UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K

[X]           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                   For the Fiscal Year Ended December 31, 2006
                                       OR
[ ]             TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                      For the Transition Period from N/A to
                                                    -----   -----

                         Commission File Number: 1-9566
                            FirstFed Financial Corp.
                            ------------------------
             (Exact name of registrant as specified in its charter)

                Delaware                               95-4087449
                --------                               ----------
     (State or other jurisdiction of      (I. R. S. Employer Identification No.)
      incorporation or organization)

          401 Wilshire Boulevard
         Santa Monica, California                          90401-1490
         ------------------------                          ----------
  (Address of principal executive offices)                 (Zip Code)

       Registrant's telephone number, including area code: (310) 319-6000

           Securities registered pursuant to Section 12(b) of the Act:
                          Common Stock $0.01 par value
                                (Title of Class)

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

 Indicate by check mark if the registrant is a well-known  seasoned  issuer,  as
 defined in Rule 405 of the SecuritiesAct.
 Yes [X]   No [ ]

 Indicate  by check  mark if the  registrant  is not  required  to file  reports
 pursuant to Section 13 or Section 15 (d) of theAct.
 Yes [ ]   No [X]

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

 Indicate by check mark if disclosure of delinquent  filers pursuant to Item 405
 of  Regulation  S-K  (sub-section  229.405 of this  chapter)  is not  contained
 herein, and will not be contained,  to the best of registrant's  knowledge,  in
 definitive  proxy or information  statements  incorporated by reference in Part
 III of the Form 10-K or any amendment to this Form 10-K.
 Yes [ ]   No [X]

 Indicate by check mark whether the registrant is a large accelerated  filer, an
 accelerated filer, or a non-accelerated  filer (as defined in Rule 12b-2 of the
 Act).
 Large accelerated filer [X]   Accelerated filer [ ]   Non-accelerated filer [ ]

 Indicate by check mark whether the registrant is a shell company (as defined in
 Rule 12b-2 of the Act).
 Yes [ ]   No [X]

 The   approximate   aggregate   market  value  of  the  voting  stock  held  by
 non-affiliates of the registrant as of June 30, 2006 was $877,144,000, based on
 the closing sales price of the registrant's  common stock on the New York Stock
 Exchange  on such date of $57.67  per  share.  For  purposes  of the  preceding
 sentence only, all directors,  executive  officers and beneficial owners of ten
 percent or more of the common stock,  as well as the Company's  Employee  Stock
 Ownership Plan ("ESOP"), are assumed to be affiliates.


 The number of shares of registrant's  $0.01 par value common stock  outstanding
 as of February 26, 2007: 16,570,568.
                       DOCUMENTS INCORPORATED BY REFERENCE

 Portions of the Proxy  Statement for Annual Meeting of  Stockholders to be held
 April 25, 2007 ("Proxy Statement"), (Parts II, III & IV).
<PAGE>



Disclosure Regarding Forward-looking Statements

     This  Annual  Report  on Form 10-K for the year  ended  December  31,  2006
includes  certain   statements  that  may  be  deemed  to  be   "forward-looking
statements"  within the meaning of Section 27A of the Securities Act of 1933, as
amended,  (the "Securities  Act") and Section 21E of the Securities and Exchange
Act of 1934,  as  amended  (the  "Exchange  Act").  All  statements,  other than
statements  of  historical  facts,  included in this Annual  Report that address
activities,  events  or  developments  that the  Company  expects,  believes  or
anticipates will or may occur in the future, including, but not limited to, such
matters as future product development, business development, competition, future
revenues, business strategies,  expansion and growth of the Company's operations
and assets and other such matters are forward-looking statements. These kinds of
statements are signified by words such as "believes,"  "anticipates," "expects,"
"intends," "may", "could," and other similar expressions.  However,  these words
are not the exclusive means of identifying such statements. These statements are
based on certain  assumptions  and analyses  made by the Company in light of its
experience and perception of historical  trends,  current  conditions,  expected
future  developments  and other  factors  it  believes  are  appropriate  in the
circumstances. Such statements are subject to a number of assumptions, risks and
uncertainties,  including the risk factors discussed below, general economic and
business  conditions,  the business  opportunities (or lack thereof) that may be
presented to and pursued by the Company, changes in law or regulations and other
factors,  many of which are beyond the Company's control.  Specific factors that
could  cause  results  to differ  materially  from  historical  results or those
anticipated are: (1) the level of demand for adjustable rate mortgages, which is
affected by external  factors  such as  interest  rates and the  strength of the
California  economy;  (2) fluctuations  between consumer  interest rates and the
cost of funds;  (3) federal and state  regulation of lending,  deposit and other
operations;  (4)  competition  for  financial  products and services  within the
Bank's market areas;  (5) operational  and  infrastructural  risks;  (6) capital
market  activities;  and  (7)  critical  accounting  estimates.   Investors  are
cautioned that any such statements are not guarantees of future  performance and
that actual results or developments  may differ  materially from those projected
in the  forward-looking  statements.  Investors  are also  referred  to the more
detailed  discussion  of risk  factors  in  "Risk  Factors"  and "  Management's
Discussion and Analysis" in this Report.



<PAGE>



<TABLE>
                            FirstFed Financial Corp.
                                      Index
<S>        <C>      <C>                                                                <C>
                                                                                       Page

Part I     Item 1.  Business.......................................................       4
           Item 1A. Risk Factors...................................................      23
           Item 1B. Unresolved Staff Comments......................................      24
           Item 2.  Properties.....................................................      24
           Item 3.  Legal Proceedings..............................................      24
           Item 4.  Submission of Matters to a Vote of Security Holders............      25

Part II    Item 5.  Market for Registrant's Common Equity and Related
                    Stockholder Matters............................................      25
           Item 6.  Selected Financial Data........................................      27
           Item 7.  Management's Discussion and Analysis of Consolidated Balance
                    Sheets and Consolidated Statements of Income...................      28
           Item 7A. Quantitative and Qualitative Disclosure About Market Risk......      41
           Item 8.  Financial Statements and Supplementary Data....................      45
                    Notes to Consolidated Financial Statements.....................      49
                    Report of Independent Registered Public Accounting Firm........      74
           Item 9A. Controls and Procedures........................................      75

Part III   Item 10. Directors and Executive Officers of the Registrant.............      77
           Item 11. Executive Compensation.........................................      77
           Item 12. Security Ownership of Certain Beneficial Owners and
                    Management.....................................................      77
           Item 13. Certain Relationships and Related Transactions.................      77
           Item 14. Principal Accounting Fees and Services.........................      77

Part IV    Item 15. Exhibits.......................................................      78
                    Signatures.....................................................      79
                    Power of Attorney..............................................      79
Exhibits
           31.1 Certification of Chief Executive Officer pursuant to Section 302
                of the Sarbanes-Oxley Act of 2002..................................      80
           31.2 Certification of Chief Financial Officer pursuant to Section 302
                of the Sarbanes-Oxley Act of 2002..................................      81
           32.1 Certification of Chief Executive Officer pursuant to 18 USC
                Section 1350, as adopted pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002.........................................      82
           32.2 Certification of Chief Financial Officer pursuant to 18 USC
                Section 1350, as adopted pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002.........................................      83
</TABLE>
<PAGE>
                                     PART I

ITEM 1. -- BUSINESS

General Description

     FirstFed Financial Corp., a Delaware  corporation  ["FFC," and collectively
with its sole and wholly owned subsidiary, First Federal Bank of California (the
"Bank"),  the "Company"],  was incorporated on February 3, 1987. Since September
22,  1987,  FFC has  operated  as a savings  and loan  holding  company  engaged
primarily  in the  business of owning the Bank.  Because  the  Company  does not
presently   engage  in  any   significant   independent   business   operations,
substantially  all income and performance  figures herein reflect the operations
of the Bank.

     The  Bank  was  organized  in 1929 as a  state-chartered  savings  and loan
association,  and, in 1935,  converted to a federal mutual charter.  In February
1983 the Bank obtained a federal  savings bank charter,  and, in December  1983,
converted from mutual to stock ownership.  The executive  offices of the Company
are located at 401  Wilshire  Boulevard,  Santa  Monica,  California,  telephone
number (310) 319-6000.

     The Company is a savings and loan holding company and the holding  company,
as well as our bank subsidiary, are subject to examination and regulation by the
Office of Thrift  Supervision  ("OTS").  Our  deposits  are insured  through the
Deposit  Insurance  Fund ("DIF") of the Federal  Deposit  Insurance  Corporation
("FDIC"),  and we are subject to  regulation by the FDIC. We are a member of the
Federal  Home  Loan  Bank  ("FHLB")  of San  Francisco,  which  is one of the 12
regional banks comprising the Federal Home Loan Bank System. We are also subject
to certain  regulations of the Board of Governors of the Federal  Reserve System
("FRB") with respect to reserves required to be maintained  against deposits and
certain   other   matters.   See   "--Summary   of  Material   Legislation   and
Regulations--".

     The Company's  periodic and current reports are available free of charge on
our website at www.firstfedca.com  as soon as reasonably  practicable after such
material is  electronically  filed with,  or furnished  to, the  Securities  and
Exchange Commission ("SEC").

     Our principal business is attracting checking and savings deposits from the
general  public,  and using such  deposits,  together with  borrowings and other
funds, to make real estate, business and consumer loans.

     We  derive  our  revenues  principally  from  interest  and fees on  loans,
interest on investments and gains on loan sales.  Our major items of expense are
interest on deposits and borrowings, and general and administrative expense.

     As of January 31, 2007, we operated 32 full-service  banking branches,  all
located in Southern California.  Permission to operate full-service  branches is
granted by the OTS. In addition to these branches,  we operate 6 lending offices
which are located in both Southern and Northern California,  a call center which
conducts  transactions  with  deposit  and loan  clients  by  telephone,  and an
internet website through which clients can open accounts,  transfer funds or pay
bills.  We offer wealth  management  and trust  services to complement the other
services  currently  offered by the retail  branches  and our  business  banking
division. Revenues from wealth management and trust services have comprised less
than 1% of revenues for the last three years.

     At  December  31,  2006,  the  Company had assets  totaling  $9.3  billion,
compared to $10.5  billion at December 31, 2005 and $7.5 billion at December 31,
2004.  Assets  decreased  during  2006 due to less  market  demand  for our loan
portfolio  product,  which is adjustable  rate loans.  The Company  recorded net
income of $129.1 million for 2006,  compared to $91.7 million for 2005 and $65.8
million for 2004.

     Prior to 2004, the Bank's primary lending area was Southern California.  In
2004,  we opened one single  family loan office in Northern  California.  Single
family loans  originated in Northern  California  comprised 42% of  originations
during 2006 compared to 47% of originations  during 2005 and 38% of originations
during 2004. The majority of our  residential  loans are obtained from wholesale
loan  brokers.  Residential  loans are also  offered by all of our  full-service
branches. In addition, we have an income property lending group and a commercial
banking group which lend primarily in Southern California.

     At the end of 2006 we began  soliciting  residential  loans from  wholesale
loan brokers in states outside of California  (Washington,  Oregon, Utah, Nevada
and Arizona).  However,  no loans were originated  outside of California  during
2006. It is our initial intent to originate these loans for sale only. We do not
anticipate having a physical presence in those states.

     The  Bank  has   three   wholly-owned   subsidiaries:   Seaside   Financial
Corporation,  Oceanside  Insurance Agency,  Inc. and Santa Monica Capital Group,
all of which are California corporations. See "--Subsidiaries--".

Current Operating Environment

     The Company's  operating results are  significantly  influenced by national
and regional  economic  conditions,  monetary and fiscal policies of the federal
government,  local  housing  demand and  affordability,  and  general  levels of
interest rates.

<PAGE>
     Home prices in the nation and California declined during 2006 after several
years of double digit increases. Many forecasters predict that home sales prices
will continue to decrease during 2007 as real estate markets stabilize.

     The  UCLA   Anderson   Forecast  for   California,   December  2006  Report
("Forecast"), states "slowing housing markets will create a significant slowdown
in the California  economy,  but will not create a recession without a secondary
source of weakness."  The Forecast also states that,  "The  construction  sector
will continue to weaken, with total residential permit activity and construction
employment hitting bottom in late 2007. 2008 will see a small recovery, but will
remain sluggish."

     A slowdown  in the  California  real  estate  market,  such as what we have
experienced  during 2006,  could negatively  impact our level of  non-performing
assets to the extent that such a slowdown affects the economy generally and real
estate prices in particular.

     We continuously  monitor the  sufficiency of the collateral  supporting our
real estate loan portfolio based on many factors  including  property  location,
date of loan  origination,  original  loan-to-value  ratios  and the  amount  of
negative amortization.

     Business loans  collateralized  by inventory,  accounts  receivable  and/or
other  assets are  monitored  on a monthly or quarterly  basis  through  reports
provided  by the  borrower.  Site  visits and  collateral  audits are  generally
required at loan origination and periodically thereafter.

     We  adjust  our  general  allowance  for loan  losses  as a  result  of our
evaluations  and the overall  level of the loan  portfolio.  We recorded a $12.4
million  provision for loan losses during 2006 compared to $19.8 million  during
2005 and $3.0 million during 2004.

     The ratio of allowances for loan losses  (general  valuation  allowance and
valuation  allowances for impaired loans) to gross loans receivable was 1.28% at
the end of 2006  compared  to 1.00%  at the end of 2005 and  1.15% at the end of
2004.  The change in the ratio  over the last  three  years is due to changes in
risk factors for various segments of the portfolio.  See "--Business - Loan Loss
Allowance--" for additional information.

     Our non-performing  assets increased to 0.21% of total assets at the end of
2006 from 0.05% of total  assets at the end of 2005 and 0.07% of total assets at
the end of 2004.

     Current  Interest Rate  Environment.  The Federal Reserve Board ("FRB") has
increased  the  federal  funds rate  several  times  over the last  three  years
bringing the current rate to 5.25%,  up from 4.25% at the end of 2005,  2.25% at
the end of 2004 and  1.00% at the end of 2003.  There  has been no change in the
federal funds rate since June 29, 2006.

     Typically,  our interest rate spread decreases during  increasing  interest
rate  environments  (savings and borrowing  costs  respond to  increasing  rates
faster  than  our  loan  portfolio).  The  reverse  is true  during  periods  of
decreasing interest rates. Due to borrower preference, demand for our adjustable
rate products  typically  decreases  during periods when interest rates on fixed
rate loans are comparable to or less than adjustable rate loans. Adjustable rate
loans comprised 88% of loan originations  during 2006. The remaining 12% of loan
originations during 2006 were hybrid fixed/adjustable rate loans.

     Changes in interest  rates impact our  portfolio  yield due to the interest
rate adjustment  features of our loans.  Additionally,  a time lag exists before
changes in interest  rates can be  implemented  with  respect to our real estate
loan portfolio due to operational and regulatory constraints.  These constraints
do not  allow us to  implement  monthly  changes  in the  indices  utilized  for
adjustable rate loan clients for periods of sixty to ninety days.

     Our  interest  rate spread was 2.71% in 2006  compared to 2.54% in 2005 and
2.86% in 2004.  The average cost of deposits and  borrowings  increased by 1.49%
during  2006  compared  to 2005,  while  the  average  yield  earned on the loan
portfolio increased by 1.70% during the year. See  "Asset-Liability  Management"
and "Components of Earnings - Net Interest Income" in "--Management's Discussion
and Analysis of  Consolidated  Balance  Sheets and  Consolidated  Statements  of
Income--" for additional information.

     Competition.  We experience strong  competition in attracting and retaining
deposits and originating real estate and business loans. We compete for deposits
with many of the nation's largest savings institutions and commercial banks that
have significant operations in Southern California.

     We  also  compete  for  deposits  with  credit  unions,   thrift  and  loan
associations,  internet banks,  money market mutual funds,  issuers of corporate
debt  securities,  and the  government.  In  addition  to the rates of  interest
offered to depositors,  our ability to attract and retain deposits  depends upon
the quality and variety of services  offered,  the  convenience of our locations
and our financial strength as perceived by depositors.

     We compete for loans primarily with savings institutions, commercial banks,
mortgage  companies,  real estate  investment  trusts and  insurance  companies.
Commercial  banks are our primary  competition for business  loans.  The primary
factors in competing  for loans are interest  rates,  loan fees,  interest  rate
caps, interest rate adjustment  provisions and the quality and extent of service
to borrowers and mortgage brokers.

<PAGE>

     Environmental  Concerns.  In certain  circumstances,  such as when actively
participating  in the management or operation of properties  securing our loans,
we  could  have  liability  for  properties  found  to have  pollutant  or toxic
features.  Environmental protection laws are strict and impose joint and several
liability  on  numerous  parties.  It is  possible  for the cost of  cleanup  of
environmental  problems to exceed the value of the  security  property.  We have
adopted environmental  underwriting  requirements when considering loans secured
by properties  which appear to have  environmentally  high-risk  characteristics
(e.g.  commercial and industrial  properties  and  construction  of all property
types,  which may contain friable  asbestos or lead paint  hazards).  We utilize
third-party  specialists to provide an assessment of  environmental  risk on all
commercial   properties  (retail,   office,   industrial)  and  on  multi-family
properties  that may be near any commercial  influence.  These  assessments  may
include the sampling of underground soils as necessary.  These  requirements are
intended to minimize the risk of environmental  hazard  liability.  Our policies
are also designed to minimize the potential for liability imposed on lenders who
assume the management of a property.

     Business  Concentration.  We have no  single  client  or group of  clients,
either as depositors  or  borrowers,  the loss of any one or more of which would
have a material adverse effect on our operations or earnings prospects.

     Yields Earned and Rates Paid. Net interest  income,  the major component of
earnings for us,  depends  primarily  upon the  difference  between the combined
average  yield earned on the loan and  investment  security  portfolios  and the
combined average  interest rate paid on deposits and borrowings,  as well as the
relative balances of interest-earning  assets and interest-bearing  liabilities.
See "--Management's  Discussion and Analysis of Consolidated  Balance Sheets and
Consolidated  Statements  of Income - Overview  and  Components  of Income - Net
Interest Income--" for further analysis and discussion.

Lending Activities

     General.  Our primary lending  activity is the origination of loans for the
purchase or refinance of, or construction  of  improvements on residential  real
property.  The loan portfolio  primarily consists of loans made to homeowners on
the security of single  family  dwellings  and property  owners on  multi-family
dwellings.  The loan  portfolio  also includes  loans secured by commercial  and
industrial properties, consumer loans and commercial business loans.

     For an analysis of the loan  portfolio  composition  and an analysis of the
types of loans  originated,  see  "--Management's  Discussion  and  Analysis  of
Consolidated  Balance  Sheets and  Consolidated  Statements  of Income - Balance
Sheet Analysis - Loan Portfolio and Loan Composition--".

     Origination  and Sale of Loans.  We obtain  qualified loan  applicants from
mortgage  brokers,  borrower  referrals,  and the  clients  of our  full-service
banking branches.

     Loan originations were $2.2 billion in 2006, $4.8 billion in 2005, and $3.9
billion in 2004.  Loan  originations  decreased  in 2006 due to higher  interest
rates on adjustable rate mortgages,  a cooling off of the California real estate
market and the impact resulting from  implementing  the Interagency  Guidance on
Non-Traditional  Mortgage  Product  Risks.  Due to a decrease  in demand for the
adjustable   loan  types  we  maintain  in  our   portfolio,   we  entered  into
correspondent  lending relationships with various other lenders to originate and
sell loans to them during 2006.

     Loans sold totaled $481.6 million in 2006,  $12.8 million in 2005, and $3.3
million in 2004.  During 2006,  $619.6 million in loans were originated for sale
compared to $15.7 million in 2005 and $2.8 million in 2004. Loans originated for
sale totaled 28.10%,  0.32%, and 0.07% of loan  originations  during 2006, 2005,
and 2004, respectively.

     Loans  held-for-sale  at  December  31,  2006,  2005,  and 2004 were $140.9
million,  $2.9 million,  and $0,  respectively.  Loans  originated  for sale are
recorded  at the  lower  of  carrying  amount  or  fair  value.  The  time  from
origination to sale varies depending on the type of loan.  Adjustable rate loans
may take up to six  months to sell as the loans are  originated  and  aggregated
into pools for delivery.  There is substantially no market risk during this time
period. Hybrid  fixed/adjustable rate loans are typically sold within 30-45 days
after  origination.  During  this  time  period  we  may  be  exposed  to  price
adjustments as a result of fluctuations in market interest rates.

     The    portfolio   of    mortgage-backed    securities,    classified    as
available-for-sale,  was recorded at fair value at December 31, 2006,  2005, and
2004. Unrealized gains of $83 thousand,  $108 thousand and $420 thousand, net of
tax, were recorded in stockholders' equity at December 31, 2006, 2005, and 2004,
respectively.

     We serviced  $128.9 million in loans for other investors as of December 31,
2006, $53.2 million of which were sold under recourse arrangements ($3.9 million
of the loans sold with recourse were formed into mortgage-backed  securities and
are still owned by us as of December 31, 2006). Due to regulatory  requirements,
we maintain  capital for loans sold with recourse as if those loans had not been
sold.  Our portfolio of loans sold with recourse were  originated  prior to 1990
and because no further losses are expected,  the  repurchase  liability on these
loans was eliminated in 2004. The principal  balance of loans sold with recourse
decreased to $53.2  million at the end of 2006 from $59.9  million at the end of
2005 and $76.3 million at the end of 2004, due to loan payments and payoffs.

