useful life of 5 years.

Following
is a summary of the Companys intangible assets as of December 31, 2003 and
2002:

`December 31, 2003                 December 31, 2002
                                          -------------------------------   -------------------------------
                                          Gross Carrying    Accumulated     Gross Carrying    Accumulated
                                              Amount        Amortization        Amount        Amortization
                                          --------------   --------------   --------------   --------------
  Intangible Assets:
    Goodwill ..........................   $        3,393   $         (339)  $        3,393   $         (339)
    Core deposit intangible ...........            1,294             (906)           1,294             (647)
                                          --------------   --------------   --------------   --------------
      Total ...........................   $        4,687   $       (1,245)  $        4,687   $         (986)
                                          ==============   ==============   ==============   ==============`

For
the year ended December 31, 2003 the Company recorded amortization expense of
$259 related to the core deposit intangible. The estimated amortization of the
December 31, 2003 balance for the succeeding fiscal years is $259 (2004), $129
(2005), and none thereafter.

There
were no changes in the carrying value of goodwill during the year ended December
31, 2003. The Company tested goodwill for impairment as of March 31, 2003 and
determined that no impairment charge was required. There were no conditions that
indicated impairment as of December 31, 2003.

The
Companys PMSRs totaled approximately $0.25 million at December 31, 2003
and $0.7 million at December 31, 2002. Amortization expense for PMSRs was $0.6
million for the year ended December 31, 2003 and $0.9 million for the year ended
December 31, 2002. The estimated amortization expense of the December 31, 2003
balance of PMSRs for the five succeeding fiscal years is $121 (2004), $63
(2005), $32 (2006), $17 (2007) and $9 (2008). The estimated amortization expense
is based only on currently held PMSRs and on current information regarding
expected loan payments and prepayments. Actual results may vary as a result of
changes in the rate of prepayments and other market factors.

SFAS
No. 142 requires disclosure of what reported net income would have been in all
periods presented exclusive of amortization expense (including any related tax
effects) recognized in those periods related to intangible assets that are no
longer being amortized, any deferred credit related to an excess over cost,
equity method goodwill, and changes in amortization periods for intangible
assets that will continue to be amortized (including any related tax effects).
The Companys amortization expense for the years ended December 31, 2003,
2002 and 2001 were as follows (net of income taxes):

`Year Ended December 31,
                                                    ------------------------------------------
                                                        2003           2002           2001
                                                    ------------   ------------   ------------
Amortization of goodwill .........................  $         --   $         --   $       (184)
Amortization of deferred acquisition costs .......            --             --            (32)
Amortization of core deposit intangible ..........          (148)          (161)          (157)
Amortization of PMSRs ............................          (365)          (575)          (856)`

F-22

---

Below
is a reconciliation of reported income from continuing operations to adjusted
income from continuing operations (including per-share amounts) showing the
pro-forma effect if SFAS No. 142 had been adopted prior to January 2002:

`Year Ended December 31,
                                                                ------------------------------------------
                                                                    2003           2002           2001
                                                                ------------   ------------   ------------
Reported income from continuing operations ...................  $      3,392   $        884   $      6,259
Add back: Amortization of goodwill ...........................            --             --            184
Add back: Amortization of deferred acquisition costs .........            --             --             32
                                                                ------------   ------------   ------------
Adjusted income from continuing operations ...................  $      3,392   $        884   $      6,475
                                                                ============   ============   ============

Basic earnings per share:
Reported income from continuing operations ...................  $       0.18   $       0.05   $       0.31
Amortization of goodwill .....................................            --             --           0.01
Amortization of deferred acquisition costs ...................            --             --             --
                                                                ------------   ------------   ------------
Adjusted income from continuing operations ...................  $       0.18   $       0.05   $       0.32
                                                                ============   ============   ============

Diluted earnings per share:
Reported income from continuing operations ...................  $       0.17   $       0.04   $       0.30
Amortization of goodwill .....................................            --             --           0.01
Amortization of deferred acquisition costs ...................            --             --             --
                                                                ------------   ------------   ------------
Adjusted income from continuing operations ...................  $       0.17   $       0.04   $       0.31
                                                                ============   ============   ============`

## 11. DEPOSITS

Deposits consist of the following:

`December 31,
                                                             ---------------------------
                                                                 2003           2002
                                                             ------------   ------------
      Savings accounts...................................    $      2,319   $      1,746
      NOW and money market accounts......................          65,500         43,044
      Noninterest-bearing deposit accounts...............           4,175          3,659
      Time deposits:
            Less than $100...............................         111,639        116,216
            $100 or more.................................         289,776        231,116
                                                             ------------   ------------
      Total deposits.....................................    $    473,409   $    395,781
                                                             ============   ============`

A
summary of time deposits as of December 31, 2003, by maturity, is as follows:

`2004.....................................................     $  353,276
      2005.....................................................         22,668
      2006.....................................................         15,137
      2007.....................................................            328
      2008.....................................................         10,006
                                                                    ----------
                                                                    $  401,415
                                                                    ==========`

The
Banks deposits generally are not collateralized, with the exception of
approximately $30 million of public fund certificates of deposit from the State
of California, which are secured by loans and mortgage-backed securities.

F-23

---

## 12. SHORT-TERM BORROWINGS
AND FHLB ADVANCES

Short-term
borrowings at December 31, 2003 and 2002 consisted of the Banks
repurchase agreements of $88,000 and $91,870, respectively, which provide liquidity and financing for the Banks
acquisitions of loan pools and mortgage-backed securities. Following is
information about short-term borrowings:

`Year Ended December 31,
                                                                 ------------------------------------------
                                                                     2003           2002           2001
                                                                 ------------   ------------   ------------

      Average balance during the year.........................   $     89,162   $     55,651   $         23
      Highest amount outstanding during the year..............         99,170         91,870          4,277
      Average interest rate - during the year.................           2.04%          2.43%          6.70%
      Average interest rate - end of year.....................           1.96%          2.16%            --%`

In
addition to the borrowings described above, the Companys Mortgage
Investment Operations have secured longer-term investment financing, consisting
of lines of credit from institutional lenders. At December 31, 2003, WFC had an
outstanding line-of-credit borrowing with an institutional lender in the amount
of $0.7 million, bearing interest at 6.12%. This debt facility does not have a
contractual maturity, but is repaid as cash flows are received on the loans
serving as collateral.

The
Bank has an agreement with the Federal Home Loan Bank of San Francisco (the
FHLB) whereby the Bank can apply for advances not to exceed 35% of
the Banks total assets as of the previous quarter-end. These advances are
secured by mortgage-backed securities and loans.  The balances of FHLB advances outstanding
at December 31, 2003 and 2002 were $249.3 million and $216.0 million, respectively.

The following table sets forth the Companys FHLB advances at and for the years ended December 31, 2003 and 2002:

`Year Ended
                                                                          December 31,
                                                                   ---------------------------
                                                                       2003           2002
                                                                   ------------   ------------
FHLB Advances:
      Average amount outstanding during the period................ $    223,424   $    189,923
      Maximum month-end balance outstanding during the period.....      249,337        216,000
      Weighted average rate:
            During the period.....................................        4.05%           5.23%
            At end of period......................................        3.27%           4.66%`

The Companys
short-term borrowings and FHLB advances mature as follows:

`2004...........................   $   126,500
                  2005...........................       120,000
                  2006...........................        74,500
                  2007...........................        16,337
                  Serial notes...................           681
                                                    -----------
                       Total.....................   $   338,018
                                                    ===========`

## 13. LONG-TERM
DEBT

At
December 31, 2003, the Company had outstanding $20.6 million in floating-rate
junior subordinated notes payable to a trust, bearing interest at the
three-month LIBOR rate plus 3.65% (approximately 4.8% at December 31, 2003) and
maturing in 2032. The borrowings may be prepaid after July 11, 2007 (in whole or
in part) at par. The Company incurred interest expense of approximately $1.0
million and $0.5 million on this debt for the years ended December 31, 2003 and
2002, respectively.

In
July 2002, the Company issued trust preferred securities through a wholly-owned
statutory business trust (trust), and the Company issued junior
subordinated notes payable to the trust. Prior to the adoption of FIN 46, this
trust was reported as a consolidated subsidiary of the Company. At December 31,
2002, the $20 million of trust preferred securities were included in the
Companys consolidated statement of financial condition in the liabilities
section, under the caption Trust preferred securities, and the
retained common capital securities of the issuer trusts were eliminated against
the Companys investment in the issuer trusts. Distributions on the
preferred securities were recorded as interest expense on the consolidated
statements of operations.

Pursuant
to the adoption of FIN 46, the Company deconsolidated this trust as of December
31, 2003. As a result, the junior subordinated notes payable issued by the
Company to the issuer trust, totaling $20.6 million, are now reflected in the
Companys consolidated statement of financial condition in the liabilities
section at December 31, 2003 under the caption Junior subordinated notes
payable to trust. For years subsequent to 2003 the Company will record
interest expense on the corresponding junior subordinated notes payable in its
consolidated statements of operations. The Company also recorded its equity
investment in the trust of $619 in other assets in its consolidated statement of
financial condition as of December 31, 2003.

F-24

---

In
January and February 2002 the Company issued a total of $7.69 million in 8%
convertible subordinated debentures due December 15, 2005. The debentures were
issued in a private placement to certain of the Companys Directors, and
provided the majority of the financing for the Companys December 2001
purchase of approximately 4.2 million shares of its common stock. In July 2002,
after the Company called for redemption of the debentures, the Directors elected
to convert their holdings into common stock. Accordingly, the Company canceled
the debentures and issued a total of 3,396,416 shares of WFSG common stock to
the Directors. The Company incurred interest expense of approximately $0.3
million on these debentures for the year ended December 31, 2002.

## 14. INCOME
TAXES

The
Company files consolidated federal and state income tax returns with its
eligible subsidiaries. As discussed in Note 2, the Company has entered into an
agreement to sell its wholly-owned loan servicing subsidiary, WCC, to Merrill
Lynch Mortgage Capital Inc. WCC is accounted for as a disposal group held for
sale in the accompanying consolidated financial statements, and its assets and
liabilities and operating results have each been removed from the Companys
consolidated statements of financial condition and operations, respectively, and
reported separately in a single caption. Accordingly, the discussion in this
note concerns primarily the Companys income tax provision (benefit) and
its deferred tax asset as they relate to its continuing operations.

The
components of income from continuing operations before federal and state income
taxes were as follows:

`Year Ended December 31,
                                                                            ------------------------------------------
                                                                                2003           2002           2001
                                                                            ------------   ------------   ------------
      Domestic..........................................................    $      5,931   $      1,418   $      9,259
      Foreign...........................................................              --             --             --
                                                                            ------------   ------------   ------------
            Total.......................................................    $      5,931   $      1,418   $      9,259
                                                                            ============   ============   ============

      The components of the income tax provision were as follows:
                                                                                     Year Ended December 31,
                                                                            ------------------------------------------
                                                                                2003           2002           2001
                                                                            ------------   ------------   ------------
      Current tax provision (benefit):
            Federal.......................................................  $        391   $     (1,556)  $       (892)
            State ........................................................           233            685            350
                                                                            ------------   ------------   ------------
                  Total current tax provision (benefit)...................           624           (871)          (542)
                                                                            ------------   ------------   ------------
      Deferred tax (benefit) provision:
            Federal.......................................................       (10,477)           452        (3,942)
            State.........................................................        (2,993)           138        (1,199)
                                                                            ------------   ------------   ------------
                  Total deferred tax (benefit) provision..................       (13,470)           590        (5,141)
                                                                            ------------   ------------   ------------
      Allocation to stockholders' equity:
            Utilization of pre-reorganizational deferred tax assets ......        15,385            815         8,683
                                                                            ------------   ------------   -----------
                  Total allocation to stockholders' equity................        15,385            815         8,683
                                                                            ------------   ------------   -----------
                  Total income tax provision..............................  $      2,539   $        534   $     3,000
                                                                            ============   ============   ===========`

The
Company recorded a total income tax provision on income from continuing
operations of approximately $2.5 million for the year ended December 31, 2003.
The current federal tax provision for the years ended December 31, 2003, 2002
and 2001 included excess inclusion income earned on certain residual interests
in REMICs which cannot be offset by tax losses. In addition, in 2001 the Company
realized certain benefits related to the resolution and closing of open audit
years.

F-25

---

The
difference between the effective tax rate applicable to income from continuing
operations in the consolidated financial statements and the statutory federal
income tax rate can be attributed to the following:

`Year Ended December 31,
                                                                            ------------------------------
                                                                              2003       2002       2001
                                                                            --------   --------   --------

      Federal income tax provision at statutory rate.....................       34.0%      34.0%      34.0%
      State taxes, net of federal tax effect.............................        6.4        6.8        5.0
      Permanent differences..............................................       (0.6)       0.6        0.1
      Excess inclusion income from residual interests in REMICs..........         --       16.8        5.4
      Refund related to amended excess inclusion income from REMICs......         --      (24.8)        --
      Resolution and closing of open audit years.........................         --         --      (16.2)
      Other..............................................................        3.0        4.3        4.1
                                                                            --------   --------   --------
      Effective income tax rate..........................................       42.8%      37.7%      32.4%
                                                                            ========   ========   ========`

The
Companys deferred tax assets and liabilities represent the tax effect of
future deductible or taxable amounts. They are attributable to carryforwards,
such as net operating losses and capital losses, and also to temporary timing
differences between amounts that have been recognized in the financial
statements and amounts that have been recognized in the income tax returns. An
effective tax rate of approximately 43% is applied to each attribute in
determining the amount of the related deferred tax asset or liability.

Deferred
income tax assets and liabilities as they relate to the Companys
continuing operations are summarized as follows:

`December 31,
                                                                                    ---------------------------
       Deferred tax assets:                                                             2003           2002
                                                                                    ------------   ------------
          Loans - purchase discounts, allowance for loan losses
             and market valuation adjustments ...................................   $        651   $      2,775
          Market adjustment on mortgage-backed securities and hedge instruments..          4,216          3,411
          Capitalized mortgage servicing rights .................................          2,104          2,294
          Depreciation and amortization .........................................             92          1,109
          Net operating loss carryforward, net of cancellation of debt income ...         45,773         40,708
          Accrued expenses ......................................................            255          2,097
          Capitalized costs .....................................................            406            419
          Goodwill ..............................................................            491            470
          Capital loss carryforward .............................................          2,074          3,203
                                                                                    ------------   ------------
                Gross deferred tax assets .......................................         56,062         56,486
                                                                                    ------------   ------------
       Deferred tax liabilities:
          Deferred loan fees ....................................................             --            (54)
          State taxes ...........................................................         (3,175)        (2,669)
          Pass-through income ...................................................        (2,701)        (1,384)
          Purchase accounting ...................................................             --           (451)
          Other .................................................................         (2,015)        (3,460)
                                                                                    ------------   ------------
                Gross deferred tax liabilities ..................................         (7,891)        (8,018)
                                                                                    ------------   ------------
          Total deferred tax asset, net .........................................         48,171         48,468
          Valuation allowance ...................................................        (30,117)       (45,502)
                                                                                    ------------   ------------
                Net deferred tax asset ..........................................   $     18,054   $      2,966
                                                                                    ============   ============`

F-26

---

SFAS
No. 109, Accounting for Income Taxes, requires that deferred tax
assets be reduced by a valuation allowance if it is more likely than not that
some portion or all of the deferred tax asset will not be realized. Through the
year ended December 31, 2002, the Company had offset substantially all of its
deferred tax asset with a valuation allowance. As of December 31, 2003, pursuant
to its annual evaluation of the deferred tax asset, the Company determined that
it is more likely than not that it will realize a significant portion of its
deferred tax asset in future periods. Consequently, the Company reduced the
amount of the valuation allowance and realized the related tax benefit. In
accordance with AICPA Statement of Position 90-7, Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code (SOP 90-7),
the tax benefit was recorded as an increase to stockholders equity, and
not as a tax benefit in the statement of operations, because the benefit related
to deferred tax assets generated in the Companys pre-reorganizational
period. As benefits relating to the Companys post-reorganizational period
are realized, the tax effect will be recorded as a tax benefit in the
consolidated statements of operations.

In
June 2002 the Company experienced a change in control as set forth by Section
382 of the Internal Revenue Code. In general, a change in control is defined as
a greater than 50% ownership shift as measured over the prior three-year period.
The change in control will limit the Companys ability to utilize certain
tax attributes, such as net operating loss and capital loss carryforwards, in
future periods. The Company has determined that the limitation on the amount
that may be used annually to offset taxable income is approximately $6 million.