<PAGE>

     From time to time we form  mortgage-backed  securities  with loans from our
loan portfolio for use in collateralized borrowing arrangements. In exchange for
the improvement in credit risk when the  mortgage-backed  securities are formed,
guarantee fees are paid to the Federal Home Loan Mortgage Corporation  ("FHLMC")
or the Federal National  Mortgage  Association  ("FNMA").  Since the securitized
loans were  initially  originated  using our  standard  credit and  underwriting
guidelines,  the  mortgage-backed  securities that we create  generally have the
same experience with respect to prepayment, repayment,  delinquencies, and other
factors as our overall loan  portfolio.  In January of 2005, we completed a loan
securitization  with FNMA in which $1.3 billion in  multi-family  loans from our
loan  portfolio  were formed into  mortgage-backed  securities.  At December 31,
2006, the outstanding  balance of these loans totaled $918.6 million compared to
$1.1  billion at December  31, 2005.  Because we retained  full  recourse on the
securitized loans, the  mortgage-backed  securities continue to be accounted for
as part of the loan portfolio  under current  accounting  literature and are not
considered as serviced for others.  These  mortgage-backed  securities are being
used in collateralized borrowing arrangements.

     Interest  Rates,  Terms  and  Fees.  We  originate  residential  adjustable
mortgage  loans  ("AMLs")  with 30 and 40 year terms and  interest  rates  which
adjust monthly based upon various indices. The indices used include the 12-month
average of the 3-month  certificate  of deposit  Index  ("CODI"),  the  12-month
average of the one year U.S. Treasury Security rate ("12MAT"),  the Federal Home
Loan  Bank's  Eleventh  District  Cost of Funds  Index  ("COFI")  and the London
Inter-bank Offered Rate ("LIBOR"). The CODI index is the monthly rate on 3-month
certificate of deposits as published by the Federal Reserve Bank and is a simple
average based upon the twelve most recent months of data.  CODI loans  comprised
6% of loan  originations  during 2006,  76% during 2005 and 69% during 2004. The
COFI index is the  monthly  weighted  average  cost of savings,  borrowings  and
advances  of members of the  Federal  Home Loan Bank of San  Francisco,  as made
available.  COFI loans comprised 57% of loan originations during 2006, 9% during
2005 and 3% during 2004. 12MAT loans comprised 23% of loan  originations  during
2006, 14% during 2005 and 25% during 2004. (See "--Asset-Liability Management--"
in "--Quantitative and Qualitative Disclosures about Market Risk--".)

     Payment Caps.  There are varying periods for which our loan payments may be
fixed,  ranging  from one year to five  years.  If the  payment is fixed for one
year,  after the first year the  payment may be  increased  by no more than 7.5%
each year.  If the  payment is fixed for three  years,  after the third year the
payments  for the fourth and fifth years may be  increased  by no more than 7.5%
for each year. If the payment is fixed for five years, after the fifth year, the
payment  will be adjusted to provide for full  amortization,  starting  with the
sixth year.  An annual  payment cap of 7.5% applies  thereafter,  subject to the
lifetime  balance cap described below.  Most of our loans,  including loans with
fixed  payment  periods of less than or equal to five years,  will have payments
adjusted  ("recast")  every five years without regard to the 7.5%  limitation to
provide  for full  amortization  over the  balance of the loan term.  The annual
payment cap of 7.5% applies  thereafter.  The  portfolio of single  family loans
with a one-year  fixed  payment was $4.6  billion at both  December 31, 2006 and
December 31, 2005 and was $2.9 billion at December  31, 2004.  The  portfolio of
single family loans with  three-to-five  year fixed payments was $1.8 billion at
December  31, 2006,  compared to $2.7  billion at December  31,  2005,  and $1.6
million at December 31, 2004.

     Additionally, we have Graduated Payment Advantage ("GPA") loans which start
at lower  interest rates and increase by  pre-determined  amounts over the first
five years of the loan.  After the first five years  these  loans are subject to
the same  payment caps and "recast"  provisions  as the Bank's other  adjustable
rate loans.

     Any interest not paid by the borrower each month is accrued,  recognized as
income,   and  added  to  the   principal   balance   of  the  loan   ("negative
amortization").  Payments  may revert to the fully  amortizing  payment  without
regard to the payment  caps if the loan  balance  reaches  its  maximum  allowed
negative amortization  (lifetime balance cap), which can range from 110% to 125%
of the original loan balance.  For loans with an 80% or less loan-to-value ratio
at origination,  the lifetime balance cap can range from 110% to 125%. For loans
with a loan-to-value ratio over 80% at origination,  the lifetime balance cap is
limited to 110%. Once the lifetime balance cap is reached,  the 7.5% payment cap
no longer  applies to the loan until the balance  falls below the  lifetime  cap
again.

     Because AML  loan-to-value  ratios may increase above those  established at
the time of loan  origination due to negative  amortization,  when we do lend in
excess of 80% of the  appraised  value,  additional  fees and  higher  rates are
charged or we may require mortgage  insurance which reduces our loss exposure to
below 75%.

     At December 31, 2006, 2005, and 2004,  negative  amortization,  included in
the balance of loans receivable, totaled $215.8 million, $62.6 million, and $5.5
million,  respectively.  Negative  amortization  as a  percentage  of all single
family loans with fixed payment periods in the Bank's portfolio totaled 3.44% at
December  31,  2006,  0.86% at December 31, 2005 and 0.12% at December 31, 2004.
Negative  amortization  has increased  over the last two years  primarily due to
increases in short-term interest rates.
<PAGE>

     In September 2006, the OTS along with the other federal  banking  agencies,
published the final  Interagency  Guidance on  Non-Traditional  Mortgage Product
Risks  ("Guidance"),  which addresses  adjustable rate and interest-only  loans.
Non-Traditional products are generally defined as loans that allow interest-only
payments or have the potential for negative  amortization.  The Guidance  states
that underwriting  standards should address the effect of a substantial  payment
increase on the borrower's capacity to repay when full loan amortization begins.
Consequently,  an  institution's  analysis of a  borrower's  repayment  capacity
should  include an  evaluation  of their  ability to repay the debt at the first
"recast"  at the  fully-indexed  rate,  assuming  a  fully-amortizing  repayment
schedule.  The  repayment  analysis  should also be based upon the initial  loan
amount plus any balance increase that may accrue from negative amortization. The
Guidance also suggests  that, in analyzing a borrower's  repayment  capacity,  a
lender should avoid  over-reliance  on credit scores as a substitute for income,
asset or outstanding liability verification in the underwriting process.

     While the Guidance terms  interest-only and negative  amortization loans as
"non-traditional",  the Bank has been offering adjustable rate loan products for
over twenty years. Prior to the issuance of the Guidance,  the Bank had employed
(and  continues to employ)  certain of the standards and practices  suggested in
the  Guidance,  such as using the fully  indexed rate in evaluating a borrower's
ability to repay a loan.  We are  assessing  the impact of the  Guidance  on our
lending  process.  We will continue to closely monitor trends in the residential
housing and lending markets, and make adjustments as deemed appropriate. At this
time,  however, we cannot predict the precise levels, or the impact, on our loan
production  as certain  aspects of the  Guidance  are not  specific  and will be
subject to interpretation by the Federal banking agencies.

     Although  interest rates are adjusted  monthly,  AMLs have maximum interest
rates ranging from 400 to 750 basis points above the initial interest rate.

     Generally,  AMLs may be assumed at any time during the term,  provided that
the  person  assuming  the loan  meets our credit  standards  and enters  into a
separate written agreement with us.  Additionally,  the new borrower is required
to pay assumption fees customarily charged for similar transactions.

     We generally  require that borrowers obtain private  mortgage  insurance on
loans in  excess  of 80% of the  appraised  property  value.  On  certain  loans
originated  for the  portfolio,  we charge premium rates and/or fees in exchange
for waiving the insurance  requirement.  Management believes that the additional
rates and fees that we receive for these  loans  compensate  for the  additional
risk  associated  with this type of loan.  Subsequent  to the  origination  of a
portfolio loan, we may purchase private  mortgage  insurance with our own funds.
Under certain mortgage  insurance  programs we act as co-insurer and participate
with the insurer in absorbing  any future loss.  As of December 31, 2006,  2005,
and 2004,  loans with  co-insurance  totaled $295.1 million,  $334.8 million and
$202.4 million,  respectively.  Loans with initial  loan-to-value ratios greater
than 80% with no private mortgage  insurance  totaled $292.4 million at December
31, 2006,  $495.5  million at December 31, 2005,  and $519.0 million at December
31, 2004.

     Loans with 40-year terms were 80%, 77%, and 27% of loan originations during
2006, 2005, and 2004, respectively.  The increase in loans with 40-year terms is
attributable  to increased  marketing  efforts for this product as a response to
the decreased "affordability" of houses in our market areas.

     The following table shows the contractual  maturities of our loan portfolio
at December 31, 2006:
<TABLE>

                                                        Loan Maturity Analysis
                              ----------------------------------------------------------------------------------
                                Total        1 Year    > 1 Year     > 5-10     > 10-20   > 20-30
                               Balance       or Less   to 5 Years    Years       Years     Years     > 30 Years
                              ----------  ----------  ----------  ----------  ----------  ----------  ----------
                                                        (Dollars in thousands)
<S>                           <C>           <C>         <C>         <C>       <C>         <C>        <C>

Interest rate sensitive loans:
  AMLs........................$8,408,855    $108,895    $878,371    $626,120  $1,818,126  $2,708,864 $ 2,268,479
  Fixed rate loans............    43,905       3,280      28,040       6,400       4,235       1,704         246
  Commercial business loans...    83,759      20,771      62,988          --          --          --          --
  Consumer and other loans....    48,745      14,494      34,251          --          --          --          --
                              ----------  ----------  ----------  ----------  ----------  ----------  ----------
  Total.......................$8,585,264    $147,440  $1,003,650    $632,520  $1,822,361  $2,710,568 $ 2,268,725
                              ==========  ==========  ==========  ==========  ==========  ==========  ==========
</TABLE>

Non-accrual, Past Due, Impaired and Restructured Loans

     We establish  allowances  for  delinquent  interest  equal to the amount of
accrued  interest on all loans 90 days or more past due or in foreclosure.  This
practice  effectively  places  such loans on  non-accrual  status for  financial
reporting purposes.

     The  following  is a summary  of  non-accrual  loans  for which  delinquent
interest  allowances  had been  established  as of  December  31, at each of the
periods indicated:
<TABLE>

                             % of            % of           % of          % of            % of
                      2006  Total    2005   Total   2004   Total   2003  Total    2002   Total
                     ------ -----   ------  -----  ------  -----  ------  -----  ------  -----
                                        (Dollars in thousands)
<S>                 <C>      <C>    <C>     <C>    <C>     <C>    <C>     <C>    <C>     <C>
Non-accrual loans:
  Single family.....$18,474   98%   $3,569   72%   $4,590   92%   $3,326   99%   $5,705   85%
  Multi-family......     --   --        --   --       391    8        --   --     1,017   15
  Commercial........     --   --     1,364   28        --   --        --   --        --   --
  Consumer..........     11    1        13   --         4   --        16    1        --   --
  Business..........     12    1        20   --        --   --        --   --        --   --
                     ------  ----  -------  ----   ------  ----   ------  ----   ------  ----
Total non-accrual   $18,497  100%   $4,966  100%   $4,985  100%   $3,342  100%   $6,722  100%
   loans.......      ======  ====  =======  ====   ======  ====   ======  ====   ======  ====
</TABLE>


     The allowance for delinquent interest, based on loans past due more than 90
days or in  foreclosure,  totaled $769 thousand,  $147 thousand,  $256 thousand,
$227 thousand,  and $372 thousand at December 31, 2006,  2005,  2004,  2003, and
2002, respectively.

<PAGE>

     Our  modified  loans  result  primarily  from  temporary  modifications  of
principal and interest  payments or an extension of maturity dates.  Under these
arrangements,  loan  terms  are  typically  reduced  to no less  than a  monthly
interest payment required under the note. If the borrower is unable to return to
scheduled principal and interest payments at the end of the modification period,
foreclosure  proceedings  are  initiated  or  the  modification  period  may  be
extended.  As of December 31, 2006,  the Bank had modified  loans  totaling $1.8
million.  This compares  with modified  loans of $2.0 million as of December 31,
2005 and $1.4 million as of December 31, 2004. No modified loans were 90 days or
more delinquent as of December 31, 2006, 2005, or 2004.

     Statement  of  Financial  Accounting  Standards  No.  114,  "Accounting  by
Creditors for Impairment of a Loan" ("SFAS No. 114"),  requires the  measurement
of impaired  loans.  SFAS No. 114 does not apply to large groups of  homogeneous
loans that are collectively reviewed for impairment.

     We consider a loan to be impaired when management  believes that we will be
unable to  collect  all  amounts  due under  the  contractual  terms of the loan
agreement.  In accordance with SFAS 114, we annually evaluate the collectibility
of  commercial  business  loans greater than or equal to $500  thousand,  single
family loans  greater than or equal to $1.0  million and income  property  loans
greater than or equal to $1.5 million for  impairment  purposes using our normal
loan review  procedures.  When a loan is determined  to be impaired,  we measure
impairment  based on either (1) the present value of expected future cash flows,
discounted at the loan's effective  interest rate, or (2) the loan's  observable
market  price,  or (3) the fair value of the  collateral.  Estimated  impairment
losses are included in our impairment allowances.

     There were no valuation  allowances for impaired loans at December 31, 2006
or 2005.  There was a $496 thousand  valuation  allowance for impaired  loans at
December  31,  2004.  The  following  is a summary  of  impaired  loans,  net of
valuation allowances for impairment, at the dates indicated:

<TABLE>
                                              At December 31,
                                       -------------------------
                                         2006     2005     2004
                                       -------   ------   ------
                                              (In thousands)
<S>                                     <C>      <C>      <C>

Non-accrual loans...................... $2,544   $3,027   $1,360
Other impaired loans...................  2,894       --       --
                                       -------   ------   ------
                                        $5,438   $3,027   $1,360
                                       =======   ======   ======
</TABLE>

     The following is a summary of impaired loans,  net of valuation  allowances
for impairment, by loan type, at the dates indicated:

<TABLE>
                                              At December 31,
                                       -------------------------
                                         2006     2005     2004
                                       -------   ------   ------
                                              (In thousands)
<S>                                     <C>      <C>      <C>

Single family.......................... $5,438   $1,663   $1,360
Commercial.............................     --    1,364       --
                                       -------   ------   ------
Total impaired loans................... $5,438   $3,027   $1,360
                                       =======   ======   ======
</TABLE>

     The present value of an impaired  loan's expected future cash flows changes
from one  reporting  period to the next  because of the passage of time and also
because of revised  estimates  in the amount or timing of those cash  flows.  We
record the entire change in the present value of the expected  future cash flows
as an impairment valuation  allowance,  which may necessitate an increase in the
provision  for loan losses.  Similarly,  the fair value of the  collateral of an
impaired  collateral-dependent  loan may change from one reporting period to the
next.  We also  record a change in the  measure  of these  impaired  loans as an
impairment  valuation  allowance,  which may  necessitate  an  adjustment to the
provision for loan losses.

<PAGE>

     The  following is an analysis of the activity in our  valuation  allowances
for impaired loans during the periods indicated (in thousands):
<TABLE>
<S>                                           <C>

Balance at December 31, 2001..................$1,850
  Transfer to general valuation allowance.....(1,354)
                                              ------
Balance at December 31, 2002..................   496
  Net charge-offs.............................    --
                                              ------
Balance at December 31, 2003..................   496
  Net charge-offs.............................    --
                                              ------
Balance at December 31, 2004..................   496
  Net charge-offs.............................    --
    Provision for loan losses................. 1,100
    Net charge-offs...........................(1,596)
                                              ------
Balance at December 31, 2005..................    --
   Net charge-offs............................    --
                                              ------
Balance at December 31, 2006..................$   --
                                              ======
</TABLE>

     Cash payments  received from impaired loans are recorded in accordance with
the contractual  terms of the loan. The principal portion of the payment is used
to reduce the  principal  balance of the loan,  whereas the interest  portion is
recognized as interest income.

     The  following  is a summary of  information  pertaining  to  impaired  and
non-accrual loans:
<TABLE>
                                                       At December 31,
                                                    ---------------------
                                                       2006       2005
                                                    ----------  ---------
                                                        (In thousands)
<S>                                                 <C>         <C>

Impaired loans without a valuation allowance........$   5,438   $   3,027
Impaired loans with a valuation allowance...........$      --   $      --
Valuation allowances related to impaired loans......$      --   $      --

Total non-accrual loans.............................$  18,497   $   4,966
</TABLE>



<TABLE>
                                                        Year Ended December 31,
                                                    ---------------------------------
                                                       2006        2005       2004
                                                    ---------   ---------  ----------
                                                             (In thousands)
<S>                                                 <C>         <C>         <C>

Average investment in impaired loans................$   6,767   $   2,649   $   1,467
Total interest income recognized on impaired loans..$     689   $     174   $      22
Interest income recognized on a cash basis
  on impaired loans.................................$     562   $     166   $      22
</TABLE>


Internal Asset Review System

     We classify our assets  according to a nine-tier  risk rating  system.  The
nine risk grades are segmented into three general groups: "Unclassified" (Pass 1
through 5),  "Criticized"  (Special  Mention),  and  "Classified"  (Substandard,
Doubtful and Loss).  In  determining  the  appropriate  risk grade for an asset,
consideration is given to a number of factors  affecting the timely  liquidation
of the  asset,  including  but not  limited  to: the cash flow  provided  by the
collateral;  the financial  condition of borrowers,  guarantors  and  endorsers;
collateral value; and payment history.

     For internal asset review purposes,  assets are segregated into two groups:
homogeneous and non-homogeneous assets.

     Homogeneous  Assets.  These are  defined  as groups  of assets  that  share
similar  risk  characteristics   that  are  collectively   evaluated  for  asset
classification  purposes.  Homogeneous  assets include single family residential
loans  with  balances  less  than $1.0  million,  multi-family  residential  and
commercial real estate loans ("income  property  loans") with balances less than
$1.5 million,  commercial  business loans with balances less than $500 thousand,
consumer loans, and high-grade investment securities.

     Non-Homogeneous   Assets.   These  are  individually   reviewed  for  asset
classification  purposes due to their relatively  higher balances or complexity.
Non-homogeneous  assets include single family residential loans with balances of
$1.0 million or greater,  income  property  loans of $1.5  million or more,  and
commercial  business  loans of $500 thousand or greater.  Other  non-homogeneous
assets  include  modified  or  restructured  loans,  real estate  owned  through
foreclosure,  investments in  subsidiaries,  and significant  off-balance  sheet
items.

<PAGE>

Loan Loss Allowance

     We  maintain  a general  valuation  allowance  for loan  losses  due to the
inherent  risks  in  the  loan  portfolio  that  have  yet  to  be  specifically
identified.  Our loan  portfolio is  stratified  based on factors  affecting the
perceived level and concentration of risk, the type of collateral, the extent of
borrower   documentation   obtained,  the  borrower's  credit  rating,  year  of
origination,  original  loan-to-value ratio, the level of negative  amortization
and geographic location.

     The  appropriate  level of general  valuation  allowance is  calculated  by
applying reserve factors to the various stratifications  identified above. These
reserve factors represent the expected  likelihood of default  multiplied by the
expected rate of loss.  The expected  rates of loss and default are based on our
historical  loss  experience  adjusted for current  conditions and trends in our
lending areas.

     Based on this  methodology,  we recorded a $12.4 million provision for loan
losses during 2006, $19.8 million during 2005 and $3.0 million during 2004.

     Loans  that  allow  for  a  reduced  level  of  borrower  documentation  at
origination  are a  significant  percentage  of loans  originated  in our market
areas. On "Stated  Income/Stated  Asset" ("SISA") loans,  the borrower  includes
information  on  his/her  level of income  and  assets  that is not  subject  to
verification.  On "Stated  Income/Verified  Assets" ("SIVA") loans, the borrower
includes  information  on  his/her  level  of  income  that  is not  subject  to
verification, but his/her assets are verified. For "No Income/No Asset" ("NINA")
loans,  the borrower is not required to submit  information  on his/her level of
income or assets.  The  underwriting  of these loans is based on the  borrower's
credit score and credit history,  intended  occupancy,  reasonableness of stated
income  and  the  value  of  the  collateral.  Adjustments  to  interest  rates,
loan-to-values  and  required  credit  scores are made on these types of reduced
documentation  loans in order to compensate for any additional risks the lack of
documentation may pose. At December 31, 2006, approximately 12%, 33%, and 35% of
our single family loan  portfolio  was  comprised of NINA,  SIVA, or SISA loans,
respectively.  This  compares  to 11%,  32%,  and 38% of our single  family loan
portfolio being NINA,  SIVA, or SISA loans  respectively,  at December 31, 2005.
Our portfolios of multi-family  and other real estate loans all require complete
and customary documentation from the borrowers.

     The following is an analysis of the activity in our general loan  valuation
allowance for the periods indicated:
<TABLE>

                                                    Year Ended December 31,
                                              --------------------------------------------------
                                              --------------------------------------------------
                                                2006      2005       2004       2003      2002
                                              --------  --------   --------   --------  --------
                                                               (In thousands)
<S>                                          <C>       <C>        <C>        <C>       <C>

Beginning general loan valuation allowance...$ 97,558  $ 78,675   $ 75,238   $ 75,223  $ 72,919
Provision for loan losses.........             12,400    18,650      3,000         --        --
Charge-offs, net of recoveries:
   Single family..................                (35)       11        120        (52)     (372)
   Multi-family...................                  2       189        237         14       189
   Commercial.....................                (53)       85         (7)        --        --
   Non-real estate................               (104)      (52)        87         53     1,133
                                              --------  --------   --------   --------  --------
Total net (charge-offs) recoveries               (190)      233        437         15       950
                                              --------  --------   --------   --------  --------
                                              --------  --------   --------   --------  --------
Transfers from (to) impaired                       --        --         --         --     1,354
   valuation allowance
                                              --------  --------   --------   --------  --------
Ending general loan valuation                $109,768  $ 97,558   $ 78,675   $ 75,238  $ 75,223
allowance.........................
                                              ========  ========   ========   ========  ========
</TABLE>


     We recorded  total net  charge-offs  of $190  thousand  against the general
valuation  allowance  during  2006.  There  were no  chargeoffs  from  valuation
allowances for impaired  loans in 2006.  The low level of  charge-offs  over the
last five years is attributable to the relatively strong economy and real estate
market in California during those years. The Bank establishes a specific reserve
to charge off assets with  identified  weaknesses that may render all or part of
the asset uncollectible.

     Any increase in  charge-offs  would  adversely  impact our future loan loss
provision and net income.

     The ratio of general loan loss  allowances  to gross loans  receivable  was
1.28%, 1.00%, 1.15%, 1.70% and 1.96% at December 31, 2006, 2005, 2004, 2003, and
2002, respectively.

<PAGE>

     The following table details the general valuation allowance by loan type at
the dates indicated:
<TABLE>
                                                    December 31,
                      ---------------------------------------------------------------------------
                               % of           % of             % of           % of            % of
                       2006   Total   2005   Total    2004    Total    2003  Total    2002   Total
                      ------  -----  ------  -----   ------   -----   ------ -----   ------  -----
                                               (Dollars in thousands)
<S>                 <C>       <C>    <C>     <C>    <C>      <C>     <C>    <C>     <C>     <C>
Real estate loans:
  Single family.....$ 83,934   77%  $ 68,329   70%  $ 48,271   61%  $ 28,775   38%  $ 24,952   33%
  Multi-family......  17,686   16     20,486   21     19,570   25     24,789   33     27,037   36
  Commercial........   2,395    2      3,221    3      5,053    6      6,185    8      9,938   13
  Construction......      --   --        148   --        508    1      2,266    3      2,281    3
                      ------  -----  -------   ---     -----  ----    ------  -----    -----  ------
Total real estate
  loans..............104,015   95     92,184   94     73,402   93     62,015   82     64,208   85
                      ------  -----  -------  -----     -----  ------  ------  -----   -----  ------

Non-real estate loans:
  Commercial.........  3,626    3      2,855    3      2,618    3      5,595    8      4,977    7
  Consumer...........  2,127    2      2,519    3      2,655    4      7,624   10      5,978    8
  Other..............    --     -         --    -         --    -          4      --      60    -
                      ------  -----    -----  -----    -----  ------  ------  -----    -----  ------
Total non-real         5,753    5      5,374    6      5,273    7     13,223   18     11,015   15
  estate loans.......
                      ------  -----    -----  -----    -----  ------  ------  -----   -----  ------
Total...............$109,768  100%  $ 97,558  100%  $ 78,675  100%  $ 75,238  100%  $ 75,223  100%
                      ======  =====    =====  =====    =====  ======  ======  =====  =====  ======
</TABLE>


     During 2006,  the exposure  base of single  family loans  decreased by $920
million.  However,  because home prices began to decline  during 2006 and due to
concerns  about  specific  portions  of the single  family loan  portfolio,  the
general  valuation  allowance  increased  by $15.6  million.  There were several
adjustments made to the calculation of the general  valuation  allowance for the
single family portfolio.  The risk factors for no documentation  loans, loans in
certain  geographic areas with weak housing markets and loans with loan to value
ratios higher than 85% and no mortgage  insurance were  increased.  The exposure
base for multi-family  loans decreased by $129 million,  resulting in a decrease
in the general  valuation  allowance  of $2.8  million.  The  exposure  base for
commercial real estate loans  decreased by $63 million,  resulting in a decrease
in the general  valuation  allowance of $826  thousand.  The  construction  loan
portfolio  fully paid off and the general  valuation  allowance of $148 thousand
was  eliminated.  The total  non-real  estate loan  portfolio  decreased by $6.7
million.  However, the non-real estate commercial  exposure,  which has a higher
general valuation allowance (GVA) allocation factor,  increased and the non-real
estate consumer  exposure,  which has a lower GVA allocation  factor,  decreased
resulting in a $379 thousand increase to the general valuation allowance.


     During 2005,  the exposure  base of single  family loans  increased by $2.8
billion,  generating a net increase in the general valuation  allowance of $20.1
million.  There were two changes  pertaining to the  calculation  of the general
valuation  allowance for the single family portfolio:  we decreased risk factors
for loans  with  loan-to-value  ratios  up to 60%;  and we also  decreased  risk
factors for loans with less than complete customary documentation.  The exposure
base  for  multi-family  loans  increased  by  $116.5  million  and the  general
valuation allowance increased by $916 thousand. The exposure base for commercial
real  estate  decreased  $67.2  million,  generating  a decrease  in the general
valuation allowance of $1.8 million.  The exposure base of the construction loan
portfolio  decreased by $16.0  million,  while the general  valuation  allowance
declined by $360 thousand.  The non-real  estate  commercial  loan exposure base
increased by $21.3 million and the general valuation allowance increased by $237
thousand.  The consumer  loan  exposure  base  decreased by $3.3 million and the
general valuation allowance decreased by $136 thousand.


     During 2004,  the exposure  base of single  family loans  increased by $2.1
billion,  generating  an increase in the general  valuation  allowance  of $19.6
million.  Also,  documentation  type was added as a risk  factor  for the single
family portfolio during 2004. The exposure base for multi-family loans increased
by $279.8 million;  however,  the general valuation  allowance decreased by $5.2
million.  This  decrease in general  valuation  allowance  was  attributable  to
lowered risk factors for certain geographic locations.  We also reduced the loss
factors associated with anticipated loss on this product.  The exposure base for
commercial  real estate  decreased  $20.2 million,  generating a decrease in the
general  valuation  allowance  of  $1.1  million.   The  exposure  base  of  the
construction  loan  portfolio  decreased  by $4.5  million,  while  the  general
valuation  allowance  declined by $1.8 million.  The non-real estate  commercial
loan exposure base increased by $47.0 million;  however,  the general  valuation
allowance  decreased by $3.0 million.  The consumer loan exposure base increased
by $29.8 million;  however,  the general valuation  allowance  decreased by $5.0
million.  The  decrease in general  valuation  allowances  for  non-real  estate
consumer  and  commercial  loans was  attributable  to a decline in the expected
rates of default as we gained experience with these product lines.


     Depending  on the  economy  and real  estate  markets in which we  operate,
increases in the general valuation  allowance may be required in future periods.
In  addition,  various  regulatory  agencies,  as  an  integral  part  of  their
examination process,  periodically review our general valuation allowance. These
agencies may require us to establish  additional  general  valuation  allowances
based  on  their  judgment  of the  information  available  at the time of their
examination.

     See "--Management's  Discussion and Analysis of Consolidated Balance Sheets
and Consolidated  Statements of Income - Asset Quality Ratios--" for an analysis
of our general valuation  allowances as a percentage of non-performing loans and
loans receivable.

<PAGE>

     Our Asset  Classification  Committee meets at least quarterly to review and
monitor the condition of the loan  portfolio.  Additionally,  a special  workout
group of our  officers  meets at  least  quarterly  to  review  delinquent  loan
situations  and to insure that  actions are  commenced  enforcing  our rights in
security properties pending foreclosure and liquidation.

     Non-performing  Assets. For a further discussion of non-performing  assets,
see "--Management's  Discussion and Analysis of Consolidated  Balance Sheets and
Consolidated Statements of Income - Non-Performing Assets--".

     Generally,  real estate loans  greater than 90 days  delinquent  are placed
into  foreclosure  and  a  specific  valuation  allowance  is  established,   if
necessary. We acquire title to the property in most foreclosure actions in which
the loan is not  reinstated  by the  borrower.  Once real  estate is acquired in
settlement of a loan,  the property is recorded at the lower of carrying  amount
or fair value.

     Real Estate  Owned.  Real Estate  Owned  ("REO") is property  acquired as a
result of  foreclosure.  Following  the  acquisition  of REO,  we  evaluate  the
property and establish a plan for marketing and disposing of the property. After
inspecting the property, we determine whether the property may be disposed of in
its  present  condition  or  if  repairs,  rehabilitation  or  improvements  are
necessary.

      The following table provides information regarding our REO for the periods
indicated:
<TABLE>

                                     Year Ended December 31,
                                  ----------------------------
                                    2006      2005      2004
                                  --------  --------  --------
                                         (In thousands)
<S>                               <C>       <C>       <C>

Beginning balance................ $     -   $      -  $      -
  Additions......................   1,461          -         -
  Sales and other................    (367)         -         -
                                  --------  --------  --------
Ending balance................... $ 1,094   $      -  $      -
                                  ========  ========  ========
</TABLE>

     Real Estate Held for  Investment.  From time to time we acquire real estate
as a result of the enforcement of judgments against borrowers.

     The following table provides information regarding our real estate held for
investment activity for the last three years:
<TABLE>

                                      Year Ended December 31,
                                  -----------------------------
                                    2006      2005       2004
                                  --------  --------   --------
                                         (In thousands)
<S>                               <C>       <C>       <C>

Beginning balance................ $      -  $    986  $   1,324
  Additions......................        -     1,869        986
  Sales and other................        -    (2,855)    (1,324)
                                  --------  --------   --------
Ending balance................... $      -  $      -  $     986
                                  ========  ========   ========
</TABLE>

     Other  Interest-Earning   Assets.  We  owned  no  contractually  delinquent
interest-earning assets other than loans as of December 31, 2006.

     Investment  Activities.  It is our policy to maintain liquidity investments
at a modest level and to use available cash to originate mortgages that normally
command  higher yields.  Therefore,  interest  income on  investments  generally
represents less than 5% of total revenues.

     Collateralized  Mortgage  Obligations.  The following table  summarizes the
portfolio of  collateralized  mortgage  obligations at fair value by type at the
end of the periods indicated:
<TABLE>

                                                       At December 31,
                                  -----------------------------------------------------
                                    2006       2005       2004       2003       2002
                                  --------   --------   --------   --------   ---------
                                                    (Dollars in thousands)
<S>                               <C>       <C>        <C>         <C>        <C>

Collateralized mortgage
   obligations ("CMO's")....      $ 311,467  $ 293,453  $ 249,781  $ 115,992  $ 101,802
Unrealized gain on securities
   available-for-sale............       383        564        805        219      1,053
                                    --------   --------   --------   --------  --------
                                  $ 311,850  $ 294,017  $ 250,586  $ 116,211  $ 102,855
                                    ========   ========   ========   ========  ========
Weighted average yield on
   interest-earning investments        5.51%     4.15%      2.82%      2.92%      4.77%
   end of period..................
                                     ========   ========   ========   ========  ========
</TABLE>

     Our collateralized mortgage obligations all have expected maturities within
five years.

     Mortgage-Backed Securities. Our portfolio of mortgage-backed securities was
formed with loans from our loan  portfolio.  In exchange for the  improvement in
credit risk when the mortgage-backed  securities are formed,  guarantee fees are
paid to FHLMC or FNMA.  Since the  securitized  loans were initially  originated
using our  standard  credit and  underwriting  guidelines,  the  mortgage-backed
securities  that we create  generally have the same  experience  with respect to
prepayment,  repayment,  delinquencies,  and other  factors as our overall  loan
portfolio.

     The  following  table sets  forth the  composition  of our  mortgage-backed
securities at the dates indicated:
<TABLE>

                                                    December 31,
                                  --------------------------------------------------
                                  --------------------------------------------------
                                    2006       2005      2004      2003       2002
                                  --------   --------  --------  ---------  --------
                                                    (In thousands)
<S>                               <C>       <C>       <C>       <C>        <C>
FHLMC and FNMA Mortgage-backed
  securities (at fair value):
   Secured by single family
   dwellings...................   $ 53,290  $ 69,581  $ 91,308  $ 128,465  $ 192,395
   Secured by multi-family
   dwellings...................      3,907     4,673     5,751      6,711      8,190
                                  --------   --------  --------  ---------  --------
    Total Mortgage-backed         $ 57,197  $ 74,254  $ 97,059  $ 135,176  $ 200,585
    securities.................   ========   ========  ========  =========  ========
</TABLE>


     FHLB Stock. The Bank owned $119.0 million,  $205.7 million, $143.4 million,
$87.8 million and $78.7 million of FHLB stock at December 31, 2006,  2005, 2004,
2003 and 2002,  respectively.  The yields on the stock were 5.37%, 4.67%, 3.97%,
3.85% and 5.31%, respectively, at the end of each year.

Sources of Funds

     General.  Our  principal  sources  of funds  are  deposits,  principal  and
interest payments on loans,  loan sales,  advances from the FHLB, and securities
sold under agreements to repurchase.

     Deposits.  We  obtain  deposits  through  four  different  sources:  1) our
full-service  branch  system,  2) phone  solicitations  by designated  employees
(telemarketing deposits), 3) national brokerage firms, and 4) the internet.

     Deposits  obtained  through  the  branch  system  were $2.9  billion,  $2.6
billion,  and $2.5 billion at December 31, 2006,  2005, and 2004,  respectively.
Branch  deposits  comprised 49% of total  deposits at December 31, 2006,  60% of
total  deposits at December  31, 2005 and 67% of total  deposits at December 31,
2004.

     Deposits acquired through  telemarketing  efforts are typically placed with
us by  professional  money  managers  and  represented  3%,  2%, and 1% of total
deposits  at  December  31,  2006,  2005 and  2004,  respectively.  The level of
telemarketing  deposits varies based on yields  available to depositors on other
investment instruments and the depositors' perception of our creditworthiness.

     Deposits  acquired through national  brokerage firms  represented 47%, 38%,
and 32% of total deposits at December 31, 2006,  2005,  and 2004,  respectively.
Any fees paid to deposit brokers are amortized over the term of the deposit.  We
increased  our use of this type of deposit in 2006  because  they were the least
expensive  source of funds on an  "all-in  cost"  basis.  We have used  brokered
deposits in varying amounts since 1983. Based on historical renewal percentages,
management   believes  that  these  deposits  are  a  stable  source  of  funds.
Institutions  meeting the regulatory  capital  standards  necessary to be deemed
well-capitalized  are not  required to obtain a waiver from the FDIC in order to
accept brokered deposits. See "--Management's  Discussion and Analysis - Capital
Resources and Liquidity--".

     Deposits acquired through the internet are acquired by posting our rates on
internet  rate  boards.  We accept  internet  deposits  from every state  except
California. These deposits comprise a minor amount of total deposits at December
31,  2006.  Due to the high cost of  advertising  and the higher  rates paid for
internet deposits, we are continually evaluating the cost effectiveness of these
deposits.
<PAGE>

      The following table shows the average balances and average rates paid on
deposits by deposit type for the periods indicated:
<TABLE>

                                           During the Year Ended December 31,
                            -----------------------------------------------------------------
                            -----------------------------------------------------------------
                                  2006                   2005                    2004
                            ------------------     ------------------     -------------------
                            Average   Average      Average   Average      Average   Average
                            Balance    Rate        Balance    Rate        Balance     Rate
                            --------  --------     --------  --------     --------  ---------
                                             (Dollars in thousands)
<S>                         <C>         <C>      <C>           <C>      <C>           <C>

Passbook accounts......   $  107,296    1.26%    $  119,421    1.01%    $  124,923    1.03%
Money market
   deposit accounts....      884,007    3.79      1,069,070    2.05      1,383,119    1.47
Interest-bearing
   checking accounts...      196,818    0.32        212,054    0.31        198,084    0.31
Non interest-bearing
   checking accounts..       387,091      --        401,998      --        338,692      --
Fixed-term certificate
   accounts.........       3,850,539    4.82      2,276,242    3.25        923,939    2.16
                           --------               --------               --------
                          $5,425,751    4.07%    $4,078,785    2.40%    $2,968,757    1.42%
                           ========               ========               ========
</TABLE>

     The following table shows  information  regarding the amount of deposits in
the  various  types of  deposit  programs  offered by us at the end of the years
indicated and the balances and average rates for those dates:
<TABLE>

                                                             At December 31,
                                            --------------------------------------------------
                                            --------------------------------------------------
                                                2006              2005              2004
                                            --------------   ---------------   ---------------
                                             Amount    %       Amount     %     Amount     %
                                            --------  ----   ---------  ----   --------  -----
                                                          (Dollars in thousands)
<S>                                       <C>          <C>  <C>           <C>  <C>         <C>
Variable rate non-term accounts:

Money market deposit accounts
   (weighted average rate of 4.12%,
   2.80%, and 1.61%).................     $  887,933   15%  $  886,592   20%   $1,328,230   35%

Interest-bearing checking accounts
   (weighted average rate of 0.34%,
   0.34%, and 0.23%).................        172,297    3      196,741     5      279,912    8

Passbook accounts (weighted average
   rate of 1.31%, 1.00%, and 1.00%)..         93,155    2      115,380     3      121,355    3

Non-interest bearing checking
accounts.............................        361,973    6      393,980     9      276,438    7
                                            --------  ----   ---------   ----    --------  ----
                                           1,515,358   26    1,592,693    37    2,005,935   53
                                            --------  ----   ---------   ----    --------  ----
Fixed-rate term certificate accounts:

Under six-month term (weighted
   average rate of 5.29%, 3.73%, and
   2.02%)...........................         659,843   11      374,660     9      423,656   11

Six-month term (weighted average
   rate of 5.11%, 3.74%, and 1.96%)..        724,280   12      766,527    17      391,141   11

Nine-month term (weighted average
   rate of 5.16%, 3.84%, and 2.27%)..        623,038   11      519,956    12      549,615   15

One year to 18-month term (weighted
   average rate of 5.05%, 3.82%, and
   1.87%)............................      2,289,550   39      986,068    22      204,975    5

Two year to 30-month term (weighted
   average rate of 4.24%, 2.85%, and
   2.40%)............................         19,904    0       43,285     1       52,441    1

Over 30-month term (weighted average
   rate of 3.80%, 3.42%, and 3.71%)..         57,908    1       88,468     2      133,402    4
                                            --------  ----   ---------   ----    --------  ----
                                           4,374,523   74    2,778,964    63    1,755,230   47
                                            --------  ----   ---------   ----    --------  ----
Total deposits (weighted average
   rate of 4.44%, 3.00%, and 1.65%)..     $5,889,881  100%  $4,371,657   100%  $3,761,165  100%
                                            ========  ====   =========   ====    ========  ====
</TABLE>

     We consider both the interest rate and administrative cost when determining
what  source of funds to use.  As the cost and  interest  rate of each source of
funds  fluctuates  from time to time, we seek funds from the overall lowest cost
source until the relative cost changes. As the costs of funds, operating margins
and net income of the Bank  associated  with each source of funds are  generally
comparable,  we do not deem the impact of a change in incremental use of any one
of the specific sources of funds at a given time to be material.

     The following  table shows the maturity  distribution  of  certificates  of
deposit of $100,000 and greater as of December 31, 2006 (in thousands):
<TABLE>

<S>                                          <C>
Maturing in:
  1 month or less..........................  $  91,664
  Over 1 month to 3 months.................    238,392
  Over 3 months to 6 months................    266,444
  Over 6 months to 12 months...............    177,629
  Over 12 months...........................     42,939
                                              --------
Total......................................  $ 817,068
                                              ========
</TABLE>

     Based on  historical  renewal  percentages  at  maturity,  we believe  that
deposits  greater than  $100,000 are a stable  source of funds.  For  additional
information  with respect to deposits,  see Note 8 of the Notes to  Consolidated
Financial Statements.

     Borrowings.  The  Federal  Home Loan Bank System  functions  as a source of
credit to  financial  institutions  that are members of a regional  Federal Home
Loan Bank.  The Bank may apply for  advances  from the FHLB  secured by the FHLB
capital  stock  owned by the Bank,  certain of our  mortgages  and other  assets
(principally obligations issued or guaranteed by the United States government or
its agencies). Advances can be requested for any sound business purpose which an
institution is authorized to pursue.  Any  institution not meeting the qualified
thrift  lender  test will be subject to  restrictions  on its  ability to obtain
advances from the FHLB.  See "Summary of Material  Legislation  and Regulation -
Qualified Thrift Lender Test". In granting  advances,  the FHLB also considers a
member's creditworthiness and other relevant factors.

     Total  advances  from the FHLB were $1.5  billion at December 31, 2006 at a
weighted  average rate of 5.33%.  This compares with advances of $4.2 billion at
December  31,  2005 and $3.0  billion at December  31, 2004 at weighted  average
rates of 4.19% and 2.59%,  respectively.  We have credit  availability  with the
FHLB,  which  allows us to borrow up to 60% of our total  assets as computed for
regulatory purposes.  At December 31, 2006, our unused borrowing capacity at the
FHLB was in excess of $4.0 billion.

     We enter into sales of securities under  agreements to repurchase  (reverse
repurchase agreements) which require the repurchase of the same securities.  The
agreements are treated as borrowings in our Consolidated  Balance Sheets.  There
are certain risks  involved with entering into these types of  transactions.  In
order to minimize these risks,  our policy is to enter into agreements only with
well-known   national   brokerage  firms  that  meet  their  regulatory  capital
requirements.

     Borrowings under reverse repurchase  agreements decreased by $185.2 million
to  $978.4  million  at  December  31,  2006 due to  payoffs  of the  collateral
supporting the borrowings.  The weighted  average rate was 5.37% at December 31,
2006 and the borrowings were secured by loans with market values totaling $917.8
million,   investments   with  market   values   totaling   $73.2   million  and
mortgage-backed securities with market values totaling $46.9 million. Borrowings
under reverse  repurchase  agreements  totaled $1.2 billion at December 31, 2005
and $187.0  million at December 31, 2004 at weighted  average rates of 4.04% and
2.24%, respectively.

     We had $100,000,000 of Senior  Debentures  outstanding at both December 31,
2006 and December 31, 2005. The weighted  average interest rate was 5.94% at the
end of each year.

     Borrowings  from all sources totaled $2.6 billion,  $5.4 billion,  and $3.2
billion at weighted  average  rates of 5.37%,  4.19%,  and 2.57% at December 31,
2006, 2005, and 2004,  respectively.  The decrease in borrowings  during 2006 is
due to the increased use of brokered deposits.