As
of December 31, 2003, the Company had U.S. net operating loss carryforwards and
capital loss carryforwards of approximately $109 million and $5 million,
respectively, and also has state net operating loss carryforwards. The federal
carryforward period runs through 2023. As discussed above, the Companys
net operating loss carryforwards and capital loss carryforwards that were
generated in the pre-reorganizational period are subject to an annual limitation
on the amount that may be used to offset taxable income. The Company believes
that it has adequately provided for this limitation with its valuation allowance
against the deferred tax asset.

WCCs
allocable share of the consolidated income tax provision was approximately $2.2
million, $0.2 million, and $0, respectively, for the years ended December 31,
2003, 2002 and 2001. At December 31, 2003 and 2002, WCCs total deferred
tax asset, representing the tax effect of net future deductions, was $3.7
million and $1.1 million, respectively.

## 15.
COMMITMENTS AND CONTINGENCIES

Lease
CommitmentsThe following is a schedule of future minimum rental
payments under operating leases as of December 31, 2003:

`2004..........................   $      589
                  2005..........................          359
                  2006..........................          290
                  2007..........................          290
                  2008..........................          218
                                                   ----------
                       Total....................   $    1,746
                                                   ==========`

In
addition to the above totals, WCC has operating lease obligations in the
following amounts: $1,117 (2004), $913 (2005), $963 (2006), $992 (2007), $1,022
(2008) and $4,473 (thereafter). WCCs obligation under the lease agreement
for the corporate offices at the Beaverton, Oregon location is guaranteed by
WFSG. The Company is requesting that the landlord release this guaranty in
connection with the closing date of the sale of WCC to Merrill Lynch Mortgage
Capital Inc. (expected to occur in the second quarter of 2004).

Derivatives
and Hedging Transactions- During 2002, the Bank entered into an interest
rate swap agreement. Under this agreement, the Bank receives a floating rate and
pays a fixed rate. The swap qualifies for cash flow hedging for accounting
purposes, and effectively fixes the interest rate paid on $35 million, as of
December 31, 2003 and 2002, of borrowings under reverse repurchase agreements.
The swap expires in December 2004. The fair value of the swap as of December 31,
2003 and 2002 was unfavorable by $257 and $243, respectively. As the swap
qualifies as a cash flow hedge, this amount is shown, net of taxes, in
accumulated other comprehensive income as an unrealized loss.

F-27

---

Loan
CommitmentsAt December 31, 2003, the Bank had outstanding
commitments to extend credit of approximately $53.6 million and unfunded
commitments under lines of credit of $0.5 million. Loan commitments expose the
Bank to credit risk in excess of amounts reflected in the consolidated financial
statements. The Bank receives collateral to support loans and commitments to
extend credit for which collateral is deemed necessary.

Purchase
CommitmentsFrom time to time, the Company enters into various
commitments and letters of intent relating to purchases of loans, foreclosed
real estate portfolios and other investments. There can be no assurance that any
of such transactions will ultimately be consummated. It is the Companys
policy generally to record such transactions in the financial statements in the
period in which such transactions are closed. There were no such commitments
outstanding at December 31, 2003.

LitigationThe
Company expects to incur additional expenses on behalf of a former officer for
legal fees and other costs in connection with the events that gave rise to the
litigation discussed in Note 3.

The
Company is a defendant in other legal actions arising from transactions
conducted in the ordinary course of business. Some of these claims involve
individual borrowers demanding material amounts for alleged damages. Management,
after consultation with legal counsel, and based on prior experience with
consumer claims, believes the ultimate liability, if any, arising from such
actions will not materially affect the Companys consolidated results of
operations, financial position or cash flows.

## 16. REGULATORY
MATTERS

Regulatory
AgreementsOn January 11, 2002, the OTS determined that the Bank may
reimburse WFSG for the Banks stand-alone tax obligations for periods that
are no longer subject to tax carry-back. For those periods that are subject to
tax carry-back, the Bank may reimburse WFSG in the lesser amount of WFSGs
actual payments to the taxing authorities or the Banks stand-alone tax
obligations. The Bank reimbursed WFSG for actual payments to the taxing
authorities in 2003 and 2002 of $1,210 and $735, respectively.

Capital
Requirements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 possibly
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 their assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Banks capital
amounts and classifications 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 Tier I capital (as defined) 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 most recent notification from the OTS
categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier 1
risk-based and Tier 1 leverage ratios as set forth in the following tables.
There are no conditions or events since the notification that management
believes have changed the Banks category. As of December 31, 2003 and
2002, the total core capital and total risk-based capital amounts of the Bank,
compared with the OTS minimum requirements, were as follows:

F-28

---

`To Be
                                                                                                        Categorized as
                                                                                   Amount Required    "Well Capitalized"
                                                                                     For Capital              under
                                                                                       Adequacy        Prompt Corrective
                                                                  Actual               Purposes       Action Regulations
                                                          -------------------   -------------------   -------------------
                                                            Amount     Ratio      Amount     Ratio      Amount     Ratio
                                                          ----------  -------   ----------  -------   ----------  -------
      December 31, 2003
      Total Capital to Risk-Weighted Assets
         (Risk-Based Capital)...........................  $   83,995     12.2%  $   54,944   => 8.0%  $   68,679   =>10.0%
      Tier 1 Capital to Risk-Weighted Assets............      77,520     11.3%      Not Applicable        41,198   => 6.0%
      Core Capital to Adjusted Tangible Assets..........      77,520      8.6%      36,098   => 4.0%      45,122   => 5.0%
      Tangible Capital to Tangible Assets...............      77,520      8.6%      13,537   => 1.5%      Not Applicable

      December 31, 2002
      Total Capital to Risk-Weighted Assets
         (Risk-Based Capital)...........................  $   76,792     15.7%  $   39,155    =>8.0%  $   48,943   =>10.0%
      Tier 1 Capital to Risk-Weighted Assets............      70,662     14.4%      Not Applicable        29,361   => 6.0%
      Core Capital to Adjusted Tangible Assets..........      70,662      9.0%      31,546    =>4.0%      39,432   => 5.0%
      Tangible Capital to Tangible Assets...............      70,662      9.0%      11,830    =>1.5%      Not Applicable`

## 17. RELATED
PARTY TRANSACTIONS

In
April 2001 the Company sold approximately $1.5 million in mortgage-backed
securities to its former affiliate, Fog Cutter Capital Group Inc.
(FCCG, formerly known as Wilshire Real Estate Investment Inc.
(WREI)) for proceeds of approximately $1.2 million. FCCG owned
approximately 14% of the Companys outstanding common stock on the date of
the transaction.

In
December 2001 the Company repurchased 4,168,854 shares of its common stock from
entities affiliated with American Express Financial Advisors Inc. (collectively,
AXP). These shares represented AXPs entire interest in the
Companys common stock, or approximately 21% of the total WFSG shares then
outstanding. The purchase price for the shares was approximately $10.0 million,
or $2.40 per share.

In
January and February 2002 the Company issued a total of $7.69 million in 8%
convertible subordinated debentures due December 15, 2005 to five of its
Directors in a private placement. The proceeds from this issuance provided the
majority of the financing for the common stock repurchase described above. In
July 2002, after the Company called for redemption of the debentures, the
Directors elected to convert their holdings into common stock. Accordingly, the
Company canceled the debentures and issued a total of 3,396,416 shares of WFSG
common stock to the Directors in proportion to each Directors initial
investment. The Company incurred approximately $0.3 million in interest expense
on the debentures during the year ended December 31, 2002.

F-29

---

## 18. EARNINGS
(LOSS) PER SHARE

The
Company has outstanding stock options which are considered common stock
equivalents in the calculation of earnings per share. Following is a
reconciliation of net income and weighted average shares outstanding as used to
calculate basic and diluted earnings per share for the years ended December 31,
2003, 2002 and 2001.

`Year Ended December 31,
                                                                   ------------------------------------------
                                                                       2003           2002           2001
                                                                   ------------   ------------   ------------
    Income from continuing operations ..........................   $      3,392   $        884   $      6,259
    Discontinued operations ....................................          3,495          1,078           (647)
                                                                   ------------   ------------   ------------
    Net income .................................................   $      6,887   $      1,962   $      5,612
                                                                   ============   ============   ============
    Weighted average number of common shares
       outstanding - basic .....................................     18,508,892     17,142,561     20,138,015
                                                                   ------------   ------------   ------------
    Net effect of dilutive stock options - based on
       treasury stock method ...................................      2,035,141      1,804,676      1,038,054
                                                                   ------------   ------------   ------------
    Weighted average number of common shares
       outstanding - diluted ...................................     20,544,033     18,947,237     21,176,069
                                                                   ============   ============   ============

    Earnings (loss) per share - Basic:
       Income from continuing operations........................   $       0.18   $       0.05   $       0.31
       Discontinued operations..................................           0.19           0.06          (0.03)
                                                                   ------------   ------------   ------------
       Net income...............................................   $       0.37   $       0.11   $       0.28
                                                                   ============   ============   ============

    Earnings (loss) per share - Diluted:
       Income from continuing operations........................   $       0.17   $       0.04   $       0.30
       Discontinued operations..................................           0.17           0.06          (0.03)
                                                                   ------------   ------------   ------------
       Net income...............................................   $       0.34   $       0.10   $       0.27
                                                                   ============   ============   ============`

## 19. EMPLOYEE
BENEFITS AND AGREEMENTS

Profit
Sharing PlanThe Companys employees participate in a defined
contribution profit sharing and 401(k) plan sponsored by companies included in
the Companys control group. At the discretion of the
Companys Board of Directors, the Company may elect to contribute to the
plan based on profits of the Company or based on matching participants
contributions. The Company contributed $409, $482, and $431, respectively, for
the years ended December 31, 2003, 2002 and 2001.

Employment
AgreementsFrom April 1, 2000 to February 28, 2002, the Companys
Chief Executive Officer, Mr. Stephen P. Glennon, received a salary of $24.00 per
year for two years, and was reimbursed for certain living expenses. Mr. Glennon
also was granted 575,000 stock options at a price equal to the fair value at the
grant date. The options vested at the rate of 25,000 per month and had vested in
full as of February 28, 2002. In March 2002 Mr. Glennon entered into a new
employment agreement with the Company. Pursuant to this agreement, Mr. Glennon
received a salary of $100,000 from March 1, 2002 to February 28, 2003 and a
salary of $300,000 from March 1, 2003 to February 29, 2004, and continued to be
reimbursed for certain living expenses. Mr. Glennon also was granted 300,000
stock options at a price equal to the fair value at the grant date. The options
vested at the rate of 12,500 per month and had vested in full as of February 29,
2004. Mr. Glennons letter agreement expired on February 29, 2004. On
February 27, 2004, the Companys Board of Directors extended Mr.
Glennons current salary under his new agreement through and including the
anticipated closing of the sale of WCC in the second quarter of 2004.

F-30

---

The
Company and the Bank entered into an Employment, Confidentiality and Contingent
Severance Agreement with Mr. Joseph W. Kiley III, effective as of January 1,
2003 (the Kiley Agreement). The Kiley Agreement provides that Mr.
Kiley serve as President and Chief Executive Officer of the Bank commencing
January 1, 2003. Pursuant to the Kiley Agreement, Mr. Kileys employment is
for a term of twelve (12) months, automatically renewing for successive periods
of twelve months each, unless, at least 90 days before the expiration of such
twelve-month period, either the members of the board of directors of the Bank
(the Board of Directors or the Board) gives written
notice of non-renewal to Mr. Kiley, or Mr. Kiley gives written notice of
non-renewal to the Bank. Under the Kiley Agreement, Mr. Kiley receives an annual
base salary of $275,000, and is entitled to participate in the Banks
employee benefit plans, medical, dental, vision, disability or insurance
programs, if any, to the extent offered to other officers of similar position
under the Banks personnel policies. The Company and Mr. Kiley have entered
into (1) an Amended and Restated Incentive Stock Options Agreement dated March
12, 2001 for 150,000 options and (2) Incentive Stock Option Agreement dated
October 2, 2001 for 50,000 options. Mr. Kileys rights to such stock
options shall be determined by the terms and conditions of said agreements. All
stock options granted under the Kiley Agreement were granted at a price equal to
the fair market value of the Companys common stock on the date of grant.
Pursuant to the Kiley Agreement, in the event Mr. Kileys employment is
terminated upon the occurrence of an Other Event of Termination, (as
defined in the Kiley Agreement) he is entitled to an amount equal to his then
annual base salary and to life, medical, dental and disability coverage
substantially identical to the coverage maintained by the Bank or the Company
for Mr. Kiley prior to his termination of employment at no cost to him for a
period of one year, subject to certain limitations. Under the Kiley Agreement,
in the event of a change in control (as defined in the Kiley
Agreement) of the Bank or the Company, Mr. Kiley is entitled to an amount equal
to two times his then annual base salary. In addition, Mr. Kileys stock
options become immediately vested and exercisable.

In
October 2000, the Company gave change-in-control agreements to Messrs. Jay H.
Memmott, Mark H. Peterman, Russell T. Campbell and Bradley B. Newman. The
Company revised portions of these agreements in April 2001, June 2002 and
December 2003. These agreements provide that, in the event of a change in
control of the Company or WCC, these executives would be entitled to receive a
severance payment if within 120 days after a change in control, their employment
is involuntarily terminated by the Company for any reason other than cause or
death or disability, or they voluntarily terminate their employment after
certain adverse changes in the terms of their employment (Good
Reason). In addition, these executives are entitled to their severance
payment if they terminate their employment after the 120-day period, whether or
not they have been terminated without cause or voluntarily terminate for Good
Reason. The amount of the severance payment for Mr. Campbell would be his annual
base salary, and the amount of the severance payment for the other executives
would be twice their annual base salary. Pursuant to the terms of the Stock
Purchase Agreement between the Company and Merrill Lynch Mortgage Capital Inc.
(Merrill Lynch), upon the closing of the sale of WCC, the Company
will have no further obligations under these change-in-control agreements.

In
connection with the signing of the definitive agreement for the sale of WCC to
Merrill Lynch, Messrs. Memmott, Newman and Peterman agreed to enter into
employment agreements with Merrill Lynch, effective as of the closing of the
sale of WCC, providing for their continued employment by WCC following the
closing. As part of their new employment agreements, Messrs. Memmott, Newman and
Peterman have each agreed to forego the severance payment to which he would
otherwise be entitled under his change-in-control agreement, and in
consideration for their release of WFSGs severance payment obligations and
their efforts that have resulted in the sale of WCC, WFSG has agreed to pay
bonuses at the closing to Messrs. Memmott, Newman and Peterman in the amounts of
$475,000, $500,000 and $200,000, respectively. Subsequent to the signing of the
definitive agreement for the sale of WCC, Mr. Campbell agreed to continue his
employment with WCC after the closing pursuant to a new employment agreement
with Merrill Lynch, pursuant to which he also has agreed to forego the severance
payment to which he would otherwise be entitled under his change-in-control
agreement.

Stock
OptionsThe Company adopted a stock option plan, the 1999 Equity
Participation Plan, on December 2, 1999. The 1999 Equity Participation Plan
permits the Company to grant incentive stock options (ISOs),
non-statutory stock options (NSOs), restricted stock and stock
appreciation rights (collectively Awards) to employees, directors
and consultants of the Company and subsidiaries of the Company. In June 2000 the
Plan was amended to increase the number of shares reserved for issuance by
1,200,000 shares of common stock to an aggregate of 4,000,000 shares, and to
allow any participant in the Plan to receive grants of options or other awards
with respect to up to 1,000,000 shares of common stock per year. In January 2001
the Plan was further amended to revise the definition of change in
control in those provisions of the Plan that permit accelerated vesting of
the options in the event of a change in control, and in April 2001, the Plan was
amended to provide that all options would vest upon certain changes in control
of the Company or the Bank. In March 2002 the Board passed a resolution
providing that options granted after January 1, 2002 would not automatically
include a provision for immediate vesting upon a change in control, unless
otherwise determined by the Committee. In December 2003 the Board passed a
resolution providing that all options granted to employees of WCC will
immediately vest upon a change in control of WCC.

F-31

---

The
option exercise price of both ISOs and NSOs may not be less than the fair market
value of the shares covered by the option on the date the option is granted. The
Committee may also grant Awards of restricted shares of common stock. Each
restricted stock Award would specify the number of shares of common stock to be
issued to the recipient, the date of issuance, any consideration for such shares
and the restrictions imposed on the shares (including the conditions of release
or lapse of such restrictions). The Committee may also grant Awards of stock
appreciation rights. A stock appreciation right entitles the holder to receive
from the Company, in cash or common stock, at the time of exercise, the excess
of the fair market value at the date of exercise of a share of common stock over
a specified price fixed by the Committee in the Award, multiplied by the number
of shares as to which the right is being exercised. The specified price fixed by
the Committee will not be less than the fair market value of shares of common
stock at the date the stock appreciation right was granted.