<PAGE>

     Our portfolio of short-term  borrowings  includes FHLB advances due in less
than one year and securities sold under agreements to repurchase.  The following
schedule summarizes  short-term  borrowings for the last three years at December
31:
<TABLE>

                                                 Maximum
                                                 Month-End
                                                 Outstanding
                                                 Balance
                                                 During
                           End of Period         the Period           Average
                         -------------------     -----------    --------------------
                         -------------------
                         Outstanding  Rate                      Outstanding   Rate
                         -----------  ------                    -----------   ------
                                           (Dollars in thousands)
<S>                   <C>             <C>    <C>             <C>               <C>

2006
Short-term FHLB
advances............. $  1,455,000    5.31%  $  4,087,000    $  2,755,833     4.96%
Securities sold
   under agreements
   to repurchase..... $    978,448    5.37%  $  1,163,684    $  1,006,344     4.98%

2005
Short-term FHLB
advances............. $  4,035,500    4.17%  $  4,035,500    $  3,288,391     3.31%
Securities sold
   under agreements
   to repurchase..... $  1,163,684    4.04%  $  1,231,978    $  1,048,524     3.34%

2004
Short-term FHLB
advances............. $  2,604,600    2.30%  $  2,604,600    $  1,789,575     2.05%
Securities sold
   under agreements
   to repurchase..... $    187,000    2.24%  $    192,000    $    129,192     1.52%

Other Sources of Funds

     See "--Management's  Discussion and Analysis of Consolidated Balance Sheets
and Consolidated  Statements of Income - Sources of Funds--" for a discussion of
other funding sources.
</TABLE>

Subsidiaries

     We have three  wholly-owned  subsidiaries:  Seaside  Financial  Corporation
("Seaside"),  Oceanside Insurance Agency, Inc.  ("Oceanside"),  and Santa Monica
Capital Group  ("SMCG"),  all of which are California  corporations.  SMCG is an
inactive corporation.

     Revenues and  operating  results of these  subsidiaries  accounted for less
than 1% of  consolidated  revenues  in 2006 and 2005 and no  material  change is
foreseen.

     Trustee Activities.  Seaside acts as trustee on our deeds of trust. Trustee
fees for this  activity  amounted to $63  thousand in both 2006 and 2005 and $41
thousand in 2004.

     Insurance  Brokerage  Activities.  Oceanside  engages in limited  insurance
agent  activities.  Income  to date  from this  source  has been  insignificant.
Oceanside  operates as a licensed life insurance agent and receives  commissions
on the sale of annuities and other insurance products conducted in our branches.
During  2006,  2005,  and  2004,  Oceanside  received  commission  income of $65
thousand,  $55  thousand,  and  $181  thousand,  respectively,  from the sale of
non-insured annuity products.

Employees

     As of  December  31,  2006,  we had a total  of 603  full  time  equivalent
employees,  including  part-time  employees.  No employees were represented by a
collective  bargaining  group. At present,  all of our employees are employed by
the Bank,  not by our holding  company.  We provide our  regular  full-time  and
part-time  employees with a comprehensive  benefits  program that includes basic
and major medical insurance, long-term disability coverage, sick leave, a 401(k)
plan,  and a profit  sharing  employee  stock  ownership  plan.  We consider our
employee relations to be excellent.

Summary of Material Legislation and Regulations

     General. We are subject to extensive  regulation.  The regulatory framework
is  intended  primarily  for  the  protection  of  depositors,  federal  deposit
insurance  funds  and  the  banking  system,  and  not  for  the  protection  of
stockholders.  The following  discussion of significant elements of the laws and
regulations  applicable  to us is  qualified in its entirety by reference to the
full text of the statutes,  regulations  and policies that are described.  These
statutes,  regulations and policies are continually  under review by legislative
bodies and regulatory agencies. A change in statutes,  regulations or regulatory
policies applicable to us could have a material effect on our business.

     FFC, as a savings and loan holding company,  is registered with and subject
to regulation and examination by the OTS. FFC is also under the  jurisdiction of
the SEC as well as the rules of the New York Stock Exchange  ("NYSE") for listed
companies. The Bank, which is a federally chartered savings bank and a member of
the FHLB  System,  is  subject to  regulation  and  examination  by the OTS with
respect  to most  of its  business  activities,  including  lending  activities,
capital standards,  general investment  authority,  deposit taking and borrowing
authority,  mergers and other  business  combinations,  establishment  of branch
offices, and permitted subsidiary  investments and activities.  Our deposits are
insured by the FDIC. As insurer,  the FDIC is authorized to conduct examinations
of the  Bank.  The OTS  imposes  assessments  and  examination  fees on  savings
institutions.  OTS assessments,  based on asset size, were $2.3 million in 2006,
$1.1 million in 2005,  and $751 thousand in 2004. We are also subject to Federal
Reserve Board regulations  concerning reserves required to be maintained against
deposits.

     As a member of the FHLB System, we are required to own capital stock in our
regional  FHLB in an amount at least equal to the greater of 1% of the aggregate
principal  amount  of our  unpaid  residential  mortgage  loans,  home  purchase
contracts and similar  obligations  at the end of each  quarter,  or 4.7% of our
outstanding   borrowings  from  the  FHLB.  We  were  in  compliance  with  this
requirement,  with an investment of $119.0 million in FHLB stock at December 31,
2006.

     The FHLB serves as a source of liquidity for the member institutions within
an assigned region. Our assigned region is the FHLB Eleventh District.  The FHLB
is  funded  primarily  from  proceeds  derived  from  the  sale of  consolidated
obligations of the FHLB System.  It makes advances to members in accordance with
policies and procedures established by the Federal Housing Finance Board and the
Board of Directors of each  regional  FHLB.  At December 31, 2006,  our advances
from the FHLB  amounted to $1.5  billion,  or 18% of our total  funding  sources
(deposits and borrowings).

     The FHLBs are required to contribute to affordable housing programs through
direct  loans or interest  rate  subsidies on advances  targeted  for  community
investment and low and moderate  income housing  projects.  These  contributions
have adversely affected the level of dividends that the FHLBs have paid to their
members.  These  contributions also could have an adverse effect on the value of
FHLB stock in the  future.  The  dividend  yield  earned on FHLB stock was 5.12%
during 2006 compared to 4.40% in 2005 and 4.01% in 2004.

     Financial  Services  Modernization   Legislation.   The  Gramm-Leach-Bliley
Financial  Modernization Act of 1999 (the "GLB Act") made significant changes to
the operations of financial services companies,  including  provisions affecting
affiliations among banks, securities firms and insurance companies,  the ability
of commercial entities to obtain thrift charters,  the confidential treatment of
nonpublic personal information about consumers,  and the Community  Reinvestment
Act (the "CRA", as discussed in more detail below).

     The GLB Act also  significantly  amended  the  FHLB  System,  by  modifying
membership  requirements in regional FHLBs to permit  membership to be voluntary
for both thrift and bank members.  The GLB Act changed  corporate  governance of
the  FHLBs  by  eliminating  the  right of the  Federal  Housing  Finance  Board
("FHFB"),  the  regulator of the FHLB System,  to select the  management  of the
local  FHLBs,  and  returning  that  authority to the boards of directors of the
FHLBs. Additionally, the obligations of the FHLBs to repay federal borrowings to
finance the thrift bailout have been  restructured from a fixed dollar amount to
a fixed percentage of the FHLBs' annual net income.

     There  continues  to be ongoing  discussions  in Congress as to whether the
regulator of the FHLBs should be changed and if so, to which regulatory  agency.
The FHFB  has  required  the  FHLBanks  to  register  a class  of  their  equity
securities  with the SEC. On December  22,  2006,  the FHFB adopted a final rule
which prohibits an FHLBank from issuing new excess stock (stock in excess of the
minimum  amount of stock  required for  membership)  if such member excess stock
exceeds 1% of the  FHLBank's  assets.  The new rule also permits the FHLBanks to
pay dividends only out of known income. Additionally, the FHFB has indicated its
intent to issue a regulation concerning the FHLBanks "retained earnings" policy,
the purpose of which is to cause the  FHLBanks to retain more of their  earnings
versus paying dividends to members such as the Bank. Because of the level of our
borrowings  from the FHLB, the outcome of these changes could affect the cost of
borrowings and the dividends we receive on our FHLB stock.

     Savings and Loan Holding Company Regulations. The activities of savings and
loan holding  companies  are  governed by the Home Owners' Loan Act of 1933,  as
amended.  Pursuant to that statute, we are subject to certain  restrictions with
respect to its activities and investments.

     A savings and loan  holding  company,  like FFC,  which  controls  only one
savings  association,  is exempt from  restrictions  on the conduct of unrelated
business  activities  that are applicable to savings and loan holding  companies
that control more than one savings  association.  The  restrictions  on multiple
savings  and loan  holding  companies  are  similar to the  restrictions  on the
conduct of unrelated  business  activities  applicable to bank holding companies
under  the  Bank  Holding   Company  Act.  We  would  become  subject  to  these
restrictions if we were to acquire  control of another  savings  association and
maintain that association as a separate entity or if we were to fail to meet our
qualified thrift lender ("QTL") test. See "--Qualified Thrift Lender Test--".

     The OTS may impose  restrictions  when it has  reasonable  cause to believe
that the  continuation of any particular  activity by a savings and loan holding
company  constitutes  a  serious  risk to the  financial  safety,  soundness  or
stability of such holding company's savings institution.  Specifically,  the OTS
may,  as  necessary,   (i)  limit  the  payment  of  dividends  by  the  savings
institution;  (ii) limit  transactions  between the savings  institution and its
holding company or its affiliates; and (iii) limit any activities of the savings
institution  or the  holding  company  that  create  a  serious  risk  that  the
liabilities  of the holding  company may be imposed on the savings  institution.
Any such limits will be issued in the form of a directive having the effect of a
cease-and-desist order.

     Regulatory Capital  Requirements.  The capital  regulations of the OTS (the
"Capital  Regulations")  require federally insured institutions such as the Bank
to meet certain minimum capital  requirements.  (See "--Management's  Discussion
and Analysis of  Consolidated  Balance  Sheets and  Consolidated  Statements  of
Income - Capital Resources and Liquidity - Capital Requirements--"). The OTS may
establish,  on a case-by-case basis, individual minimum capital requirements for
a savings  institution  which vary from the  requirements  that would  otherwise
apply under the Capital Regulations.

     The OTS has adopted rules based upon five capital tiers:  well-capitalized,
adequately capitalized,  undercapitalized,  significantly undercapitalized,  and
critically   undercapitalized.   An   institution   falls   into  one  of  these
classifications depending primarily on its capital ratios. We meet the standards
necessary to be  considered  "well-capitalized"  for  purposes of these  capital
measures.

     Insurance of Deposit Accounts.  In February 2006, the Budget Reconciliation
Bill (S. 1932) was  enacted.  The  legislation  contains  comprehensive  Deposit
Insurance  Reform  provisions.  The bill  provides  for  legislative  reforms to
modernize the federal deposit insurance system.  Among other things,  provisions
in the  legislation  and  subsequent  implementing  regulations  merged the Bank
Insurance Fund ("BIF") and the Savings Association  Insurance Fund ("SAIF") into
the new Deposit  Insurance Fund ("DIF")  effective  March 31, 2006;  indexed the
$100 thousand deposit  insurance limit to inflation  beginning in 2010 and every
succeeding  five years  while  giving  the FDIC and the  National  Credit  Union
Administration  ("NCUA")  boards  authority  to  determine  whether  raising the
standard maximum deposit insurance is warranted;  increase the deposit insurance
limit for certain retirement accounts to $250 thousand and indexed that limit to
inflation;  establish a general  range of 1.15  percent to 1.50  percent  within
which the FDIC Board of Directors may set the DIF reserve ratio; require certain
actions by the FDIC if the reserve ratio varies within this range; and allow the
FDIC Board to set  assessments for deposit  insurance  according to risk for all
insured  institutions.  The legislation  granted a one-time  initial  assessment
credit to recognize institutions' past contributions to the insurance fund.

     The FDIC has  implemented a risk-based  assessment  system,  under which an
institution's  deposit insurance assessment is based on the probability that the
deposit  insurance fund will incur a loss with respect to the  institution,  the
likely amount of any such loss,  and the revenue needs of the deposit  insurance
fund.  Under  the  risk-based   assessment  system,  a  savings  institution  is
categorized into one of three capital categories:  well-capitalized,  adequately
capitalized, and undercapitalized. A savings institution is also assigned to one
of three supervisory subgroup categories based on examinations by the OTS.

     The FDIC may terminate the deposit  insurance of any insured  depository if
the FDIC  determines,  after a hearing,  that the  institution has engaged or is
engaging in unsafe or unsound practices, is in an unsafe or unsound condition to
continue  operations or has violated any applicable law,  regulation or order or
any condition  imposed in writing by the FDIC. The FDIC may also suspend deposit
insurance  temporarily  during the  hearing  process if the  institution  has no
tangible  capital.  In  addition,  FDIC  regulations  provide  that any  insured
institution that falls below a 2% minimum leverage ratio will be subject to FDIC
deposit insurance  termination  proceedings  unless it has submitted,  and is in
compliance with, a capital plan with its primary federal regulator and the FDIC.

     Liquidity.  The OTS requires a savings  institution to maintain  sufficient
liquidity  to ensure its safe and sound  operation.  The  determination  of what
constitutes  safe and sound  operation is left to the  discretion of management.
For several  years it has been our strategy to keep cash and liquid  investments
at a modest level due to availability of substantial credit lines. Our liquidity
policy  includes  unused  borrowing  capacity  in the  definition  of  available
liquidity. Our current liquidity policy requires that cash and cash equivalents,
short-term  investments and unused borrowing capacity be maintained at a minimum
level of 10% of our  liquidity  base  (defined as deposits  and  borrowings  due
within one year).  At December  31,  2006,  liquidity-qualifying  balances  were
57.41% of our liquidity base.

     Community Reinvestment Act. The Community Reinvestment Act ("CRA") requires
each savings institution, as well as commercial banks and certain other lenders,
to assist in meeting the credit needs of their market areas consistent with safe
and sound banking practice by, among other things,  providing credit to low- and
moderate-income  individuals  and  communities.  The  CRA  requires  the  OTS to
periodically assess an institution's  performance in complying with the CRA, and
to take such  assessments  into  consideration  in reviewing  applications  with
respect  to  branches,  mergers  and  other  business  combinations,   including
acquisitions by savings and loan holding companies.  Failure to achieve a rating
of at least  "satisfactory" may be considered by the regulators when considering
approval of a proposed transaction. We were rated "satisfactory" in our last CRA
examination,  which was  conducted in 2003. An  institution  that is found to be
deficient  in its  performance  in meeting its  community's  credit needs may be
subject to  enforcement  actions,  including  cease and desist  orders and civil
money penalties.

     Restrictions on Dividends and Other Capital Distributions.  OTS regulations
require  that  savings  institutions  controlled  by  savings  and loan  holding
companies file a 30-day advance notice of a proposed capital  distribution.  The
OTS may disapprove a notice if it finds that (a) the savings association will be
undercapitalized,  significantly undercapitalized or critically undercapitalized
following the distribution,  (b) the proposed capital distribution raises safety
and soundness concerns;  or (c) the proposed distribution violates a prohibition
contained in a statute,  regulation or agreement between the savings institution
and the OTS (or FDIC) or a condition imposed by an OTS approval. The regulations
also  require  a  30-day  advance  notice  to  be  filed  for  proposed  capital
distributions  that  would  result in the  savings  institution  being less than
well-capitalized  or that  involve the  reduction or  retirement  of the savings
institution's  stock. No capital  distributions  were made to the Company during
2006 or 2005.  During  2004,  the Bank paid a total of $30.0  million in capital
distributions to the Company.

     Limits on Types of Loans and Investments.  Federal savings institutions are
authorized,  without quantitative limits, to make loans on the security of liens
upon residential real property and to invest in a variety of instruments such as
obligations of, or fully  guaranteed as to principal and interest by, the United
States;  stock or bonds of the FHLB;  certain mortgages,  obligations,  or other
securities which have been sold by FHLMC or FNMA; and certain  securities issued
by, or fully  guaranteed  as to  principal  and  interest  by, the Student  Loan
Marketing Association and the Government National Mortgage Association.  Certain
other types of loans or  investments  may be originated  or acquired  subject to
quantitative  limits:  secured or  unsecured  loans for  commercial,  corporate,
business,  or  agricultural  purposes,  loans  on the  security  of  liens  upon
nonresidential real property,  investments in personal property,  consumer loans
and  certain  securities  such as  commercial  paper  and  corporate  debt,  and
construction loans without security.

     Savings institutions are subject to the same loans-to-one borrower ("LTOB")
restrictions that are applicable to national banks, with limited  provisions for
exceptions.  In general,  the national bank standard restricts loans to a single
borrower to no more than 15% of a bank's unimpaired capital and surplus, plus an
additional  10% if the loan is  collateralized  by  certain  readily  marketable
collateral. Our loans were within the LTOB limitations at December 31, 2006.

     Savings  institutions and their  subsidiaries are prohibited from acquiring
or retaining any corporate  debt security that, at the time of  acquisition,  is
not  rated  in one  of the  four  highest  rating  categories  by at  least  one
nationally recognized statistical rating organization.  We have no impermissible
investments in our investment portfolio.

     Safety  and  Soundness  Standards.  OTS  regulations  contain  "safety  and
soundness"  standards  covering  various  aspects of the  operations  of savings
institutions.  The  guidelines  relate to internal  controls and internal  audit
systems, information systems, loan documentation,  credit underwriting, interest
rate risk  exposure,  asset growth,  executive  compensation,  maximum ratios of
classified  assets to capital,  and minimum  income  sufficient to absorb losses
without impairing capital.  If the OTS determines that a savings institution has
failed  to  meet  the  safety  and  soundness  standards,  it  may  require  the
institution to submit to the OTS, and thereafter  comply with, a compliance plan
acceptable to the OTS describing the steps the  institution  will take to attain
compliance  with the  applicable  standard and the time within which those steps
will be taken.

     Federal  regulations contain a number of measures intended to promote early
identification of management  problems at depository  institutions and to ensure
that regulators intervene promptly to require corrective action by institutions.
Our annual  management report on the effectiveness of internal control standards
and  compliance  with  certain  designated  laws will be made  available  on our
website in March of 2007.

     Prompt  Corrective  Action.  The  "prompt  corrective  action"  regulations
require  insured  depository  institutions  to be  classified  into  one of five
categories    based    primarily   upon   capital    adequacy,    ranging   from
"well-capitalized" to "critically undercapitalized".  These regulations require,
subject to certain  exceptions,  the appropriate  federal banking agency to take
"prompt  corrective  action"  with  respect  to  an  institution  which  becomes
"undercapitalized"  and to take additional  actions if the  institution  becomes
"significantly undercapitalized" or "critically undercapitalized".

     Only "well-capitalized" institutions may obtain brokered deposits without a
waiver.  An "adequately  capitalized"  institution can obtain brokered  deposits
only if it receives a waiver from the FDIC.  An  "undercapitalized"  institution
may  not  accept  brokered  deposits  under  any   circumstances.   We  met  the
"well-capitalized"  standards  during 2006 and were eligible to accept  brokered
deposits without a waiver.

     Qualified Thrift Lender Test. In general, the QTL test requires that 65% of
an institution's  portfolio assets be invested in "qualified thrift investments"
(primarily loans, securities and other investments related to housing), measured
on a monthly  average basis for nine out of every 12 months on a rolling  basis.
Any savings institution that fails to meet the QTL test must either convert to a
bank charter or become subject to national bank-type  restrictions on branching,
business activities,  and dividends, and its ability to obtain FHLB advances. We
met the QTL test at  December  31,  2006,  with  98.6% of the  portfolio  assets
comprised of "qualified thrift investments".

     Transactions with Affiliates.  Federal savings  institutions are subject to
the provisions of Sections 23A and 23B of the Federal  Reserve Act.  Section 23A
restricts  loans or extensions of credit to, or investments in, or certain other
transactions with,  affiliates and as to the amount of advances to third-parties
collateralized  by the  securities or  obligations  of  affiliates.  Section 23B
generally   requires   that   transactions   with   affiliates   must  be  on  a
non-preferential  basis. Federal savings institutions may not make any extension
of credit to an affiliate  which is engaged in activities  not permitted by bank
holding  companies,  and may not  invest in  securities  issued by an  affiliate
(except with respect to a subsidiary). The Company is an "affiliate" of the Bank
for the purposes of these provisions.

     Transactions  with  Insiders.  By  regulation of the OTS,  federal  savings
institutions  are subject to the  restrictions  of Sections 22(g) and (h) of the
Federal Reserve Act which, among other things, restrict the amount of extensions
of credit which may be made to executive officers,  directors, certain principal
shareholders  (collectively  "insiders"),  and to their related interests.  When
lending to  insiders,  a savings  association  must follow  credit  underwriting
procedures  that are no less  stringent  than  those  applicable  to  comparable
transactions  with persons  outside the  association.  The amount that a savings
association  can  lend  in the  aggregate  to  insiders  (and to  their  related
interests) is limited to an amount equal to the  association's  core capital and
surplus.  Insiders are also  prohibited  from knowingly  receiving (or knowingly
permitting  their  related  interests to receive) any  extensions  of credit not
authorized  under  these  statutes.  All of our  loans to  insiders  are made in
compliance with these regulations.

     Federal Reserve System.  Federal Reserve Board regulations  require savings
institutions to maintain non-interest bearing reserves against their transaction
accounts. The reserve for transaction accounts as of December 31, 2006 was 0% of
the first $8.5 million of such  accounts,  3% of the next $37.3  million of such
accounts and 10% (subject to adjustment by the Federal  Reserve Board between 8%
and 14%) on net  transaction  accounts  in  excess of $45.8  million.  We are in
compliance with these requirements as of December 31, 2006.

     Taxation.  The  Company,  the  Bank  and  the  Bank's  subsidiaries  file a
consolidated  federal  income  tax return on a  calendar  year  basis  using the
accrual method.  Each entity is responsible for paying its pro rata share of the
consolidated  tax liability.  The maximum marginal federal tax rate is currently
35%.