On
June 25, 2002, the Company adopted a new stock option plan, the 2002 Equity
Participation Plan, which authorizes up to 1,000,000 shares of Company common
stock for issuance. Under the 2002 Equity Participation Plan, the Company may
grant ISOs and NSOs, and also may grant or sell shares of common stock of the
Company to employees, consultants and directors of the Company, the Bank or any
other subsidiary of the Company.

The
weighted average fair values of the Companys options granted during the
years ended December 31, 2003, 2002 and 2001 were $0.80, $1.06, and $0.77,
respectively. A summary of the Companys stock options as of December 31,
2003, 2002 and 2001, and changes during the years then ended, is presented
below:

`Year Ended December 31,
                                             ---------------------------------------------------------------------------------
                                                        2003                        2002                        2001
                                             -------------------------   -------------------------   -------------------------
                                                             Weighted                    Weighted                    Weighted
                                                             Average                     Average                     Average
                                                             Exercise                    Exercise                    Exercise
                                                Shares        Price         Shares        Price         Shares        Price
                                             ------------   ----------   ------------   ----------   ------------   ----------
Outstanding at beginning of year.............   3,596,666   $     1.55      3,190,000   $     1.35      3,157,000   $     1.16
Granted  ....................................      60,000         3.75        550,000         2.65        810,000         1.61
Exercised....................................    (670,829)        1.28        (75,000)        1.29       (314,000)        1.06
Forfeited....................................    (161,669)        1.91        (68,334)        1.32       (463,000)        1.12
                                             ------------   ----------   ------------   ----------   ------------   ----------
Outstanding at end of year...................   2,824,168   $     1.64      3,596,666   $     1.55      3,190,000   $     1.35
                                             ============   ==========   ============   ==========   ============   ==========
Exercisable at end of year...................   2,375,817   $     1.48      2,451,660   $     1.30      1,508,320   $     1.17
                                             ============   ==========   ============   ==========   ============   ==========`

Additional information regarding options outstanding as of December 31, 2003 is as follows:

`Weighted-      Weighted-
                                                                                         Average       Average
                               Range of                    Total       Exercisable      Remaining      Exercise
                            Exercise Prices                Shares         Shares           Life         Price
                            ---------------             ------------   ------------    ------------   ----------
      $0.88...........................................        30,000         30,000            6.24   $     0.88
      $1.06-$1.38.....................................     1,573,333      1,573,333            6.24   $     1.17
      $1.63-$1.90.....................................       613,334        406,661            7.63   $     1.82
      $2.20-$2.61.....................................       419,167        324,161            8.13   $     2.35
      $3.45-$3.80.....................................       188,334         41,662            8.75   $     3.56`

F-32

---

## 20. ESTIMATED
FAIR VALUES OF FINANCIAL INSTRUMENTS

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 estimated fair value
amounts have been determined by the Company using available market information
and appropriate valuation methodologies. However, considerable judgment is
required to interpret market data to develop 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.

`December 31, 2003             December 31, 2002
                                                                   ---------------------------   ---------------------------
                                                                     Carrying      Estimated       Carrying      Estimated
                                                                      Amount       Fair Value       Amount       Fair Value
                                                                   ------------   ------------   ------------   ------------
      Assets:
          Cash and cash equivalents ............................   $     18,739   $     18,739   $     15,981   $     15,981
          Mortgage-backed securities available for sale ........        224,312        224,312        261,535        261,535
          Investment securities available for sale .............         22,086         22,086         11,962         11,962
              Investment securities held to maturity ...........          9,607          9,754             --             --
          Loans and discounted loans, net ......................        614,624        621,828        492,496        526,711
          Federal Home Loan Bank stock .........................         12,767         12,767         10,808         10,808
          Purchased mortgage servicing rights ..................            250            290            713            952
    Liabilities:
          Deposits .............................................        473,409        472,117        395,781        398,339
          Short-term borrowings ................................         88,000         88,262         91,870         92,198
          FHLB advances ........................................        249,337        253,670        216,000        224,941
          Investment financing .................................            681            681          2,133          2,133
          Junior subordinated notes payable to trust ...........         20,619         20,619             --             --
          Trust preferred securities ...........................             --             --         20,000         20,000
          Interest-rate swaps ..................................            257            257            243            243`

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

Cash
and Cash EquivalentsThe carrying amounts approximate fair values due
to the short-term nature of these instruments.

Investment
Securities and Mortgage-Backed SecuritiesThe fair values of securities
are generally obtained from discounted cash flow models, market bids for similar
or identical securities, independent security brokers or dealers.

Loans
and Discounted LoansLoans are segregated by type, such as fixed- and
adjustable-rate interest terms. The fair values of fixed-rate mortgage loans are
based on discounted cash flows utilizing applicable risk-adjusted spreads
relative to the current pricing of similar fixed-rate loans as well as
anticipated prepayment schedules. The fair values of adjustable-rate mortgage
loans are based on discounted cash flows utilizing discount rates that
approximate the pricing of available mortgage-backed securities having similar
rate and repricing characteristics, as well as anticipated prepayment schedules.
No value adjustments have been made for changes in credit within the loan
portfolio. It is managements opinion that the allowance for estimated loan
losses pertaining to loans results in a fair value adjustment of the credit risk
of such loans. The fair value of discounted loans, which are predominantly
non-performing loans, is more difficult to estimate due to uncertainties as to
the nature, timing and extent to which the loans will be either collected
according to original terms, restructured, or foreclosed upon. Discounted
loans fair values were estimated using the Companys best judgement
for these factors in determining the estimated present value of future net cash
flows discounted at a risk-adjusted market rate of return. For other loans, fair
values are estimated for portfolios of loans with similar financial
characteristics.

F-33

---

Federal
Home Loan Bank StockThe carrying amounts approximate fair values
because the stock may be sold back to the Federal Home Loan Bank at carrying
value.

Purchased
Mortgage Servicing RightsThe fair value of PMSRs is determined by
estimating the present value of expected future cash flows, using a discount
rate that is considered commensurate with the risks involved. The amounts and
timing of the cash flows are estimated after considering various economic
factors including prepayment speeds, delinquency, default assumptions and
related servicing costs.

DepositsThe
fair values of deposits are estimated based on the type of deposit products.
Demand accounts, which include passbook and transaction accounts, are presumed
to have equal book and fair values, since the interest rates paid on these
accounts are based on prevailing market rates. The estimated fair values of time
deposits are determined by discounting the cash flows of settlements of deposits
having similar maturities and rates, utilizing a yield curve that approximated
the prevailing rates offered to depositors as of the reporting date.

Short-Term
Borrowings and FHLB AdvancesThe carrying value of short-term
borrowings and FHLB advances maturing within one year is a reasonable
approximation of fair value. The fair value of FHLB advances with maturities
greater than one year is estimated using rates currently offered for borrowings
and advances of similar maturities.

Investment
FinancingThe carrying value of the Companys investment financing
is a reasonable approximation of fair value, as the majority of these borrowings
are expected to be repaid in approximately one year.

Junior
Subordinated Notes Payable to Trust and Trust Preferred SecuritiesThe
carrying value of the Companys Notes payable to the trust is a reasonable
approximation of fair value, as this debt bears interest at prevailing market
rates, adjusting quarterly.

Derivative
Financial InstrumentsThe fair value of the interest-rate swap is
estimated at the net present value of the future payable, based on the current
spread, discounted at a current rate. The fair value of the interest-rate option
is obtained from market bids for similar options.

The
fair value estimates presented herein are based on pertinent information
available to management as of each reporting date. 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 herein.

## 21. OPERATING
SEGMENTS

Effective
the second quarter of 2003, the Company redefined its operating segments in
order to reflect a complete separation of its investment operations from its
servicing operations. Consequently, the operating results of the Companys
investment subsidiary, WFC, are reported as an individual business segment
(Mortgage Investments), separate from those of its loan servicing
subsidiary, WCC (Loan Servicing). (In prior periods, the results of
WCC and WFC were combined into one operating segment known as Specialty
Servicing and Finance Operations.) The results of prior periods have been
revised to give effect to the new segments.

As
discussed in Note 2, the Company has entered into an agreement to sell WCC to
Merrill Lynch Mortgage Capital Inc. Accordingly, the operating results of WCC
are presented separately, in a single caption titled Income (loss) from
operations of subsidiary held for sale in the Companys consolidated
statements of operations.

The
operating segments differ in terms of regulatory environment, funding sources
and asset acquisition strategies, as described below:

F-34

---

|o | Banking OperationsThrough FBBH, the Company conducts a
banking business focused primarily on specialty-niche products, including
commercial and multi-family real estate lending, investments in residential
whole loans, and investments in primarily AAA-rated and government agency
mortgage-backed securities. The primary sources of liquidity for the Banks
acquisitions and originations are wholesale certificates of deposit, retail
deposits, FHLB advances and repurchase agreements. The Bank is a federally
chartered savings bank and is regulated by the OTS.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o | Mortgage Investment Operations The Companys investment
subsidiary, WFC, acquires mortgage-backed securities and pools of performing,
sub-performing and non-performing residential and commercial loans. WFC conducts
certain of these activities with an institutional investor where such
investments align the Companys interests with those of the institutional
investor. WFCs funding sources consist primarily of commercial bank
financing and co-investors, with debt service repayment terms that generally
parallel the cash flows of the underlying collateral.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o | Holding Company and Miscellaneous OperationsThe Companys
Holding Company and Miscellaneous Operations consist of other operating revenues
and expenses not directly attributable to the aforementioned business segments.
In addition, this segment includes interest expense on the $20.6 million of
junior subordinated notes payable issued in July 2002 and eliminations of
intercompany accounts and transactions.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Segment
results for the years ended December 31, 2003, 2002 and 2001 are shown in the
following tables. This data has been prepared in accordance with the accounting
principles discussed in Note 1.

`Year Ended December 31, 2003
                                                    ------------------------------------------------------------------------
                                                                       Loan         Mortgage       Holding
                                                      Banking       Servicing     Investments      Company         Total
                                                    ------------   ------------   ------------   ------------   ------------
    Interest income .............................   $     42,542   $         --   $      2,929   $         65   $     45,536
    Interest expense ............................         22,604             --             74          1,007         23,685
                                                    ------------   ------------   ------------   ------------   ------------
    Net interest income (expense) ...............         19,938             --          2,855           (942)        21,851
    (Recapture of) provision for loan
       losses ...................................           (750)            --            211             --           (539)
                                                    ------------   ------------   ------------   ------------   ------------
    Net interest income (expense) after
       (recapture of) provision for loan losses .         20,688             --          2,644           (942)        22,390
    Realized gains (losses) .....................            249             --           (435)            17           (169)
    Other income (loss) .........................            579             --           (572)            26             33
    Compensation and employee benefits expense ..          4,632             --            543          1,174          6,349
    Other expenses ..............................          5,506             --            205          4,263          9,974
                                                    ------------   ------------   ------------   ------------   ------------
    Income (loss) from continuing operations
       before income tax provision (benefit) ....         11,378             --            889         (6,336)         5,931
    Income tax provision (benefit) ..............          4,779             --            389         (2,629)         2,539
                                                    ------------   ------------   ------------   ------------   ------------
    Income (loss) from continuing operations ....          6,599             --            500         (3,707)         3,392
    Income from operations of subsidiary held
       for sale, net of taxes ...................             --          3,495             --             --          3,495
                                                    ------------   ------------   ------------   ------------   ------------
    Net income (loss) ...........................   $      6,599   $      3,495   $        500   $     (3,707)  $      6,887
                                                    ============   ============   ============   ============   ============
    Total assets ................................   $    906,186   $     42,698   $     23,254   $      3,144   $    975,282
                                                    ============   ============   ============   ============   ============`

F-35

---

`Year Ended December 31, 2002
                                                    ------------------------------------------------------------------------
                                                                       Loan         Mortgage       Holding
                                                      Banking       Servicing     Investments      Company         Total
                                                    ------------   ------------   ------------   ------------   ------------
    Interest income .............................   $     45,899   $         --   $      6,348   $        468   $     52,715
    Interest expense ............................         27,445             --            439            738         28,622
                                                    ------------   ------------   ------------   ------------   ------------
    Net interest income (expense) ...............         18,454             --          5,909           (270)        24,093
    Provision for loan losses ...................             --             --            255             --            255
                                                    ------------   ------------   ------------   ------------   ------------
    Net interest income (expense) after
       provision for loan losses ................         18,454             --          5,654           (270)        23,838
    Realized (losses) gains .....................         (1,354)            --            523             --           (831)
    Other income (loss) .........................            253             --           (745)          (280)          (772)
    Compensation and employee benefits
       expense ..................................          3,985             --          1,065          1,601          6,651
    Other expenses ..............................          5,348             --            796          8,022*        14,166
                                                    ------------   ------------   ------------   ------------   ------------
    Income (loss) from continuing
       operations before income tax
       provision (benefit) ......................          8,020             --          3,571        (10,173)         1,418
    Income tax provision (benefit) ..............          3,328             --             (4)        (2,790)           534
                                                    ------------   ------------   ------------   ------------   ------------
    Income (loss) from continuing operations ....          4,692             --          3,575         (7,383)           884
    Income from operations of subsidiary
       held for sale, net of taxes ..............             --          1,764             --             --          1,764
    Minority interest in subsidiary
       held for sale ............................             --           (686)            --             --           (686)
                                                    ------------   ------------   ------------   ------------   ------------
    Income from operations of subsidiary
       held for sale, net of taxes and
       minority interest ........................             --          1,078             --             --          1,078
                                                    ------------   ------------   ------------   ------------   ------------
    Net income (loss) ...........................   $      4,692   $      1,078   $      3,575   $     (7,383)  $      1,962
                                                    ============   ============   ============   ============   ============
    Total assets ................................   $    794,078   $     33,387   $     27,095   $    (10,972)  $    843,588
                                                    ============   ============   ============   ============   ============`

* Other expenses at the
Holding Company included approximately $6.45 million in expenses related to the
settlement of litigation discussed in Note 3 and expenses incurred on behalf of
prior officers in connection with the events that gave rise to the litigation.

F-36

---

`Year Ended December 31, 2001
                                                    ------------------------------------------------------------------------
                                                                       Loan         Mortgage       Holding
                                                      Banking       Servicing     Investments      Company         Total
                                                    ------------   ------------   ------------   ------------   ------------
    Interest income .............................   $     52,008   $         --   $      4,111   $        310   $     56,429
    Interest expense ............................         34,480             --            572           (142)        34,910
                                                    ------------   ------------   ------------   ------------   ------------
    Net interest income .........................         17,528             --          3,539            452         21,519
    Recapture of loan losses ....................         (1,730)            --            (71)            --         (1,801)
                                                    ------------   ------------   ------------   ------------   ------------
    Net interest income after recapture of loan
       losses ...................................         19,258             --          3,610            452         23,320
    Realized gains (losses) .....................            624             --           (504)            --            120
    Other income (loss) .........................          8,521             --           (908)           378          7,991
    Compensation employee and benefits expense...          8,125             --            989          1,246         10,360
    Other expenses ..............................          7,737             --          1,624          2,451         11,812
                                                    ------------   ------------   ------------   ------------   ------------
    Income (loss) from continuing operations
        before income tax provision (benefit) ...         12,541             --           (415)        (2,867)         9,259
    Income tax provision (benefit) ..............          5,619             --             --         (2,619)         3,000
                                                    ------------   ------------   ------------   ------------   ------------
    Income (loss) from continuing operations ....          6,922             --           (415)          (248)         6,259
    Loss from operations of subsidiary held for
       sale, net of taxes .......................             --         (1,294)            --             --         (1,294)
    Minority interest in subsidiary held for sale             --            647             --             --            647
                                                    ------------   ------------   ------------   ------------   ------------
    Loss from operations of subsidiary held for
       sale, net of taxes and minority interest .             --           (647)            --             --           (647)
                                                    ------------   ------------   ------------   ------------   ------------
    Net income (loss) ...........................   $      6,922   $       (647)  $       (415)  $       (248)  $      5,612
                                                    ============   ============   ============   ============   ============
    Total assets ................................   $    717,802   $     40,101   $     31,176   $    (17,926)  $    771,153
                                                    ============   ============   ============   ============   ============`