     We are required to use the specific charge-off method of accounting for bad
debts for federal income tax purposes. Prior to 1995, we used the reserve method
of accounting for bad debts. The Consolidated Balance Sheet at December 31, 2006
does not include a tax liability of $5,356,000 related to the adjusted base year
bad debt reserve that was created when we were on the reserve  method.  The base
year reserve is subject to recapture  if: (1) we fail to qualify as a "bank" for
federal income tax purposes;  (2) certain distributions are made with respect to
the stock of the Bank;  (3) the bad debt reserves are used for any purpose other
than to absorb bad debt losses;  or (4) there is a change in federal tax law. We
do not expect any of these events to occur.

     To the extent  that  distributions  by the Bank to the  Company  exceed our
cumulative  income and profits (as  computed for federal  income tax  purposes),
such  distributions  would be treated for tax  purposes as being made out of our
base year reserve and would thereby constitute taxable income to ourselves in an
amount  equal to the lesser of our base year reserve or the amount  which,  when
reduced by the amount of income tax attributable to the inclusion of such amount
in gross income,  is equal to the amount of such  distribution.  At December 31,
2006,  our  cumulative  income and profits (as computed  for federal  income tax
purposes) was approximately $800.5 million.

     We are  required  to use the  specific  charge-off  method  for  state  tax
purposes for all periods  beginning after 2002. Prior to 2002, we made additions
to our state tax bad debt  reserves in amounts  necessary  to "fill up" to a tax
reserve balance  calculated using the experience  method. A change in California
tax law during 2002  eliminated  the bad debt reserve  method for California tax
purposes  and  conformed  state tax law to  federal  tax law with  regard to the
method of accounting for bad debts used by banks.

     At December 31, 2006,  we had $88.9  million in gross  deferred tax assets.
The Company did not have a valuation  allowance  for the  deferred  tax asset at
December  31, 2006 or 2005,  as it is more likely than not that the deferred tax
asset will be realized  due to taxable  income in prior  years,  to which losses
could be carried back, and an expectation of future earnings. Gross deferred tax
liabilities totaled $30.1 million at December 31, 2006.

     We are subject to an  alternative  minimum tax ("AMT") if the AMT is larger
than the tax otherwise payable. Generally, alternative minimum taxable income is
a taxpayer's regular taxable income,  increased by the taxpayer's tax preference
items for the year and  adjusted by  computing  certain  deductions  utilizing a
methodology  that negates the  acceleration of such deductions under the regular
tax. The adjusted  income is then reduced by an exemption  amount and is subject
to tax at a 20% rate. No AMT was  applicable  to us for tax years 2006,  2005 or
2004.

     California tax laws  generally  conform to federal tax laws. For California
franchise  tax  purposes,   federal   savings  banks  are  taxed  as  "financial
corporations"  at a  rate  2%  higher  than  that  applicable  to  non-financial
corporations  because of exemptions from certain state and local taxes.  The tax
rate for 2006, 2005, and 2004 was 10.84%.

     As  described in Footnote 1, the Company  reversed  $3.7 million of accrued
state and federal tax liabilities  which were on the Consolidated  Balance Sheet
at December 31, 2005. This resulted in a $3.7 million  increase in the Company's
retained earnings at January 1, 2006.

     The Internal Revenue Service ("IRS") has examined our consolidated  federal
income tax  returns  for tax years up to and  including  2003.  The  adjustments
proposed by the IRS were  primarily  related to temporary  differences as to the
recognition of certain taxable income and expense items.  While we have provided
for  deferred  taxes for federal and state  purposes,  a change in the period of
recognition  of certain  income and expense  items can result in interest due to
the IRS and the Franchise Tax Board  ("FTB").  Interest  accruals of $62 and $56
thousand  were  recorded  during 2006 and 2005,  respectively,  for  interest on
amended returns.  During 2006 and 2005, interest payments totaling $138 thousand
and $207  thousand,  respectively,  were paid in  settlement  of tax years  1999
through 2003. The balance of accrued  interest  payable for amended  returns was
$83  thousand  and $159  thousand as of December 31, 2006 and December 31, 2005,
respectively.

     Financial  Privacy  and  Data  Security.  In  accordance  with the GLB Act,
federal banking regulators adopted rules that limit the ability of savings banks
and other  financial  institutions  to  disclose  non-public  information  about
consumers to nonaffiliated  third-parties.  These limitations require disclosure
of privacy policies to consumers and, in some circumstances,  allow consumers to
prevent  disclosure of certain  personal  information to a  nonaffiliated  third
party. The privacy provisions of the GLB Act affect how consumer  information is
transmitted  through  diversified  financial  companies  and conveyed to outside
vendors.   Data  security  regulations  and  regulatory  guidance  also  require
institutions  to  take  appropriate   precautions  in  developing  security  for
confidential   data,  such  as  customer   information,   and  impose  reporting
requirements for certain types of security breaches.

     Anti-Money Laundering Initiatives and the USA Patriot Act. A major focus of
governmental policy on financial  institutions in recent years has been aimed at
combating money laundering and terrorist financing.  The USA Patriot Act of 2001
(the "USA  Patriot  Act")  substantially  broadened  the scope of United  States
anti-money   laundering  laws  and  regulations  by  imposing   significant  new
compliance and due diligence obligations,  creating new crimes and penalties and
expanding the  extra-territorial  jurisdiction of the United States.  The United
States Treasury Department has issued a number of implementing regulations which
apply to various  requirements of the USA Patriot Act to financial  institutions
such as the Bank. These regulations impose obligations on financial institutions
to maintain appropriate policies, procedures and controls to detect, prevent and
report money  laundering  and terrorist  financing and to verify the identity of
their  clients.  Failure of a financial  institution  to maintain and  implement
adequate  programs to combat money  laundering  and terrorist  financing,  or to
comply  with  all of the  relevant  laws or  regulations,  could  subject  us to
penalties and cause damage to our reputation.

     Legislative  Initiatives.  From  time  to  time,  various  legislative  and
regulatory  initiatives  are introduced in Congress and state  legislatures,  as
well as by regulatory agencies. Such initiatives may include proposals to expand
or contract  the powers of savings and loan  holding  companies  and  depository
institutions  or proposals to  substantially  change the  financial  institution
regulatory  system.  Such  legislation  could  change  banking  statutes and our
operating  environment in substantial and unpredictable  ways. If enacted,  such
legislation  could  increase or decrease  the cost of doing  business,  limit or
expand  permissible  activities or affect the  competitive  balance among banks,
savings associations, credit unions, and other financial institutions. We cannot
predict  whether  any such  legislation  will be enacted,  and, if enacted,  the
effect that it, or any implementing regulations,  would have on our Consolidated
Balance Sheets or Consolidated  Statements of Income of the Company. A change in
statutes, regulations or regulatory policies applicable to the Bank could have a
material effect on our business.

     On October 13, 2006, the Financial  Services  Regulatory Relief Act of 2006
("FSRRA")  was  enacted.  The FSRRA was intended to  eliminate  unnecessary  and
overly burdensome regulation of depository  institutions.  As enacted, the FSRRA
does contain  provisions that will reduce regulatory  burden,  and also contains
provisions  that are helpful to the federal  banking  regulators in the areas of
enforcement  actions and resolution of failed  institutions.  The FSRRA contains
several provisions directly affecting federal savings institutions.  Among these
are rules that : (a) direct the SEC and Board of the Federal  Reserve  System to
adopt final rules to make banks (including federal savings  institutions) exempt
from the definition of broker based on  activity-specific  statutory  exemptions
encompassing "traditional banking activities";  (b) provide federal associations
with the same  exemption as banks  currently  have from  investment  adviser and
broker-dealer  regulatory  requirements;  (c)  eliminate  reporting  of loans to
insiders,  (although no changes  were made in the  substantive  restrictions  on
loans to insiders  contained in Regulation O, 12 CFR 215 et seq.) and (d) direct
the banking regulatory  agencies,  including the OTS, to develop a model form of
privacy notice to satisfy the  requirements of GLBA. Rules have been proposed to
implement  the  "broker"  exceptions  for banks and  provide  parity for federal
associations,  as well as to eliminate the reporting of loans to insiders  (this
rule has been adopted on an interim basis).  The  implementation of FSRRA is not
expected to have a material affect on our day-to-day operations or practices.

     In September 2006, the OTS, along with the other federal banking  agencies,
published the final  Interagency  Guidance on  Non-Traditional  Mortgage Product
Risks  ("Guidance"),  which addresses  adjustable rate and interest-only  loans.
Non-Traditional  products  are  generally  defined in the Guidance as loans that
allow  interest-only  payments or have the potential for negative  amortization.
The Guidance states that  underwriting  standards should address the effect of a
substantial  payment  increase  on the  borrower's  capacity  to repay when loan
amortization  begins.  Consequently,  an institution's  analysis of a borrower's
repayment  capacity  should  include an evaluation of their ability to repay the
debt at recast at the fully-indexed rate, assuming a fully-amortizing  repayment
schedule.  The  repayment  analysis  should also be based upon the initial  loan
amount plus any balance increase that may accrue from negative amortization. The
Guidance also suggests  that, in analyzing a borrower's  repayment  capacity,  a
lender should avoid  over-reliance  on credit scores as a substitute for income,
assets or outstanding liability verification in the underwriting process.

     While the Guidance terms  interest-only and negative  amortization loans as
"non-traditional",  we have been offering adjustable rate loan products for over
twenty  years.  Prior to the  issuance of the  Guidance,  we had  employed  (and
continue to employ) a number of the  standards  and  practices  suggested in the
Guidance,  such as using the  fully  indexed  rate in  evaluating  a  borrower's
ability to repay a loan.  We are  assessing  the impact of the  Guidance  on our
lending  process.  We will continue to closely monitor trends in the residential
housing and lending markets, and make adjustments as deemed appropriate. At this
time,  however, we cannot predict the precise levels, or the impact, on our loan
production as a result of the Guidance,  as certain  aspects of the Guidance are
not specific and are subject to further  interpretation  by the Federal  banking
agencies.

     On December 14, 2006, the OTS issued its Guidance entitled  "Concentrations
in Commercial  Real Estate Lending,  Sound Risk Management  Practices" (the "CRE
Guidance").  The scope of the CRE  Guidance  includes  many types of  commercial
property  which we accept as collateral  for our loans,  including  multi-family
residential  property.  The effect of the CRE Guidance  could be to increase the
cost of capital required for commercial real estate lending  transactions.  From
time to time we have had  concentrations  in commercial  loans. We are assessing
the impact of the Guidance on our commercial lending practices. We will continue
to closely monitor our commercial  lending  portfolio,  and make  adjustments as
deemed appropriate. At this time, we cannot predict the impact on us as a result
of the Guidance.  However, it is not expected that our risk management practices
will be significantly or adversely affected by the CRE Guidance.

ITEM 1A. -- RISK FACTORS

     Investment in our stock involves a number of risks and  uncertainties.  The
risks  described  below are not the only ones we face.  There may be  additional
risks that are currently  unknown or that are now considered  immaterial,  which
may be  material  in the future.  These  additional  risks could also impair our
business or adversely  affect our financial  condition or results of operations.
If any of the following risks actually occurs, our business, financial condition
or results of operations could be adversely affected. In such case, the price or
value of our stock could decline.

General economic conditions may be less favorable than expected.

     Our business is affected by general  economic  conditions  in California as
well as, to a lesser degree, the United States in general.  An economic downturn
could negatively impact household and corporate incomes. This impact may lead to
decreased  demand  for the  products  and  services  we offer and  increase  the
likelihood  of defaults  by  borrowers  on their  loans.  A severe or  prolonged
downturn in California's real estate market would also have an adverse effect on
our business as our real estate loans are secured by property in California.

Our loan portfolio consists principally of adjustable rate loans subject to
negative amortization.

     Our  primary   product   consists  of  adjustable  rate  loans  secured  by
residential  real estate.  An increasing  portion of our interest income results
from interest accrued in excess of borrower  payments  (negative  amortization).
These loans, in large part, permit negative amortization up to a certain defined
level, and the payment on such loans adjusts periodically in accordance with the
terms of the loan  documents.  In the event of an economic  downturn,  which may
result in loss of income to  borrowers,  borrowers  may be unable to make higher
payments  that may  result  from  such  adjustments.  Additionally,  a  downturn
affecting  the market  value of the  collateral  for our loans  combined  with a
larger principal balance that can result from a negatively  amortizing loan, may
result in a loss of adequate  security for such loans.  The  confluence of these
economic conditions could have a significant effect on our net income.

     Many of these loans are made under  low-documentation loan programs.  Under
these  programs,  which are  typical in the  current  residential  loan  market,
information  about  applicants'  income  and/or assets may not be provided or if
provided,  may not be  verified.  While we take  steps to  mitigate  the risk of
unverified  income and asset  information,  such as  verification  of collateral
value,  evaluation  of credit  history  and  limitations  on the loan amount and
loan-to-value  ratio,  there  is a risk  that the  applicant  may not in fact be
qualified for the loan requested.

If we do not adjust to rapid changes in the financial services industry,
our financial performance may suffer.

     In order to achieve a strong financial performance, we must be able to meet
the  changing  needs and demands of our  customers,  and respond to  competitive
pressure.  We operate in a highly competitive  environment,  and must be able to
respond  quickly to changes  in  regulation,  technology  and  product  delivery
systems,  consolidation among financial service providers, and changing economic
conditions.

Legislative, regulatory or accounting changes, or significant litigation, could
adversely impact our business.

     We are subject to extensive state and federal  regulation,  supervision and
legislation.  These laws and  regulations  change  from time to time,  and these
changes may negatively impact us. Actions by regulatory  agencies or significant
litigation against us could cause us to devote time and resources to undertaking
a defense;  violations of law or regulations may result in penalties that affect
us and our shareholders.  Additionally,  accounting standard setters,  including
the Financial  Accounting  Standards  Board ("FASB"),  SEC and other  regulatory
bodies, may change the financial  accounting and reporting standards  applicable
to the preparation of our Consolidated  Financial Statements.  These changes can
materially  impact how we record and report our financial  condition and results
of  operations.  In some  cases,  we could be required to apply a new or revised
standard  retroactively,  resulting in the restatement of prior period financial
statements.




We are exposed to operational risk.

     We are  exposed to  operational  risk,  including  risk to our  reputation,
compliance  issues,  the risk of fraud or theft  by  employees  or  others,  and
operational errors,  including errors resulting from faulty or disabled computer
or telecommunications systems.

     We are exposed to risk to our  reputation,  which can result from actual or
alleged  conduct  in  a  number  of  activities,  including  lending  practices,
corporate  governance and actions taken in response by government  regulators or
consumer  groups.  Damage to our reputation can adversely  affect our ability to
attract and keep customers and employees.

     We are dependent on data processing systems, including third-party systems,
to record and  process  transactions.  This  exposes us to the risk that  system
flaws or tampering or  manipulation  of those systems will result in losses.  We
may be subject to disruptions of our systems arising from events that are beyond
our  control  (such as  computer  viruses or  electrical  or  telecommunications
outages),  which  may  cause  disruption  of  service  and  financial  losses or
liability.  We are also  exposed to the risk that our  providers of services may
default  on  their  contractual  obligations  and to the  risk  that  our or our
providers' continuity and data security systems are inadequate.

Changes in interest rates could affect our income.

     Our income depends to a great extent on the difference between the interest
rates earned on interest-earning assets such as loans and investment securities,
and the interest rates paid on interest-bearing liabilities such as deposits and
borrowings.  These rates are  sensitive  to factors that are beyond our control,
including general economic  conditions and the policies of various  governmental
and regulatory agencies including the Federal Reserve Board. Changes in monetary
policy,  including  changes in interest rates, will influence the origination of
loans, the prepayment of loans, and the volume of deposits.  The impact of these
changes may be greater if we do not effectively manage the relative  sensitivity
of its assets and liabilities to changes in market interest rates.

     To some  extent,  we are  reliant  on the FHLB as a funding  source for our
operations.  The FHLB is  subject to  regulation  and other  factors  beyond our
control.  These factors may  adversely  affect the  availability  and pricing of
advances to members such as the Bank.

The preparation of our financial statements requires the use of estimates that
may vary from actual results.

     The  preparation of  consolidated  financial  statements in conformity with
accounting  principles  generally  accepted  in the  United  States  of  America
requires  management  to make  significant  estimates  that affect the financial
statements. One of our most critical estimates is the level of the allowance for
loan losses.  Due to the inherent nature of these  estimates,  we cannot provide
absolute  assurance  that we will not  significantly  increase the allowance for
loan losses and/or  sustain loan losses that are  significantly  higher than the
provided allowance.

Our stock price is volatile.

     Our stock price has been  volatile in the past,  and several  factors could
cause the price to fluctuate  substantially in the future. These factors include
changes  in  earnings;  business  developments;   circumstances  affecting  peer
companies in the financial services industry,  as well as trends and concerns in
the  industry in general.  Our stock price may  fluctuate  significantly  in the
future,  and these  fluctuations  may be unrelated to our  performance.  General
market price declines or market  volatility in the future could adversely affect
the  price  of our  common  stock,  and  the  current  market  price  may not be
indicative of future market prices.

      Also see "Management's Discussion & Analysis - Risk and Uncertainties".

ITEM 1B. -- UNRESOLVED STAFF COMMENTS

      None.

ITEM 2. -- PROPERTIES

     At December  31,  2006,  we owned the building and the land for nine of our
branch  offices,  owned the  building  but  leased  the land for two  additional
offices,  and leased our remaining offices.  Properties leased by us include our
corporate and  executive  offices  located in an office tower in downtown  Santa
Monica,  a general  services  and banking  operations  office  building in Santa
Monica  and  a  residential  lending  operations  office  in  Los  Angeles.  For
information  concerning  rental  obligations,   see  Note  6  of  the  Notes  to
Consolidated Financial Statements.

ITEM 3. -- LEGAL PROCEEDINGS

     We are  involved as a  plaintiff  or  defendant  in various  legal  actions
incident  to our  business,  none of which  are  believed  by  management  to be
material to us.

ITEM 4. -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      None.

                                     PART II

ITEM 5. -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     (a) Market  Information.  Our common  stock is traded on the New York Stock
Exchange ("NYSE") under the symbol "FED".  Included in "Management's  Discussion
and Analysis of  Consolidated  Balance  Sheets and  Consolidated  Statements  of
Income" is a table  representing  the range of high and low stock prices for our
common stock for each quarterly period for the last five years.

     (b)  Holders.  As of February  13,  2007,  16,689,358  shares of our common
stock,  representing  approximately 592 stockholders were on record.  This total
does not  include  the number of  stockholders  whose  shares are held in street
name.

     (c) Dividends. As a publicly traded company, we have no history of dividend
payments on our common  stock.  However,  we may in the future adopt a policy of
paying dividends,  depending on our net income,  financial  position and capital
requirements,  as well as  regulatory  restrictions,  tax  consequences  and our
ability  to  obtain  a  dividend  from  our  bank   subsidiary  for  payment  to
stockholders.  OTS regulations  limit amounts that the Bank can pay as a capital
distribution to the Company.  No such distribution may be made if the Bank's net
worth falls below regulatory requirements. See "--Business - Summary of Material
Legislation and Regulations--" for other regulatory  capital  distributions.  No
capital  distributions were made by the Bank to the Company during 2006 or 2005.
The Board of  Directors  of the Bank  declared  and paid a $30  million  capital
distribution to the Company during 2004 for the purpose of  repurchasing  shares
of our common stock.

     During 2005, we invested  $110 million in our bank  subsidiary as a capital
investment in order to help finance the bank subsidiary's growth and for general
corporate purposes. No investments were made during 2006.

     (d) Securities  authorized for issuance  under equity  compensation  plans.
Information  appearing on page 20 of the Proxy Statement is incorporated  herein
by reference.






































                                PERFORMANCE GRAPH

     Set forth below is a stock  performance  graph  comparing  the yearly total
return on our stock with (a) the cumulative  total return on stocks  included in
the  Industry  Group 419 - Savings and Loan Index,  prepared  and  published  by
Hemscott,  Inc., and (b) the cumulative  total return on stocks  included in the
NYSE Market Index,  prepared and published by The New York Stock  Exchange.  The
information provided is from December 31, 2001 through December 31, 2006.

     The graph  assumes  $100  invested  on  December  31,  2001 with  dividends
reinvested.










     It should be noted  that  this  graph  represents  historical  stock  price
performance  and  is  not  necessarily  indicative  of any  future  stock  price
performance.  We will not make or endorse any predictions as to the future stock
performance.