F-37

---

## 22. QUARTERLY
RESULTS OF OPERATIONS (Unaudited)

`Quarters Ended
                                                                    ---------------------------------------------------------
                                                                    December 31,   September 30,    June 30,      March 31,
                                                                        2003           2003           2003           2003
                                                                    ------------   ------------   ------------   ------------
Interest income ..................................................  $     11,457   $     10,841   $     11,172   $     12,066
Interest expense .................................................         5,657          5,605          5,888          6,535
                                                                    ------------   ------------   ------------   ------------
Net interest income ..............................................         5,800          5,236          5,284          5,531
Provision for (recapture of) loan losses .........................            53             78           (700)            30
                                                                    ------------   ------------   ------------   ------------
Net interest income after provision for (recapture of)
     loan losses .................................................         5,747          5,158          5,984          5,501
Realized (losses) gains ..........................................          (343)           152              1             21
Other income (loss) ..............................................            17            (32)          (169)           217
Compensation and employee benefits expense .......................         1,487          1,266          1,934          1,662
Other expenses ...................................................         2,951          2,150          2,674          2,199
                                                                    ------------   ------------   ------------   ------------
Income from continuing operations before income tax provision ....           983          1,862          1,208          1,878
Income tax provision .............................................           421            797            517            804
                                                                    ------------   ------------   ------------   ------------
Income from continuing operations ................................           562          1,065            691          1,074
                                                                    ------------   ------------   ------------   ------------
Income from operations of subsidiary held for sale,
    net of taxes .................................................           680          1,610            715            490
                                                                    ------------   ------------   ------------   ------------
Net income .......................................................  $      1,242   $      2,675   $      1,406   $      1,564
                                                                    ============   ============   ============   ============
Earnings per share - Basic:
    Income from continuing operations.............................  $       0.03   $       0.06   $       0.04   $       0.06
    Discontinued operations.......................................          0.04           0.08           0.04           0.03
                                                                    ------------   ------------   ------------   ------------
    Net income....................................................  $       0.07   $       0.14   $       0.08   $       0.09
                                                                    ============   ============   ============   ============
Earnings per share - Diluted:
    Income from continuing operations.............................  $       0.03   $       0.05   $       0.03   $       0.05
    Discontinuing operations......................................          0.03           0.08           0.04           0.03
                                                                    ------------   ------------   ------------   ------------
    Net Income....................................................  $       0.06   $       0.13   $       0.07   $       0.08
                                                                    ============   ============   ============   ============`

F-38

---

`Quarters Ended
                                                                        ---------------------------------------------------------
                                                                        December 31,   September 30,    June 30,      March 31,
                                                                            2002           2002           2002           2002
                                                                        ------------   ------------   ------------   ------------
Interest income ......................................................  $     12,705   $     13,725   $     12,337   $     13,948
Interest expense .....................................................         6,914          7,190          7,007          7,511
                                                                        ------------   ------------   ------------   ------------
Net interest income ..................................................         5,791          6,535          5,330          6,437
Provision for loan losses ............................................            49            136             70             --
                                                                        ------------   ------------   ------------   ------------
Net interest income after provision for loan losses ..................         5,742          6,399          5,260          6,437
Realized gains (losses) ..............................................           751           (724)          (840)           (18)
Other (loss) income ..................................................           (65)          (210)          (676)           179
Compensation and employee benefits expense ...........................         2,023          1,607          1,515          1,506
Other expenses .......................................................         2,579          3,393          2,225          5,969*
                                                                        ------------   ------------   ------------   ------------
Income (loss) from continuing operations before income
   tax provision (benefit) ...........................................         1,826            465              4           (877)
Income tax provision (benefit) .......................................           688            175              1           (330)
                                                                        ------------   ------------   ------------   ------------
Income (loss) from continuing operations .............................         1,138            290              3           (547)
Income (loss) from operations of subsidiary held for sale,
   net of taxes ......................................................           403          1,138            649           (426)
Minority interest in subsidiary held for sale ........................            --           (561)          (325)           200
                                                                        ------------   ------------   ------------   ------------
Income (loss) from  operations of subsidiary held for sale, net of
   taxes and minority interest .......................................           403            577            324           (226)
                                                                        ------------   ------------   ------------   ------------
Net income (loss) ....................................................  $      1,541   $        867   $        327   $       (773)
                                                                        ============   ============   ============   ============
Earnings (loss) per share - Basic:
    Income from continuing operations.................................  $       0.06   $       0.02   $       0.00   $      (0.03)
    Discontinued operations...........................................          0.02           0.03           0.02          (0.02)
                                                                        ------------   ------------   ------------   ------------
    Net income........................................................  $       0.08   $       0.05   $       0.02   $      (0.05)
                                                                        ============   ============   ============   ============
Earnings (loss) per share - Diluted:
    Income from continuing operations.................................  $       0.06   $       0.01   $       0.00   $      (0.03)
    Discontinued operations...........................................          0.02           0.03           0.02          (0.02)
                                                                        ------------   ------------   ------------   ------------
    Net Income........................................................  $       0.08   $       0.04   $       0.02   $      (0.05)
                                                                        ============   ============   ============   ============`

* Other expenses in the
first quarter of 2002 included approximately $4.75 million in expenses related
to the settlement of litigation discussed in Note 3 and expenses incurred on
behalf of prior officers in connection with the events that gave rise to the
litigation.

## 23. PARENT
COMPANY INFORMATION

## Condensed
Statements of Financial Condition

`December 31,
                                                         ---------------------------
                                                             2003           2002
                                                         ------------   ------------
    ASSETS
    Cash and cash equivalents ........................   $      2,987   $      4,641
    Investment in subsidiaries .......................        129,628        120,906
    Prepaid expenses and other assets ................         31,540         13,841
                                                         ------------   ------------
                                                         $    164,155   $    139,388
                                                         ============   ============
    LIABILITIES AND STOCKHOLDERS' EQUITY
    Accounts payable and other liabilities ...........   $      3,125   $      5,185
     Due to affiliates, net ..........................         35,547         34,180
                                                         ------------   ------------
       Total liabilities .............................         38,672         39,365
    Stockholders' equity .............................        125,483        100,023
                                                         ------------   ------------
                                                         $    164,155   $    139,388
                                                         ============   ============`

F-39

---

## Condensed Statements
of Operations

`Year Ended December 31,
                                                                                  ------------------------------------------
                                                                                      2003           2002           2001
                                                                                  ------------   ------------   ------------
    Interest income ...........................................................   $         --   $         47   $        275
    Interest expense ..........................................................              3            190             46
                                                                                  ------------   ------------   ------------
    Net interest (expense) income .............................................             (3)          (143)           229
    Non-interest income .......................................................            149            229            150
    Non-interest expense ......................................................          5,544         10,128          4,360
                                                                                  ------------   ------------   ------------
    Loss before income tax benefit and equity in earnings of subsidiaries .....         (5,398)       (10,042)        (3,981)
    Income tax benefit ........................................................           (668)        (2,596)        (2,618)
    Equity in earnings of subsidiaries ........................................         11,617          9,408          6,975
                                                                                  ------------   ------------   ------------
    Net income ................................................................   $      6,887   $      1,962   $      5,612
                                                                                  ============   ============   ============`

## Condensed
Statements of Cash Flows

`Year Ended December 31,
                                                                                    ------------------------------------------
                                                                                        2003           2002           2001
                                                                                    ------------   ------------   ------------
  CASH FLOWS FROM OPERATING ACTIVITIES:
       Net income ...............................................................   $      6,887   $      1,962   $      5,612
       Adjustments to reconcile net income to net cash (used in) provided by
       operating activities:
          Tax effect from utilization of net operating loss carryforward ........          2,467            815          4,183
          Equity in earnings of subsidiaries ....................................        (11,617)        (9,408)        (6,975)
          Change in:
             Prepaid expenses and other assets ..................................           (335)         2,611         (5,637)
             Accounts payable and other liabilities .............................         (1,285)         1,208          1,383
             Due to affiliate, net ..............................................          1,367         15,168         12,453
                                                                                    ------------   ------------   ------------
                Net cash (used in) provided by operating activities .............         (2,516)        12,356         11,019
                                                                                    ------------   ------------   ------------
    CASH FLOWS FROM INVESTING ACTIVITIES:
          Purchase of minority interest in WCC ..................................             --        (12,000)            --
                                                                                    ------------   ------------   ------------
                Net cash used in investing activities ...........................             --        (12,000)            --
                                                                                    ------------   ------------   ------------
    CASH FLOWS FROM FINANCING ACTIVITIES:
          Issuance of subordinated debentures ...................................             --          7,690             --
          Issuance of common stock ..............................................            862             96            331
          Purchase of treasury stock ............................................             --         (5,101)       (10,005)
                                                                                    ------------   ------------   ------------
               Net cash provided by (used in) financing activities ..............            862          2,685         (9,674)
                                                                                    ------------   ------------   ------------
    NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ........................         (1,654)         3,041          1,345
    CASH AND CASH EQUIVALENTS:
          Beginning of year .....................................................          4,641          1,600            255
                                                                                    ------------   ------------   ------------
          End of year ...........................................................   $      2,987   $      4,641   $      1,600
                                                                                    ============   ============   ============
    NONCASH FINANCING ACTIVITIES:
          Conversion of subordinated debentures into common stock ...............   $         --   $      7,690   $         --
          Release of valuation allowance related to pre-reorganizational
             net operating losses................................................         17,335             --          4,500`

## 24. SUBSEQUENT
EVENT

On
January 16, 2004, WFSG entered into an agreement to sell WCC, the Companys
wholly-owned mortgage servicing subsidiary, to Merrill Lynch Mortgage Capital
Inc., a division of Merrill Lynch & Co., New York, NY. Closing is expected
to occur in the second quarter of 2004 and is subject to various customary
conditions, including the receipt of regulatory approvals. See Note 2 to the
consolidated financial statements.

F-40

---

## 25.
RESTATEMENT OF FINANCIAL STATEMENTS

Subsequent
to the issuance of the Companys consolidated financial statements for the
year ended December 31, 2002, the Companys management determined that
there were unrecorded servicer advances of approximately $1,113 related to the
accounts of WCC. These servicer advances should have been recorded in the
Companys consolidated financial statements as of May 31, 1999, the
effective date of the Companys reorganization and the date on which the
Company acquired a majority interest in WCC. As a result, the 2002 and 2001
financial statements have been restated from amounts previously reported to
properly reflect the value of the servicer advances acquired, and the resulting
increases in contributed capital (common stock) arising from the Companys
majority interest in such advances at the date of acquisition and the related
minority interest.

In
October 2002, the Company purchased the minority holders interest in WCC
and accordingly owns 100% of WCC. Since the purchase of the minority interest
has been determined to have understated additional servicer advances, the
Company has retroactively re-allocated the purchase price among the assets
acquired, resulting in decreases in the carrying values of leasehold
improvements and equipment and PMSRs as of December 31, 2002.

A
summary of the significant effects of the restatement on the carrying value of
WCCs assets is as follows:

`December 31, 2002
                                                               -------------------------------
                                                               As Previously          As
                                                                  Reported         Restated
                                                               --------------   --------------
      Leasehold improvements and equipment, net.............   $        1,704   $        1,594
      Servicer advances receivable, net.....................           19,922           21,035
      Purchased mortgage servicing rights, net..............            4,692            4,256
      Total assets..........................................           32,820           33,387`

As
discussed in Note 2, WCC is accounted for as a disposal group held for sale, and
its assets and liabilities have been combined and reported as separate captions
on the Companys consolidated statements of financial condition as of
December 31, 2003 and 2002. See Note 2 for a summary of WCCs
assets and liabilities reflecting the above restatements as of December 31,
2002.

The
significant effects of the restatement on the Companys consolidated
statement of financial condition are as follows:

`December 31, 2002
                                                               -------------------------------
                                                               As Previously          As
                                                                  Reported         Restated
                                                               --------------   --------------
       Total assets.........................................   $      843,021   $      843,588
       Common stock, $0.01 par value........................          114,357          114,924
       Total stockholders' equity...........................           99,456          100,023`

F-41

---

# WILSHIRE
FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES

## 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 on
April 14, 2004 by the undersigned, thereunto duly authorized.

| | WILSHIRE FINANCIAL SERVICES GROUP INC.
| | --------------------------------------



|Date: April 14, 2004 | By: | /s/   STEPHEN P. GLENNON   
|-------------------- | --- | ---------------------------
|                     |     | Stephen P. Glennon         
|                     |     | Chief Executive Officer and
|                     |     | Chief Financial Officer    

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below on April 14, 2004 by the following persons on behalf of the
Registrant and in the capacities indicated.

| | Signature | Title
| | --------- | -----

| | /s/   LARRY B. FAIGIN | Chairman of the Board
| | --------------------- | ---------------------
| | Larry B. Faigin       |                      

| | /s/   STEPHEN P. GLENNON | Chief Executive Officer, Chief Financial Officer
| | ------------------------ | ------------------------------------------------
| | Stephen P. Glennon       | and Director                                    

| | /s/   HOWARD AMSTER | Director
| | ------------------- | --------
| | Howard Amster       |         

| | /s/   ROBERT M. DEUTSCHMAN | Director
| | -------------------------- | --------
| | Robert M. Deutschman       |         

| | /s/   ROBERT H. KANNER | Director
| | ---------------------- | --------
| | Robert H. Kanner       |         

| | /s/   EDMUND M. KAUFMAN | Director
| | ----------------------- | --------
| | Edmund M. Kaufman       |         

| | /s/   DANIEL A. MARKEE | Director
| | ---------------------- | --------
| | Daniel A. Markee       |         

F-42

---

# WILSHIRE
FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES

## Exhibit Index

The
following exhibits are filed as part of this report.

| | 3.1 | Certificate of Incorporation
|- | --- | ----------------------------

|* | 3.2 | Second Amended and Restated By-laws
|- | --- | -----------------------------------

| | 10.1 | Employment Agreement dated March 20, 2002 between the Company and Stephen P.
Glennon (incorporated by reference to the Companys Report on Form 10-K
dated March 25, 2002)
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.2 | Employment Agreement dated March 12, 2001 between the Company and Joseph W.
Kiley III, as modified on December 19, 2001 (incorporated by reference to the
Companys Report on Form 10-K dated March 25, 2002)
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|* | 10.3 | Stock Purchase Agreement dated January 16, 2004 by and between the Company
and Merrill Lynch Mortgage Capital Inc.
|- | ---- | ------------------------------------------------------------------------------------------------------------------

| | 10.15 | Amended and Restated 1999 Equity
Participation Plan dated January 31, 2001 (incorporated by reference to the
Companys Report on Form 10-K dated March 30, 2001)
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.16 | Wilshire  Financial  Services Group Inc. 2002 Equity  Participation  Plan  (incorporated by reference to the Company's Report on Form
 10-Q dated August 14, 2002)
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.22 | Stock Option Agreement dated January 27, 2000 between the Company and Stephen P. Glennon  (incorporated by reference to the Company's
Report on Form 10-K dated March 30, 2001)
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.23 | Incentive  Stock Option  Agreement dated February 29, 2000 between the Company and Stephen P. Glennon  (incorporated  by reference to
the Company's Report on Form 10-K dated March 30, 2001)
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.24 | Wilshire  Financial  Services Group Inc. Change In Control Plan (incorporated by reference to the Company's Report on Form 10-K dated
March 30, 2001)
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.25 | Employment,  Confidentiality  and  Contingent  Severance  Agreement  between  the Company  and Joseph W. Kiley III  (incorporated  by
reference to the Company's Report on Form 10-K dated March 19, 2003)
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.26 | Millikan Business Center Lease Agreement between Wilshire Credit Corporation and
Millikan 78 Equities, LLC dated May 23, 2002 (incorporated by reference to the
Companys Report on Form 10-K dated March 19, 2003)
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.27 | Stock Option  Agreement  Amendment No. 2 between the Company and Jay H. Memmott dated October 23, 2002  (incorporated by reference to
the Company's Report on Form 10-K dated March 19, 2003)
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|* | 14 | Code of Ethics
|- | -- | --------------

|* | 21.1 | Subsidiaries
|- | ---- | ------------

|* | 23 | Consent of Independent Auditors
|- | -- | -------------------------------

|* | 31 | Certification by the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|- | -- | -----------------------------------------------------------------------------------------------------------------------------------

|* | 32 | Certification  by the Chief  Executive  Officer and Chief Financial  Officer  pursuant to 18 U.S.C.ss.1350,  as adopted,  pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|- | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|* | Filed herewith
|- | --------------

| | Incorporated by reference to the Companys report on Form 8-K dated June 15, 1999.
|- | ----------------------------------------------------------------------------------

F-43

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