     THE  FOREGOING  PERFORMANCE  GRAPH  SHALL NOT BE  DEEMED  TO BE  SOLICITING
MATERIAL  OR TO BE  FILED  WITH  THE SEC OR  INCORPORATED  BY  REFERENCE  IN ANY
DOCUMENT SO FILED.
<PAGE>

ITEM 6. -- SELECTED FINANCIAL DATA

      Our selected financial data is presented below:

<TABLE>
                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
                  FIVE YEAR CONSOLIDATED SUMMARY OF OPERATIONS

                                   2006         2005         2004         2003         2002
                                 --------     --------     --------     --------     --------
                                        (Dollars in thousands, except per share data)
<S>                            <C>           <C>         <C>          <C>          <C>
For the Year Ended December 31:
  Interest income............  $  712,622    $  491,106  $  271,427   $  242,894   $  266,804
  Interest expense............    415,050       249,190     101,190       88,342      128,419
  Net interest income.........    297,572       241,916     170,237      154,552      138,385
  Provision for loan losses...     12,400        19,750       3,000           --           --
  Non-interest income.........     16,236         9,766      12,591        9,728       15,148
  Non-interest expense........     77,448        73,481      66,372       55,589       58,212
  Income before income taxes..    223,960        73,481     113,456      108,691       95,321
  Income taxes................     94,870        66,753      47,614       44,216       40,149
  Net income..................    129,090        91,698      65,842       64,475       55,172
Basic earnings per share......       7.79          5.55        3.95         3.80         3.22
Dilutive earnings per share...       7.65          5.43        3.85         3.70         3.15
End of Year:
  Loans receivable, net (1)...  8,517,452     9,681,133   6,837,945    4,374,112    3,769,235
  Mortgage-backed securities,
    at fair value.............    57,197         74,254      97,059      135,176      200,585
  Investment securities, at
  fair value....................  311,850       294,017     250,586      116,411      103,055
  Total assets................  9,295,587    10,456,949   7,468,983    4,825,022    4,253,729
  Deposits....................  5,889,881     4,371,657   3,761,165    2,538,398    2,527,026
  Borrowings..................  2,568,448     5,419,184   3,191,600    1,816,622    1,322,273
  Liabilities.................  8,590,872     9,886,110   6,991,509    4,388,455    3,882,088
  Stockholders' equity........    704,715       570,839     477,474      436,567      371,641
  Book value per share........      42.33         34.46       28.94        25.61        21.95
  Tangible book value per share     42.25         34.25       28.62        25.18        21.40
Selected Ratios:
  Return on average assets....       1.27%         1.01%       1.12%        1.43%        1.24%
  Return on average equity....      20.28%        17.64%      14.54%       15.97%       15.82%
  Ratio of non-performing
     assets to total assets...       0.21%         0.05%       0.07%        0.10%        0.17%
  Effective net spread........       2.97%         2.69%       2.99%        3.52%        3.18%
  Ratio of non-interest
   expense to average assets..       0.76%         0.81%       1.13%        1.24%        1.31%
Other Data:
Number of retail banking
  offices.....................         32            30          29           29           29
Number of lending only offices          6             6           4            2           2
</TABLE>

(1) Includes loans held for sale.

     Also see  summarized  results of operations on a quarterly  basis for 2006,
2005, and 2004 in Note 16 of the Notes to Consolidated Financial Statements.
















ITEM 7. -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED BALANCE SHEETS
           AND CONSOLIDATED STATEMENTS OF INCOME

                          CRITICAL ACCOUNTING POLICIES

     The  discussion and analysis of the balance sheets and statements of income
are based upon the 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 management to
make  estimates  and  judgments  that affect the reported  amounts of assets and
liabilities at the date of the financial  statements.  Actual results may differ
from these estimates under different assumptions or conditions.

     Accounting  for  the  allowances  for  loan  losses  involves   significant
judgments  and  assumptions  by  management  which has a material  impact on the
carrying  value of net loans  receivable.  We consider the  accounting  for loan
valuation  allowances  to be a critical  accounting  policy.  The  judgments and
assumptions  used by  management  are based on historical  experience  and other
factors,  which are believed  reasonable under the circumstances as described in
the "Business - Loan Loss Allowance" section.

     The majority of our  residential  loans are obtained  from  wholesale  loan
brokers.  Loan origination  costs for residential  loans obtained from wholesale
loan brokers will  generally  include fees paid to those  brokers,  resulting in
loan  origination  costs  exceeding  loan  fees  received.   These  excess  loan
origination  costs are  amortized  as an  adjustment  of loan yield based on the
expected  lives of the related  loans,  including an estimate of the  prepayment
speeds on the portfolio.

                             RISKS AND UNCERTAINTIES

     In the normal  course of business,  we encounter two  significant  types of
risk: economic risk and regulatory risk. We are also exposed to operational risk
which is discussed in Item 1A.-Risk Factors.

                                  ECONOMIC RISK

     There are three main components of economic risk:  credit risk,  collateral
risk, and market risk (which includes interest rate risk).

Credit Risk

     Credit risk is the risk of default in our loan  portfolio that results from
a borrower's  inability to make  contractually  required  payments.  See "--Loss
Provision--" and "--Non-performing Assets--".

     The  determination  of the  allowance  for loan losses and the valuation of
real estate collateral are based on estimates that are susceptible to changes in
the economic environment and market conditions. We recorded loan loss provisions
of $12.4  million,  $19.8 million and $3.0 million  during 2006,  2005 and 2004,
respectfully. A downward turn in the current economic climate could increase the
likelihood  of losses  due to  credit  risks.  This  could  create  the need for
additional loan loss provisions above those required for loan growth.

Collateral Risk

     Collateral  risk is the  risk  that  the  collateral  securing  our  loans,
primarily  real estate,  may decline in value. A downward turn in the California
real estate market could  increase the  likelihood of losses if the loan exceeds
the value of the collateral. This could create the need for additional loan loss
provisions.  Collateral risk may be increased by negative  amortization which is
added to the outstanding loan balance.

Market Risk

     Market risk is the risk of loss from  unfavorable  changes in market prices
and interest rates. Our market risk arises primarily from the interest rate risk
inherent  in its  lending  and deposit  taking  activities.  Should  there be an
economic or market downturn or if market interest rates increase  significantly,
we could  experience  a  material  increase  in the level of loan  defaults  and
charge-offs.

     A  sustained  flat or  inverted  interest  rate yield  curve may hamper our
ability  to  originate  adjustable  rate  loans  and may cause  additional  loan
prepayments.

     See  "--Asset-Liability  Management--" in  "--Quantitative  and Qualitative
Disclosures About Market Risk--" for additional  information  relating to market
risk.

                                 REGULATORY RISK

     Regulatory risk is the risk that  regulations will change or the regulators
will reach different  conclusions than we have regarding our financial position.
The OTS examines our financial  results,  capital adequacy,  asset quality,  and
other  performance  measures  every year. The OTS reviews the allowance for loan
losses and may require us to adjust the allowance based on information available
at the time of their  examination.  The OTS can also  require  that we  maintain
capital levels above the regulatory minimums.

                                   OTHER RISKS
Inflation

     Inflation  substantially  impacts the financial  position and operations of
financial intermediaries, such as banks and savings institutions. These entities
primarily  hold monetary  assets and  liabilities  and, as such,  can experience
significant  purchasing  power gains and losses over relatively short periods of
time. In addition,  interest rate changes during inflationary periods change the
amounts  and   composition   of  assets  and   liabilities   held  by  financial
intermediaries  and could  result in  regulatory  pressure  for  increasing  our
capital.

Pending Lawsuits

     We have been named as a defendant  in various  lawsuits,  none of which are
expected to have a materially adverse effect on us.

                                    OVERVIEW

     Our  results of  operations  are  primarily  affected  by our levels of net
interest income, provisions for loan losses,  non-interest income,  non-interest
expense, and income taxes. Our results are strongly influenced by the California
economy  in which we  operate  and the  direction  and level of  general  market
interest rates.

     Net income of $129.1  million or $7.65 per  diluted  share was  recorded in
2006, compared to net income of $91.7 million or $5.43 per diluted share in 2005
and net income of $65.8 million or $3.85 per diluted share in 2004.

     Net income grew from 2005 to 2006 due to  increased  net  interest  income,
higher loan prepayment fees and gains on the sale of loans.  The increase in net
income from 2004 to 2005 was due to increased net interest  income,  higher loan
prepayment  fees  and  increased  gains  on real  estate  held  for  investment.
Operating  expenses increased during 2006 compared to 2005 due to higher deposit
insurance and regulatory assessments,  increased occupancy costs associated with
new branches and normal salary increases.

     Consolidated  assets at the end of 2006 were $9.3 billion,  representing an
11% decrease  from $10.5 billion at the end of 2005 and a 24% increase from $7.5
billion at the end of 2004.  The decline in assets during 2006 and the growth in
assets  in 2005 are  directly  attributable  to the  level  of loan  origination
activity.  Loan  originations  decreased to $2.2 billion during 2006 compared to
$4.8 billion in 2005 and $3.9 billion in 2004.  Loan  originations  decreased in
2006 due to higher interest rates on adjustable rate mortgages, a cooling off of
the California real estate market and the impact resulting from implementing the
Interagency   Guidance  on   Non-Traditional   Mortgage   Product  Risks.   Loan
originations  increased  during 2005 because we increased  the number of account
executives and increased our Northern California loan originations.

     We recorded loan loss  provisions of $12.4 million,  $19.8 million and $3.0
million  during  2006,  2005  and  2004,  respectfully.  We  recorded  net  loan
charge-offs   of  $190   thousand  and  $1.4  million   during  2006  and  2005,
respectively. We recorded net loan recoveries of $437 thousand during 2004.

     Certain of our key financial ratios are presented below:
<TABLE>
                                         Year Ended December 31,
                                      -----------------------------
                                                            Average
                                     Return on  Return on  Equity to
                                      Average    Average    Average
                                       Assets    Equity     Assets
                                      --------   --------   --------
<S>                                      <C>      <C>        <C>
2006..............................       1.27%    20.28%     6.28%
2005..............................       1.01     17.64      5.72
2004..............................       1.12     14.54      7.69
2003..............................       1.43     15.97      8.98
2002..............................       1.24     15.82      7.83
</TABLE>

     Non-performing  assets  (primarily loans 90 days past due or in foreclosure
plus  foreclosed  real  estate)  were $19.6  million or 0.21% of total assets at
December  31, 2006  compared to $5.0 million or .05% of total assets at December
31, 2005 and $5.0 million or 0.07% of total assets at December 31, 2004. The low
level of  non-performing  assets over the last several years is  attributable to
the relative  strength of the California  real estate market  resulting in lower
balance of delinquent loans. See --"Non-Performing Assets--".

     At December 31, 2006 our regulatory risk-based capital ratio was 17.53% and
our tangible and core capital ratios were 8.49%.  We met the regulatory  capital
standards  necessary to be deemed  "well-capitalized"  at December 31, 2006. See
--"Capital Requirements--".

     As of February 26, 2007,  1,327,779 shares of our stock remain eligible for
repurchase under our authorized repurchase program.  During the first two months
of 2007,  we  repurchased  144,300  shares of our stock at an  average  price of
$63.10.  We did  not  repurchase  any of our  stock  in  2006  or  2005,  and we
repurchased 696,900 shares of our stock during 2004.

                              COMPONENTS OF INCOME
Net Interest Income

     Net  interest  income is the primary  component  of our  income.  The chief
determinants of net interest  income are the dollar amounts of  interest-earning
assets and  interest-bearing  liabilities  and the interest rates earned or paid
thereon. The greater the excess of average  interest-earning assets over average
interest-bearing  liabilities,  the more  beneficial  the impact on net interest
income.   The   excess  of  average   interest-earning   assets   over   average
interest-bearing liabilities was $590.2 million in 2006, $461.7 million in 2005,
and $399.8 million in 2004.

     During  2006,  we  adopted  a  change  in  financial   reporting   practice
implemented by the OTS to classify  prepayment fees and late charges as interest
income rather than non-interest income. The computations for previous years were
updated to include these fees with interest income.  This change results in loan
prepayment  fees being  classified in the same category as the  amortization  of
deferred  origination costs, which were always recorded in interest income. Loan
prepayment  fees grew to $30.4 million in 2006 compared to $20.5 million in 2005
and $8.0 million in 2004 because a greater number of loans subject to prepayment
fees  were  paid off by  borrowers.  Real  estate  loans  with  prepayment  fees
represented  93.0%,  94.8%,  and 86.6% of loans  originated  during December 31,
2006, 2005, and 2004, respectively.

     To conform to  industry  practice,  starting  in 2006,  we began  including
Federal  Home Loan  Bank  stock  dividends  in the  computation  of the yield on
investments and  interest-earning  assets.  The  computations for previous years
were also updated. FHLB stock dividends were $9.5 million, $7.5 million and $4.5
million for 2006, 2005 and 2004,  respectively.  The average yield on FHLB stock
was 5.12%, 4.40% and 4.01% in 2006, 2005 and 2004, respectively.

 During the  fourth  quarter of 2006,  we changed  our  practice  for  recording
      dividend  income on Federal Home Loan Bank stock to recognize  income when
      the final dividend amount is declared.  The accrual at the end of 2005 was
      reversed against  retained  earnings on January 1, 2006 in accordance with
      SEC  Staff  Accounting  Bulletin  No.  108 (SAB  108) and no  accrual  was
      recorded at the end of 2006.  If we had  continued  to follow our previous
      practice for recording  dividends on FHLB stock,  interest on  investments
      would have been $613 thousand lower in 2006.

     The following  table sets forth the components of  interest-earning  assets
and liabilities,  the excess of  interest-earning  assets over  interest-bearing
liabilities,  the yields  earned and rates paid and net interest  income for the
periods indicated:
<TABLE>
                                                              Year Ended December 31,
                                                      ------------------------------------
                                                         2006         2005         2004
                                                      ----------   ----------   ----------
                                                         (Dollars in thousands)
<S>                                                 <C>          <C>          <C>

Average loans (1) ............................       $ 9,427,915  $ 8,509,250  $ 5,210,220
Average investment securities.................           576,878      483,565      475,873
                                                      ----------   ----------   ----------
Average interest-earning assets...............        10,004,793    8,992,815    5,686,093
                                                      ----------   ----------   ----------

Average deposits..............................         5,425,751    4,078,785    2,968,757
Average borrowings............................         3,988,806    4,452,325    2,317,518
                                                      ----------   ----------   ----------
Average interest-bearing liabilities..........         9,414,557    8,531,110    5,286,275
                                                      ----------   ----------   ----------
Excess of interest-earning assets over
  interest-bearing liabilities................       $   590,236  $   461,705  $   399,818
                                                      ==========   ==========   ==========

Yields earned on average interest-earning assets            7.12%        5.46%        4.77%
Rates paid on average interest-bearing
  liabilities.................................              4.41         2.92         1.91
Interest rate spread..........................              2.71         2.54         2.86
Effective net spread (2)......................              2.97         2.69         2.99

Interest on loans.............................       $   682,716  $   471,725  $   256,597
Interest and dividends on investments.........            29,906       19,381       14,830
                                                      ----------   ----------   ----------
  Total interest income.......................           712,622      491,106      271,427
Interest on deposits..........................           220,932       97,857       42,159
Interest on borrowings........................           194,118      151,333       59,031
                                                      ----------   ----------   ----------
  Total interest expense......................           415,050      249,190      101,190
                                                      ----------   ----------   ----------
Net interest income...........................       $   297,572  $   241,916  $   170,237
                                                      ==========   ==========   ==========
</TABLE>

 (1) Non-accrual  loans  are  included  in the  average  dollar  amount of loans
     outstanding.  However,  no income is included for the period that each such
     loan was on non-accrual status.
 (2) The  effective  net spread is a  fraction,  the  numerator  of which is net
     interest  income and the  denominator of which is the average dollar amount
     of interest-earning assets.
<PAGE>
     Our net  interest  income is impacted  by a time lag before  changes in the
cost of funds can be  passed  along to  monthly  adjustable  rate loan  clients.
Savings and borrowing costs adjust to market rates quickly while it takes two to
three months for loan yields to adjust. This time lag decreases our net interest
income  during  periods of rising  interest  rates.  The  reverse is true during
periods of declining  interest rates.  See  "--Asset-Liability  Management--" in
"--Quantitative  and  Qualitative  Disclosures  About Market Risk--" for further
discussion.

     The Federal  Reserve  increased  interest rates four times during the first
half of 2006,  but no changes have been made since June 29,  2006.  As a result,
due to the time lag mentioned  above, our loan and investment rates continued to
increase  during the last half of 2006 while our  deposit  and  borrowing  rates
stayed  approximately  the same.  Our  interest  rate spread  increased by 0.17%
during  2006  based on a 1.66%  increase  in the yield on loans and  investments
while our cost of funds increased by 1.49%.

     The table below sets forth  certain  information  regarding  changes in our
interest  income  and  interest  expense  for 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
(changes in average  balance  multiplied  by old rate) and (ii) changes in rates
(changes in rate multiplied by prior year average balance):
<TABLE>

                                    Year Ended December 31, 2006    Year Ended December 31, 2005
                                               Versus                           Versus
                                          December 31, 2005               December 31, 2004
                                   ------------------------------   ------------------------------
                                           Change Due To                   Change Due To
                                   ------------------------------   ------------------------------
                                    Volume      Rate       Total      Volume     Rate       Total
                                   --------   --------   --------   --------   --------   --------
                                                              (In thousands)
<S>                              <C>        <C>        <C>        <C>        <C>        <C>

Interest Income:
Loans..........................   $  54,912  $ 156,079  $ 210,991  $ 179,684  $  35,444  $ 215,128
Investments....................       4,190      6,335     10,525        243      4,308      4,551
                                   --------   --------   --------   --------   --------   --------
    Total interest income......      59,102    162,414    221,516    179,927     39,752    219,679
                                   --------   --------   --------   --------   --------   --------
Interest Expense:
Deposits.......................      39,588     83,487    123,075     19,573     36,125     55,698
Borrowings.....................     (17,104)    59,889     42,785     67,696     24,606     92,302
                                   --------   --------   --------   --------   --------   --------
    Total interest expense.....      22,484    143,376    165,860     87,269     60,731    148,000
                                   --------   --------   --------   --------   --------   --------
   Change in net interest income  $  36,618  $  19,038  $  55,656  $  92,658  $ (20,979) $  71,679
                                   ========   ========   ========   ========   ========   ========

      Note: Changes in rate/volume (change in rate multiplied by the change in average volume) have been allocated to the
            change in rate or the change in volume based upon the respective percentages of the combined totals.
</TABLE>
<TABLE>
                                                               Interest Rate Spreads and Effective Net Spreads
                                                                          Year Ended December 31,
                                            ---------------------------------------------------------------------------------------
                                                 2006             2005              2004              2003              2002
                                            --------------   ---------------   ---------------   ---------------   ---------------
                                            During  End of   During   End of   During   End of   During   End of   During   End of
                                            Period  Period   Period   Period   Period   Period   Period   Period   Period   Period
                                            ------  ------   ------   ------   ------   ------   ------   ------   ------   ------
<S>                                       <C>     <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>
Weighted average yield on loans...........    7.24%   8.13%    5.54%    6.60%    4.92%    5.02%    5.76%    5.14%    6.40%    6.08%

Weighted average yield on investments.....    5.18    4.77     4.01     4.28     3.12     3.07     3.09     3.18     4.06     4.42

Weighted average yield on all
  interest-earning assets.................    7.12    7.91     5.46     6.46     4.77     4.88     5.54     4.99     6.13     5.93

Weighted average rate paid on deposits....    4.07    4.44     2.40     3.00     1.42     1.65     1.56     1.29     2.41     1.98

Weighted average rate paid on borrowings
  and FHLB advances.......................    4.87    5.37     3.40     4.19     2.55     2.57     3.22     2.76     4.45     3.63

Weighted average rate paid on all
  interest-bearing liabilities............    4.41    4.72     2.92     3.65     1.91     2.06     2.19     1.90     3.18     2.54


Interest rate spread (1)..................    2.71    3.19     2.54     2.81     2.86     2.82     3.35     3.09     2.95     3.39

Effective net spread (2)..................    2.97             2.69              2.99              3.52              3.18

(1) Weighted average yield on all interest-earning assets less weighted average rate paid on all interest-bearing liabilities.
(2) Net interest income divided by average interest-earning assets.
</TABLE>


Loss Provision

     We recorded loan loss  provisions of $12.4 million,  $19.8 million and $3.0
million during 2006,  2005 and 2004,  respectively.  Non-performing  assets were
$19.6 million at December 31, 2006 compared to $5.0 million at both December 31,
2005 and 2004. We have a policy of providing for general  valuation  allowances,
unallocated  to any  specific  loan,  but  available  to offset any loan  losses
inherent in the loan  portolio  at the balance  sheet  date.  The  allowance  is
maintained  at an amount that we believe to be adequate to cover  estimable  and
probable loan  losses.We also maintain  valuation  allowances for impaired loans
and  loans  sold  with  recourse  when  needed.  See  "--Business  -  Loan  Loss
Allowance--".  We perform  regular  risk  assessments  of our loan  portfolio to
maintain appropriate valuation  allowances.  Additional loan loss provisions may
be required to the extent  that  charge-  offs are  recorded  against  valuation
allowances for impaired loans or the general valuation allowance.

     We recorded  net loan  charge-offs  of $190  thousand  during 2006 and $1.4
million  during 2005.  There were net loan  recoveries of $437  thousand  during
2004. The  charge-offs  during 2006 and 2005  primarily  resulted from losses on
business loans not secured by real estate.  The recoveries  during 2004 resulted
from cash payments by borrowers on loans that had been previously charged-off.

Non-interest Income

     Loan  servicing  and other fees were $2.6 million in 2006  compared to $1.3
million in 2005 and $840  thousand in 2004.  The increases in both 2006 compared
to 2005 and 2005  compared to 2004 were due to increases in appraisal fee income
and brokered loan fees.

     Retail  office  fees  increased  to $6.6  million in 2006  compared to $5.8
million in 2005 and $5.6 million in 2004. The increases in 2006 compared to 2005
and 2005 compared to 2004 resulted from increases in overdraft  service fees and
the implementation of an unavailable funds fee.

     Gain on sale of loans was $6.2 million in 2006,  $125  thousand in 2005 and
$5.4 million in 2004.  Loans sold were $481.6 million in 2006,  $12.8 million in
2005 and $3.3  million in 2004.  The $5.4  million  gain  recorded  during  2004
resulted  from the  reversal  of the  repurchase  liability  for loans sold with
recourse.  Loans sold vary based on the  attractiveness  of our adjustable  rate
loan programs to borrowers  compared to fixed rate and other loans programs.  In
situations  when  fixed  rate  loans or  adjustable  rate  loans  that we do not
originate  for our  portfolio  are  more  attractive  to  borrowers,  we tend to
originate  the  loans  for  sale to  other  investors.  The  elimination  of the
repurchase  liability  for loans sold with  recourse  reflects the fact that the
portfolio  of  loans  sold  with  recourse  has  been  experiencing  significant
pay-offs, and has had better credit experience than previously estimated.  Loans
sold with recourse were originated  prior to 1990. We do not expect to incur any
future losses on loans sold with recourse.

     Real estate  operations  resulted in a net loss of $14 thousand during 2006
compared  to  gains  of  $2.0  million  and  $308  thousand  in 2005  and  2004,
respectively.  The loss reported  during 2006 resulted from  write-downs of real
estate owned due to valuation  adjustments.  The gains recorded  during 2005 and
2004 resulted  from the sale of properties  acquired in settlement of judgments.
Real estate  operations also include gain on sale of foreclosed  properties,  if
any, operational income and expense during the holding period, and recoveries of
prior losses on real estate sold.

     Other operating  income increased to $842 thousand in 2006 compared to $499
thousand in 2005 and $370  thousand in 2004.  The  increases in 2006 compared to
2005 and 2005  compared to 2004 were  primarily  due to increases in  investment
services commission income.

Non-interest Expense

     The ratio of  non-interest  expense to average  total  assets was 0.76% for
2006, 0.81% for 2005 and 1.13% for 2004. The ratios decreased during each of the
last three  years due to  increases  in average  total  assets for those  years.
Non-interest  expense increased during 2006 compared to 2005 primarily due to an
increase in OTS assessments and an increase in FDIC deposit insurance  premiums.
Non-interest  expense  increased  during 2005 and 2004 due to  additional  costs
associated with loan originations.  Non-interest expense in 2004 included higher
legal costs compared to 2005.

     Salary and benefit costs  increased 2% in 2006  compared to 2005  primarily
due to stock option expense of $1.9 million which we recorded for the first time
in 2006 as a result of our  implementation of Statement of Financial  Accounting
Standards No. 123R.  Also,  incentive  costs  decreased 38% due to a decrease in
loan fundings and salary costs increased by 4% due to normal salary adjustments.
Salary and benefit costs increased 10% in 2005 compared to 2004 primarily due to
higher  compensation  and  incentive  costs due to our  significant  loan growth
during 2005.  These higher costs were offset by lower profit  sharing costs as a
result of a decreased contribution to our Employee Stock Ownership Plan.

     Occupancy expense increased 10% in 2006 compared to 2005 due to the opening
of two new branches during the year, additional repairs and remodels at existing
branches and increased  security costs.  Occupancy expense increased 12% in 2005
compared  to 2004  due to the  continued  expansion  of our  loan  divisions  in
Southern and Northern California.

     Other  operating costs increased 9% in 2006 compared to 2005 due to an $889
thousand increase in deposit  insurance  premiums and a $1.1 million increase in
OTS  assessments.  Other  operating costs increased 12% in 2005 compared to 2004
due to higher operating  losses at the retail  branches,  higher OTS assessments
and  increased  audit  fees.
<PAGE>
     The following table details the components of non-interest  expense for the
periods indicated:
<TABLE>
                                                    Non-Interest Expense
                                                   Year Ended December 31,
                                    ----------------------------------------------------
                                      2006       2005       2004       2003       2002
                                    --------   --------   --------   --------   --------
                                                   (Dollars in thousands)
<S>                               <C>        <C>        <C>        <C>        <C>
Salaries and Employee Benefits:
     Salaries....................  $  28,890  $  27,850  $  25,992  $  21,565  $  20,984
     Incentive compensation......      4,137      6,719      4,217      3,480      3,122
     Payroll taxes...............      2,598      2,660      2,334      1,883      1,827
     Stock option expense........      1,880         --         --         --         --
     Employee benefit insurance..      1,798      1,817      1,629      1,016      1,386
     Bonus compensation..........      2,296      2,057      1,500      1,275      1,500
     Profit sharing..............      1,548      1,545      2,530      2,030      2,024
     SERP........................      1,526      1,476      1,381      1,287      1,161
     401(k)......................        652        416        500        540        310
     Other salaries and benefits.        644        521        824        408        313
                                    --------   --------   --------   --------   --------
                                      45,969     45,061     40,907     33,484     32,627
                                    --------   --------   --------   --------   --------
Occupancy:
     Rent........................      5,303      5,148      4,836      4,690      4,673
     Equipment...................      2,230      2,184      1,826      1,378      1,836
     Maintenance costs...........      1,163        912        861        904        879
     Other occupancy.............      1,991      1,482      1,168      1,199      1,169
                                    --------   --------   --------   --------   --------
                                      10,687      9,726      8,691      8,171      8,557
                                    --------   --------   --------   --------   --------
Other Operating Expense:
     Insurance...................        803        896        746        648        690
     Amortization of core deposit
       intangible................      1,995      1,995      1,995      1,995      1,962
     Data processing.............      2,743      2,596      2,587      2,905      2,838
     Contributions...............        494        492        502        409        363
     Professional services.......        524        660        292        201        195
     Legal expenses..............      1,467      1,381      1,686      1,103      2,888
     OTS assessments.............      2,260      1,125        751        667        708
     Federal deposit insurance
       premiums..................      1,393        504        388        394        438
     Telephone...................        563        844        775        569        582
     Office supplies.............      1,139        936        833        839        700
     Postage.....................        988        965        677        335        376
     Subscriptions...............        236        281        229        194        188
     Delivery....................        598        638        565        480        420
     Other contracted services...        991      1,052        820        583        514
     Uninsured losses............        628      1,111        651        185        368
     Other operating costs.......      2,722      2,464      2,572      2,112      2,420
                                    --------   --------   --------   --------   --------
                                      19,544     17,940     16,069     13,619     15,650
                                    --------   --------   --------   --------   --------

Advertising......................      1,248        754        705        315      1,378
                                    --------   --------   --------   --------   --------
  Total.........................   $  77,448  $  73,481  $  66,372  $  55,589  $  58,212
                                    ========   ========   ========   ========   ========

Non-interest expense as
    % of average assets..........       0.76%      0.81%      1.13%      1.24%      1.31%
                                    ========   ========   ========   ========   ========
</TABLE>

                             BALANCE SHEET ANALYSIS

     Consolidated  assets were $9.3  billion,  $10.5 billion and $7.5 billion at
the end of 2006, 2005 and 2004, respectively. The 11% decrease from 2005 and the
24% increase  from 2004 are  attributable  to loan  origination  activity.  Loan
originations  totaled $2.2  billion in 2006,  down from $4.8 billion in 2005 and
$3.9 billion in 2004. Loan originations decreased in 2006 due to higher interest
rates on adjustable rate mortgages,  a cooling off of the California real estate
market and the impact resulting from  implementing  the Interagency  Guidance on
Non-Traditional  Mortgage  Product Risks.  Also, there was a reduction in demand
for adjustable  rate loans due to a rise in short term interest rates which made
the annual  percentage  rate of some  adjustable rate loans exceed that of fixed
rate loans. Principal repayments on loans totaled $2.8 billion during 2006, $2.0
billion during 2005, and $1.4 billion during 2004.

Real Estate Loan Portfolio

     At the end of 2006, 48% of our loans had adjustable interest rates based on
monthly  changes  in the CODI,  18% were  based on the 12MAT  Index and 29% were
based on the COFI Index. As part of our asset-liability  management strategy, we
have  maintained a high level of adjustable rate loans in our portfolio for over
twenty years. Loans tied to the COFI represented 57% and 9% of loan originations
during  2006 and 2005,  respectively.  Loans tied to CODI  comprised  6% of loan
originations  during  2006  and 76%  during  2005.  The  increase  in 2006  loan
originations based on COFI was due to customer  preference as the relative level
of the COFI  index  was  lower in 2006.  During  2005 and 2004,  we  focused  on
marketing  adjustable loans based on the CODI. We believe that the high level of
adjustable  rate mortgages will help insulate us from  fluctuations  in interest
rates,  notwithstanding  the two to three month time lag between a change in its
monthly  cost of  funds  and a  corresponding  change  in its loan  yields.  See
"--Asset - Liability Management--".

     There are varying periods for which our loan payments may be fixed, ranging
from one year to five years. See "-Business-Interest Rates, Terms and Fees-".

     Because AML  loan-to-value  ratios may increase above those  established at
the time of loan  origination due to negative  amortization,  when we do lend in
excess of 80% of the  appraised  value,  additional  fees and  higher  rates are
charged or we may require mortgage  insurance which reduces our loss exposure to
below 75%.  The amount of  negative  amortization  increases  during  periods of
rising short term interest rates. See "Business-Interest Rates, Terms and Fees".

     At December 31, 2006, 2005 and 2004, negative amortization, included in the
balance of loans  receivable,  totaled  $215.8  million,  $62.6 million and $5.5
million,  respectively.  Negative  amortization  has increased over the last two
years  primarily  due to  increasing  short-term  interest  rates and  borrowers
choosing to make less than a fully amortizing  payment.  The portfolio of single
family loans with a one-year fixed payment totaled $4.6 billion at both December
31, 2006 and  December  31,  2005 and $2.9  billion at December  31,  2004.  The
portfolio of single family loans with a  three-to-five  year fixed  payments was
$1.8  billion at December  31,  2006,  compared to $2.7  billion at December 31,
2005,  and $1.6  million  at  December  31,  2004.  Negative  amortization  as a
percentage  of all single  family loans with fixed  payment  periods in our loan
portfolio  totaled 3.44% at December 31, 2006,  0.86% at December 31, 2005,  and
0.12% at December 31, 2004.  Single family loans  comprised 88% of  originations
during 2006  compared  to 90% of  originations  in 2005 and 80% of  originations
during 2004.

     The following table summarizes loan originations and purchases by loan type
for the periods indicated:
<TABLE>
                                                             Loan Originations and
                                                             Purchases by Loan Type
                                                             Year ended December 31,
                                                          ----------------------------------
                                                            2006         2005         2004
                                                          ---------    ---------   ---------
                                                                (In thousands)
   <S>                                                  <C>         <C>         <C>
    Adjustable:
     12MAT............................................. $   502,990  $   672,230 $   988,123
     CODI..............................................     130,553    3,666,643   2,678,739
     COFI..............................................   1,259,875      443,259     109,331
     LIBOR.............................................          --           --       9,832
     Prime.............................................      39,332       40,341      70,691
                                                          ---------    ---------   ---------
                                                          1,932,750    4,822,473   3,856,716

     Fixed.............................................       5,016        1,510      19,609
     Hybrid............................................     267,504           --       4,484
                                                          ---------    ---------   ---------
        Total.......................................... $ 2,205,270  $ 4,823,983 $ 3,880,809
                                                          =========    =========   =========
</TABLE>
     The  following  table  details  loan  originations  and loan  purchases  by
property type for the periods indicated:
<TABLE>
                                                  Loan Originations and Purchases by Property Type
                                                               Year Ended December 31,
                                           -----------------------------------------------------------------
                                              2006           2005         2004         2003          2002
                                           ----------     ----------   ----------   ----------    ----------
                                                                     (In thousands)
<S>                                      <C>            <C>          <C>          <C>           <C>
Single family (one-to-four units).......  $ 1,929,686    $ 4,329,439  $ 3,095,010  $ 1,712,584   $   728,309
Multi-family............................      229,332        409,201      647,326      470,426       441,407
Commercial real estate..................       11,757         45,001       66,010       35,237        84,050
Commercial business loans...............       32,275         36,197       43,226       31,581        17,572
Other...................................        2,220          4,145       29,237       25,702        17,434
                                           ----------     ----------   ----------   ----------    ----------
Total...................................  $ 2,205,270    $ 4,823,983  $ 3,880,809  $ 2,275,530   $ 1,288,772
                                           ==========     ==========   ==========   ==========    ==========

      No loans were originated upon the sale of real estate owned during 2006, 2005 or 2004.
</TABLE>

     The following table summarizes  single family loan originations by borrower
documentation type for the periods indicated:

<TABLE>
                                                                             Loan originations by
                                                                         Borrower Documentation Type
                                                                           Year ended December 31,
                                                                       -------------------------------------
                                                                          2006         2005          2004
                                                                       ----------   ----------    ----------
                                                                                  (In thousands)
    <S>                                                              <C>          <C>           <C>
     Verified Income/Verified Asset.................................  $   356,758  $   664,807   $   526,582
     Stated Income/Verified Asset...................................      639,756    1,462,935       969,333
     Stated Income/Stated Asset.....................................      568,723    1,634,148     1,282,999
     No Income/No Asset.............................................      364,449      567,549       316,096
                                                                       ----------   ----------    ----------
     Total..........................................................  $ 1,929,686  $ 4,329,439   $ 3,095,010
                                                                       ==========   ==========    ==========
</TABLE>

     On Verified  Income/Verified  Asset loans  (VIVA),  the  borrower  includes
information  on his/her income and assets,  which is then  verified.  Loans that
allow for a reduced  level of  documentation  at  origination  are a significant
percentage of single family loans originated in our market areas. On SISA loans,
the borrower includes  information on his/her level of income and assets that is
not subject to verification. On SIVA loans, the borrower includes information on
his/her  level of income and that  information  is not  subject to  verification
while  information  provided by the borrower on his/her assets is verified.  For
NINA loans, the borrower is not required to submit  information on his/her level
of income or assets.  However,  all single family loans,  including  NINA loans,
require credit reports and  appraisals.  All  multi-family  loans and other real
estate loans require complete and customary documentation from the borrowers.

Loan Composition

     Loans based on the security of single family properties (one-to-four units)
comprise the largest  category of our loan  portfolio.  The loan  portfolio also
includes loans secured by multi-family and commercial and industrial properties.
At December  31,  2006,  75% of the loan  portfolio  consisted of first liens on
single family  properties while first liens on multi-family  properties were 21%
of the portfolio, and first liens on commercial properties represented 2% of the
portfolio.  Commercial business loans,  construction  loans,  consumer loans and
other loans  comprised  the  remaining 2% of the loan  portfolio at December 31,
2006.

     The following table sets forth the composition of our portfolio of loans at
the dates indicated:
<TABLE>
                                                                      December 31,
                                           -----------------------------------------------------------------
                                              2006           2005        2004          2003          2002
                                           ----------     ----------   ----------   ----------    ----------
                                                                     (In thousands)
<S>                                      <C>            <C>          <C>          <C>           <C>
REAL ESTATE LOANS
 First trust deed residential loans:
   One-to-four units....................  $ 6,444,225    $ 7,361,476  $ 4,585,962  $ 2,456,971   $ 1,723,690
   Five or more units...................    1,811,966      1,942,021    1,825,564    1,547,771     1,646,430
                                           ----------     ----------   ----------   ----------    ----------
       Residential loans................    8,256,191      9,303,497    6,411,526    4,004,742     3,370,120

OTHER REAL ESTATE LOANS
   Commercial and industrial............      196,569        257,560      324,805      345,273       419,273
   Construction.........................           --          4,910       20,902        9,053         6,927
   Land.................................           --             --           --           --           203
   Second trust deeds...................        3,392          6,505        5,466        7,281         5,965
                                           ----------     ----------   ----------   ----------    ----------
   Real estate loans....................    8,456,152      9,572,472    6,762,699    4,366,349     3,802,488

 NON-REAL ESTATE LOANS
   Deposit accounts.....................          825            595          491          649         1,185
   Commercial business loans............       83,759         80,186       58,869       34,424        19,582
   Consumer loans.......................       44,528         57,399       60,677       49,738        35,395
                                           ----------     ----------   ----------   ----------    ----------
   Loans receivable.....................    8,585,264      9,710,652    6,882,736    4,451,160     3,858,650

LESS:
   General valuation allowance..........      109,768         97,558       78,675       75,238        75,223
   Impaired loan valuation allowances...           --             --          496          496           496
   Deferred loan origination (costs)fees      (41,956)       (68,039)     (34,380)       1,314        13,696
                                           ----------     ----------   ----------   ----------    ----------
   Net loans receivable (1).............  $ 8,517,452    $ 9,681,133  $ 6,837,945  $ 4,374,112   $ 3,769,235
                                           ==========     ==========   ==========   ==========    ==========
   (1) Includes loans held-for-sale.
</TABLE>
<PAGE>
     The  following  table  shows the  composition  of our  single  family  loan
portfolio by borrower documentation type at the dates indicated:

Documentation Type:                       December 31,   December 31,
                                              2006           2005
                                           ----------     ----------
                                                (In thousands)

   Verified Income/Verified Asset         $ 1,322,883    $ 1,444,640
   Stated Income/Verified Asset             2,120,962      2,361,778
   Stated Income/Stated Asset               2,251,179      2,777,116
   No Income/No Asset                         749,201        777,942
                                           ----------     ----------
       Total                              $ 6,444,225    $ 7,361,476
                                           ==========     =========

     We attempt to mitigate the inherent  risk of making  reduced  documentation
loans  by  evaluating  the  other  characteristics  of the  loans,  such  as the
creditworthiness  of the  borrower  and the  loan-to-value  ratio  based  on the
collateral's  appraised value at the origination date. The underwriting of these
loans is based on the  borrower's  credit  score and  credit  history,  intended
occupancy,  reasonableness of stated income and the value of the collateral. The
creditworthiness  of the  borrower  is  based  on the  borrower's  credit  score
("FICO"),  prior use of and repayment of credit, job history and stability.  The
average  borrower  FICO score and average  loan-to-value  ratio on single family
loan originations were 714 and 73%,  respectively,  in 2006, compared to 715 and
74%, respectively, in 2005.

     The  following  table  shows the  composition  of our  single  family  loan
portfolio at the dates indicated by original loan-to-value ratio:

Original LTV                  December 31,   December 31,
Ratio:                            2006           2005
                               ----------     ----------
                                    (In thousands)

<65%                          $ 1,230,750    $ 1,416,329

65-70%                            722,380        837,964

70-75%                            802,885        931,461

75-80%                          3,104,381      3,349,640

80-85%                            111,678        162,115

85-90%                            391,128        544,825

>90%                               81,023        119,142
                               ----------     ----------
Total                         $ 6,444,225    $7,361,476
                               ==========     ==========

       The following table shows the composition of our single family loan
portfolio at the dates indicated by the FICO score of the borrower at
origination:

FICO Score at                 December 31,   December 31,
Origination                       2006           2005
                              -----------     ----------
                                    (In thousands)
<620                          $    36,428    $    53,059
620-659                           576,947        644,412
660-719                         2,957,784      3,430,230
>720                            2,824,692      3,171,315
Not Available                      48,374         62,460
                               ----------     ----------
Total                         $ 6,444,225    $ 7,361,476
                               ==========     ==========

     Net  deferred  loan  origination  costs were $42.0  million at December 31,
2006, $68.0 million at December 31, 2005 and $34.4 million at December 31, 2004.
The changes in net deferred loan costs result from the volume of wholesale loans
originated during those years. Wholesale single family loans typically have loan
deferred  origination costs in excess of deferred loan origination income due to
commissions paid to mortgage loan brokers.

Loans Sold with Recourse

     Loans sold with  recourse  totaled  $53.2  million as of December 31, 2006,
$59.9 million as of December 31, 2005 and $76.3 million as of December 31, 2004.
Loans sold with  recourse  are  primarily  secured by  multi-family  properties.
Although no longer  owned by us, these loans are  evaluated  for the purposes of
measuring risk exposure for regulatory capital.
<PAGE>

     We also have full recourse on  multi-family  loans sold to FNMA in exchange
for  mortgage-backed  securities during 2005. Due to the recourse  provisions of
the sale, these mortgage-backed  securities continue to be accounted for as part
of our loan portfolio  pursuant to Statement of Financial  Accounting  Standards
No. 140, Accounting for and Servicing of Financial Assets and Extinguishments of
Liabilities.  The  outstanding  balance of these loans was $918.6  million as of
December 31, 2006 and $1.1 billion at December 31, 2005.  These  mortgage-backed
securities are being used in collateralized borrowing arrangements.

                                  ASSET QUALITY

 Asset Quality Ratios

     The following  table sets forth  certain asset quality  ratios at the dates
indicated:
<TABLE>

                                                                 December 31,
                                           -----------------------------------------------------
                                              2006       2005      2004       2003       2002
                                           ---------  ---------  ---------  ---------  ---------
<S>                                        <C>        <C>        <C>        <C>        <C>
Non-performing loans to gross
   loans receivable (1).................       0.22%      0.05%      0.07%      0.08%      0.17%
Non-performing assets to
   total assets (2).....................       0.21%      0.05%      0.07%      0.10%      0.17%
Loan loss allowances to
   non-performing loans (3).............        593%     1,965%     1,588%     2,266%     1,126%
General loss allowances
   to gross loans receivable (4)........       1.28%      1.00%      1.15%      1.70%      1.96%
</TABLE>

(1)  Loans receivable are before deducting unrealized loan fees, the general
     valuation allowance and valuation allowances for impaired loans.
(2)  Non-performing assets are net of valuation allowances related to those
     assets.
(3)  Loan loss allowances, including the general valuation allowance and
     valuation allowances for impaired loans.
(4)  General valuation allowance plus the allowances for impaired loans as a
     percentage of loans receivable before deducting unrealized loan fees, the
     general valuation allowance and valuation allowances for impaired loans.

                              NON-PERFORMING ASSETS

     We define non-performing assets to include loans delinquent over 90 days or
in  foreclosure,  real estate  acquired in settlement of loans,  and other loans
less than 90 days delinquent but for which collectibility is questionable.

     The table below  details the  amounts of  non-performing  assets by type of
collateral. Also shown is the ratio of non-performing assets to total assets.

<TABLE>
                                                          Non-Performing Assets
                                                               December 31,
                              ------------------------------------------------------------------------------
                                   2006            2005            2004             2003            2002
                              -------------   -------------   -------------    -------------   -------------
                                $       %       $       %       $       %       $        %       $       %
                              ------  -----   ------  -----   ------  -----    ------  -----   ------  -----
                                                         (Dollars in thousands)
<S>                         <C>      <C>    <C>      <C>    <C>      <C>      <C>     <C>     <C>     <C>
Real estate owned:
Single family..............  $ 1,094     6%  $    --    --%  $    --    --%   $ 1,324    28%  $   519     7%
Multi-family...............       --    --        --    --        --    --         --    --        --    --
Less: general valuation
  allowance................       --    --        --    --        --    --         --    --      (200)   (2)
                              ------  -----   ------  -----   ------  -----    ------  -----   ------  -----
Total real estate owned....    1,094     6        --    --        --    --      1,324    28       319     5
Non-performing loans:
Single family..............   18,474    94     3,569    72     4,590    92      3,326    71     5,705    81
Multi-family...............       --    --        --    --       391     8         --    --     1,017    14
Commercial and industrial..       12    --     1,364    27        --    --         --    --        --    --
Other......................       11    --        33     1         4    --         16     1        --    --
                              ------  -----   ------  -----   ------  -----    ------  -----   ------  -----
Total non-performing loans.   18,497    94     4,966   100     4,985   100      3,342    72     6,722    95
                              ------  -----   ------  -----   ------  -----    ------  -----   ------  -----
Total......................  $19,591   100%  $ 4,966   100%  $ 4,985   100%   $ 4,666   100%  $ 7,041   100%
                              ======  =====   ======  =====   ======  =====    ======  =====   ======  =====
Ratio of non-perfomring
  assets to total assets...           0.21%           0.05%           0.07%            0.10%           0.17%
                                      =====           =====           =====            =====           =====
</TABLE>

     The low levels of non-performing  loans and real estate owned over the last
several  years is due to the strong  California  real estate market during those
years.

     Single  family  non-performing  loans are  primarily due to factors such as
unemployment  and  declining   personal  income.   Multi-family  and  commercial
non-performing  loans are attributable  primarily to factors such as declines in
occupancy  rates,  employment  rates and rental rates.  We actively  monitor the
status of all non-performing loans.
<PAGE>

     Impaired loans totaled $5.4 million, $3.0 million, and $1.4 million, net of
related  allowances of $0, $0 and $496  thousand as of December 31, 2006,  2005,
and 2004,  respectively.  See "--Business - Non-accrual,  Past Due, Impaired and
Restructured Loans--" for further discussion of impaired loans.

     Modified loans result  primarily from temporary  modifications of principal
and  interest   payments  or  an  extension  of  maturity  dates.   Under  these
arrangements,  loan  terms are  typically  reduced  to no less  than a  required
monthly  interest  payment.  Any loss of revenue under the modified  terms would
currently be  immaterial to us. If the borrower is unable to return to scheduled
principal  and  interest  payments  at  the  end  of  the  modification  period,
foreclosure  procedures  are  initiated,  or,  in  certain  circumstances,   the
modification period is extended.  As of December 31, 2006, we had modified loans
totaling  $1.8  million.  This compares with $2.0 million and $1.4 million as of
December 31, 2005 and December 31, 2004, respectively. No modified loans were 90
days or more delinquent as of December 31, 2006, 2005 or 2004.

                         CAPITAL RESOURCES AND LIQUIDITY

Liquidity Requirements

     As permitted by the OTS, we determine  the level of liquidity  required for
the safe and sound  operation of our business.  Our strategy is to keep cash and
liquid  investments at a modest level due to the  availability  of credit lines.
These credit lines are considered in our definition of available liquidity.  Our
liquidity policy requires that cash and cash equivalents, short-term investments
and unused  borrowing  capacity be  maintained  at a minimum level of 10% of our
liquidity base (defined as deposits and  borrowings due within one year).  As of
December 31, 2006,  liquidity-qualifying  balances  were 57.41% of our liquidity
base.

 External Sources of Funds

     External sources of funds include deposits,  loan sales,  advances from the
FHLB and  reverse  repurchase  agreements  ("reverse  repos").  For  purposes of
funding asset growth,  the source or sources of funds with the lowest total cost
for the desired term are generally  selected.  The  incremental  source of funds
used most often during 2006 was brokered deposits. The source of funds used most
often during 2005 and 2004 was FHLB advances.

     Deposits are accepted  from our  full-service  banking  branches,  internet
banking,  national  deposit  brokers  ("brokered  deposits")  and  telemarketing
sources. The cost of funds, operating margins and our net income associated with
brokered and  telemarketing  deposits are  generally  comparable  to the cost of
funds,  operating  margins and our net income  associated with branch  deposits,
FHLB borrowings and repurchase  agreements.  As the cost of each source of funds
fluctuates  from time to time,  based on market rates of interest  offered by us
and other depository  institutions,  we select funds from the lowest cost source
until the relative costs change. As the cost of funds, operating margins and net
income associated with each source of funds are generally comparable,  we do not
deem the  impact  of its use of any one of the  specific  sources  of funds at a
given time to be material.

     Deposits at full-service banking branches were $2.9 billion at December 31,
2006, $2.6 billion at December 31, 2005 and $2.5 billion at December 31, 2004.

     Deposits obtained from national  brokerage firms ("brokered  deposits") are
considered a source of funds  similar to a  borrowing.  In  evaluating  brokered
deposits as a source of funds, the cost of these deposits,  including commission
fees,  is compared to other  funding  sources.  We had $2.8  billion in brokered
deposits at  December  31,  2006,  $1.7  billion at  December  31, 2005 and $1.2
billion at December 31, 2004.  The  utilization of brokered  deposits  increased
during 2006 and 2005 because  they were less costly than other  sources of funds
on an "all-in" cost basis.

     Telemarketing  deposits  were  $177.4  million  at the end of  2006,  $78.0
million at the end of 2005 and $45.1 million at the end of 2004.  These deposits
are  normally  large  deposits  from  pension  plans,  managed  trusts and other
financial institutions.  The level of telemarketing deposits varies based on the
activity of  investors,  who are  typically  professional  money  managers.  The
availability  of  telemarketing  deposits also varies based on the rates offered
and the investors' perception of our creditworthiness.

     We began accepting  deposits  acquired through the internet in late 2005 by
posting our rates on internet  rate boards.  We accept  internet  deposits  from
every state except California.  These deposits totaled $48.2 million at December
31, 2006 and $2.4 million at December 31, 2005.

     Loan sales were $481.6 million  during 2006,  $12.8 million during 2005 and
$3.3 million during 2004. Loan sales increased during 2006 because we originated
and sold  adjustable  and  fixed  rate  loans  that do not  meet  the  financial
requirements for our loan portfolio. Loan sales during 2005 and 2004 were due to
the origination and sale of 30-year fixed rate products.

     FHLB advances were $1.5 billion at the end of 2006, $4.2 billion at the end
of 2005 and $3.0 billion at the end of 2004.  Borrowings from the FHLB decreased
during 2006 because  they were more costly than  brokered  deposits.  Borrowings
increased  during 2005 and 2004  because FHLB  advances  were used most often to
fund loan originations during those years.

     Reverse repurchase  agreements are short-term  borrowings secured by loans
and investment  securities.  These borrowings decreased to $978.4 million at the
end of 2006 from $1.2  billion at the end of 2005 and $187.0  million at the end
of 2004.  The  decrease  during  2006 was due to the  paydown of the  collateral
supporting the reverse repurchase agreements. The large increase in 2005 was due
to additional collateral created in a loan securitization with FNMA.

     We believe  that we have  sufficient  funds  available to fund current loan
origination  activity.  We have a credit  facility  with the FHLB in the form of
advances and lines of credit which allow  borrowings  of up to 60% of our assets
as computed for regulatory purposes.  At December 31, 2006, our unused borrowing
capacity at the FHLB was in excess of $4.0  billion.  Actual  advances  from the
FHLB totaled $1.5 billion at the end of 2006. Other sources of liquidity include
principal  and interest  payments on loans,  proceeds  from loan sales and other
borrowings,  such as  reverse  repurchase  transactions.  Historically,  we have
retained  a  significant   portion  of  maturing   deposits.   While  management
anticipates  that there may be some outflow of these  deposits upon maturity due
to the current  competitive  rate  environment,  they are not expected to have a
material impact on our long-term liquidity position.

     We completed  the placement of $100.0  million in unsecured  fixed/floating
rate senior  debentures  during 2005.  The first $50.0 million  transaction  was
completed in June of 2005 and is due in 2015. The  debentures  have a fixed rate
of 5.65% for the first five years and are adjustable  afterwards based on a rate
of 1.55% over the three-month  LIBOR.  The second $50.0 million  transaction was
completed in December of 2005 and is due in 2016.  The  debentures  have a fixed
rate of 6.23% for the first five years and are adjustable  afterwards based on a
rate of 1.55% over the three-month LIBOR. The debentures in each transaction are
redeemable at par after the first five years.  Negative  covenants  contained in
the indentures  governing the terms of these  debentures  generally  prohibit us
from  selling or  otherwise  disposing  of shares of voting stock of the Bank or
permitting  liens on the Bank's stock other than certain  permitted  liens.  The
indentures  also impose  certain  affirmative  covenants on us, none of which is
believed  to have a  material  adverse  effect on our  ability  to  operate  our
business.
     The table  below  details  the amounts of our  contractual  obligations  by
maturity at December 31, 2006.

<TABLE>
                                                            Payments due by period
                                       --------------------------------------------------------------
                                                                                            More than
                                         Total        1 year     1 - 3 years  3 - 5 years   5 years
                                       ----------   ----------   ----------   ----------   ----------
                                                               (In thousands)
<S>                                  <C>          <C>          <C>          <C>          <C>
Fixed-rate term certificates......... $ 4,374,523  $ 4,271,539  $    94,962  $     7,377  $       645
FHLB advances........................   1,490,000    1,455,000       15,000       20,000           --
Reverse repurchase agreements........     978,448      978,448           --           --           --
Senior debentures....................     100,000           --           --           --      100,000
Operating lease obligations..........      14,340        5,502        5,300        1,518        2,020
                                       ----------   ----------   ----------   ----------   ----------
Total................................ $ 6,957,311  $ 6,710,489  $   115,262  $    28,895  $   102,665
                                       ==========   ==========   ==========   ==========   ==========

</TABLE>

Internal Sources of Funds

     Internal  sources of funds include loan principal  payments,  loan payoffs,
and positive cash flows from operations. Principal payments were $2.8 billion in
2006  compared  to $2.0  billion  in 2005 and $1.4  billion  in 2004.  Principal
payments include both scheduled  principal pay downs and prepayments which are a
function of real estate activity and the general level of interest rates.

Capital Requirements

     Current OTS regulatory  capital standards require that we maintain tangible
capital of at least 1.5% of total assets,  core capital of 4.0% of total assets,
and  risk-based  capital  of 8.0% of total  risk-weighted  assets.  Among  other
things,   failure  to  comply  with  these  capital  standards  will  result  in
restrictions  on asset growth and necessitate the preparation of a capital plan,
subject to regulatory  approval.  Generally,  any institution  with a risk-based
capital  ratio in  excess of 10% and a core  capital  ratio  greater  than 5% is
considered "well-capitalized" for regulatory purposes. Institutions who maintain
this  capital  level  can  utilize  brokered   deposits  at  their   discretion.
Additionally,   if  they  achieve  a  sufficient  ranking  on  their  regulatory
examination, they may be assessed lower deposit insurance premiums.

     Management  presently  intends to maintain  its capital  position at levels
above those required by regulators to ensure  operating  flexibility  and growth
capacity  for  ourselves.   Our  capital  position  is  actively   monitored  by
management.   We  met   the   regulatory   capital   standards   to  be   deemed
"well-capitalized"  for purposes of the various  regulatory  measures of capital
including the prompt corrective action regulations.

     The following table summarizes the capital ratios of the "well-capitalized"
category and our regulatory capital position at December 31, 2006 as compared to
such ratios.  As indicated in the table,  our capital levels  exceeded the three
minimum capital ratios of the "well-capitalized" category:
<PAGE>
<TABLE>

                                     December 31, 2006
                                     Amount         %
                                   (Dollars in thousands)
                                    -------------------
<S>                               <C>         <C>

Bank's core capital..............  $ 788,611     8.49%
Core capital requirement.........    464,643     5.00%
                                    --------  ---------
   Excess core capital...........  $ 323,968     3.49%
                                    ========  =========

Bank's tier 1 risk-based capital.  $ 788,611    16.27%
Tier 1 risk-based capital
  requirement....................    290,893     6.00%
                                    --------  ---------
   Excess core capital...........  $ 497,718    10.27%
                                    ========  =========

Risk-based capital...............  $ 849,821    17.53%
Risk-based capital requirement...    484,822    10.00%
                                    --------  ---------
   Excess core capital...........  $ 364,999     7.53%
                                    ========  =========

</TABLE>


Recent Accounting Pronouncements

     In  February  2007,  SFAS  Statement  No.  159,  The Fair Value  Option for
Financial  Assets  and  Financial  Liabilities-Including  an  amendment  of FASB
Statement  No. 115, was issued.  This  statement  permits  entities to choose to
measure many financial  instruments  and certain other items at fair value.  The
objective  is to improve  financial  reporting by  providing  entities  with the
opportunity  to mitigate  volatility  in reported  earnings  caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting  provisions.  This  statement is effective for  financial  statements
issued for fiscal years beginning after November 15, 2007.  Management  plans to
adopt this statement on January 1, 2008 but does not expect a material impact on
its financial results.

     In September  2006,  SFAS  Statement  No. 158,  Employers'  Accounting  for
Defined  Benefit  Pension  and Other  Postretirement  Plans,  was  issued.  This
statement amends FASB Statement No. 87, Employees' Accounting for Pensions, FASB
Statement No. 88,  Employers'  Accounting for  Settlements  and  Curtailments of
Defined Benefit Pension Plans and for Termination  Benefits,  FASB Statement No.
106, Employers'  Accounting for Postretirement  Benefits Other than Pensions and
FASB Statement No. 132 Revised,  Employers' Disclosures about Pensions and Other
Postretirement   Benefits.  This  statement  requires  that  the  overfunded  or
underfunded  status of a defined benefit  postretirement  plan be measured as of
year end and be recognized as an asset or liability in our Consolidated  Balance
Sheet and to  recognize  changes in the  funded  status in the year in which the
changes occur through comprehensive income. The funded status is measured as the
difference  between  the plan's  assets at fair market  value and the  projected
benefit  obligation.  This information was previously  disclosed in the notes to
financial  statements but was not reflected in the  Consolidated  Balance Sheet.
This  statement is effective for fiscal years ending after December 15, 2006. In
connection  with our  adoption  of SFAS No.  158,  we  recorded  a $3.7  million
increase to our SERP liability,  which resulted in a $2.1 reduction, net of tax,
reduction  in  Accumulated  Other  Comprehensive  Earnings  on the  Consolidated
Balance  Sheet.

     In September  2006,  SFAS Statement No. 157, Fair Value  Measurements,  was
issued. This statement defines fair value, establishes a framework for measuring
fair value in generally accepted  accounting  principles and expands disclosures
about fair value measurements.  The statement clarifies that assumptions used in
measuring fair value should consider the risk inherent in a particular valuation
technique  as well  as  credit  and  non-performance  risk.  This  statement  is
effective  for  financial  statements  issued for fiscal years  beginning  after
November 15, 2007. We plan to adopt this statement on January 1, 2008 but do not
expect a material impact on our financial results.

     In September 2006, the SEC issued Staff  Accounting  Bulletin No. 108 ("SAB
108"),  "Considering  the Effects of Prior Year  Misstatements  When Quantifying
Misstatements  in Current  Year  Financial  Statements",  providing  guidance on
quantifying   financial   statement   misstatement  and  implementation   (e.g.,
restatement or cumulative effect to assets,  liabilities and retained  earnings)
when first applying this guidance.  SAB 108 is effective for fiscal years ending
after  November 15, 2006. In connection  with the adoption of SAB 108 during the
fourth  quarter of 2006,  we changed our  practice  for  recording  dividends on
Federal  Home Loan Bank stock and also  adjusted  our  liabilities  for  accrued
income taxes and pension costs as of January 1, 2006.  These changes resulted in
a $2.5  million net increase in retained  earnings as of January 1, 2006.  If we
had  continued  to follow our previous  practice of recording  dividends on FHLB
stock,  interest on investments  would have been $613 thousand lower in 2006. We
now record the  dividend  when the final  dividend  amount is  declared.  We had
previously  accrued the dividend when the FHLB  declared the estimated  dividend
amount.  Also  related ot the  adoption  of SFAS No. 108, we reversed a $275,000
excess SERP accrual with an offset to Retained Earnings as of January 1, 2006.

     In June 2006, the FASB issued  Interpretation  (FIN) No. 48, Accounting for
Uncertainty in Income Taxes,  ("FIN No. 48") an interpretation of FASB Statement
No. 109,  that  clarifies  the  accounting  for  uncertainties  in income  taxes
recognized  in  accordance  with SFAS No. 109. The  interpretation  prescribes a
recognition   threshold  and  measurement  attribute  for  the  recognition  and
measurement  of a tax  position  taken or  expected to be taken in a tax return.
Companies  are required to  determine  whether it is more likely than not that a
tax position will be sustained upon examination based on the technical merits of
the position  (assuming the taxing  authority has full knowledge of all relevant
facts).  If the tax  position  meets  the more  likely  than not  criteria,  the
position is to be measured at the largest amount of benefit that is greater than
50 percent likely to be realized upon settlement with the taxing authorities. We
do not expect the  adoption  of FIN No. 48 on January 1, 2007 to have a material
impact on the consolidated financial statements or results of operations.

     In March  2006,  SFAS  Statement  No.  156,  Accounting  for  Servicing  of
Financial  Assets,  was issued.  This  statement  amends FASB Statement No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities  ("SFAS No. 140"),  which  requires that all  separately  recognized
servicing assets and servicing  liabilities be initially measured at fair value,
if  practicable.  We have not  sold any  loans or  financial  assets  that  have
resulted in the  recognition of any servicing  assets or liabilities  since this
statement was adopted.

     In February  2006,  SFAS  Statement No. 155  Accounting  for Certain Hybrid
Financial  Instruments was issued. This statement amends FASB Statement No. 133,
Accounting for Derivative  Instruments and Hedging Activities (SFAS No. 133) and
SFAS No. 140.  This  statement's  objective  with  respect to SFAS No. 133 is to
permit  fair value  re-measurement  for any  hybrid  financial  instrument  that
contains an embedded  derivative  that otherwise would require  bifurcation.  It
also  eliminated  the  guidance  in SFAS No.  133  Implementation  Issue No. D1,
"Application  of Statement 133 to Beneficial  Interest in Securitized  Financial
Assets,"  which  provided that a beneficial  interest in  securitized  financial
assets is not subject to the  provisions of SFAS No. 133. The primary  objective
of this  statement  with respect to Statement No. 140,  Accounting for Transfers
and Servicing of Financial  Assets and  Extinguishments  of  Liabilities,  is to
eliminate a restriction on the passive  derivative  instrument  that a qualified
special-purpose  entity (SPE) may hold.  We have no  derivative  instruments  or
hedging activity within the scope of this statement.


ITEM 7A. -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

                           ASSET-LIABILITY MANAGEMENT

     Our primary  objective  in managing  interest  rate risk is to minimize the
adverse  impact of  changes in  interest  rates on our net  interest  income and
capital,  while, at the same time,  adjusting our asset-liability mix to achieve
the most favorable impact on income.

     Our  asset-liability  management  policy is designed to improve the balance
between  the   maturities   and   repricing  of   interest-earning   assets  and
interest-bearing  liabilities  in order  to  better  insulate  net  income  from
interest  rate  fluctuations.  Under this  program,  we emphasize the funding of
monthly  adjustable  mortgages with short-term  savings and borrowings and match
the re-pricing of these assets and liabilities.  By policy, we will either match
the fixed rate period of these loans with  borrowings  for the same term or will
hold  unmatched  fixed rate loans in our portfolio in an amount not to exceed 5%
of total assets.

     At the end of 2006, 48% of our loans had adjustable interest rates based on
monthly  changes  in the CODI,  18% were  based on the 12MAT  Index and 29% were
based on the COFI.  Comparisons over the last several years show that changes in
our cost of funds generally  correlate with changes in these indices.  We do not
use any futures, options or swaps in our asset-liability strategy.

     Assets and  liabilities  that are subject to repricing are considered  rate
sensitive.   The  mismatch  in  the  repricing  of  rate  sensitive  assets  and
liabilities  is  referred  to as a  company's  "GAP".  The  GAP is  positive  if
rate-sensitive  assets  exceed  rate-sensitive  liabilities  for  any  specified
repricing term.  Generally,  a positive GAP benefits a company during periods of
increasing  interest  rates.  The reverse is true during  periods of  decreasing
interest rates.  The indices we use lag changes in market interest rates from 60
to 90 days while prime-based business loans re-price  immediately.  However, our
short-term  savings and  borrowing  costs  adjust  quickly  causing net interest
income  to  initially  decrease  during  periods  of rising  interest  rates and
increase during periods of declining  interest  rates.  The movement of interest
rates,  whether  up or down,  cannot be  accurately  predicted  and could have a
negative impact on our income.

<PAGE>

     The  following  table  shows the  interest  sensitivity  of our  assets and
liabilities by repricing  period at December 31, 2006 and the  consolidated  GAP
position as a percentage of total assets at that time:
<TABLE>

                                                                              INTEREST-SENSITIVITY GAP
                                                        -------------------------------------------------------------------
                                                                                      Balances     Balances      Balances
                                                                      Balances        Repricing    Repricing     Repricing
                                                          Total       Repricing       Within 1-3   Within 4-10      After
                                                          Balance    Within 1 Year      Years        Years        10 Years
                                                        ----------   -------------    ----------   -----------   ----------
                                                                               (Dollars in thousands)
<S>                                                   <C>          <C>             <C>          <C>           <C>
Interest-earning assets:
  FHLB and other interest-earning deposits...........  $   102,628  $   102,628      $        --  $         --  $        --
  Investment securities, at fair value...............      311,850      202,671           47,283        61,896           --
  Mortgage-backed securities, at fair value..........       57,197       57,192                5            --           --
  FHLB stock.........................................      118,979      118,979               --            --           --
  Loans receivable...................................    8,585,264    8,434,739           82,535        54,631       13,359
                                                        ----------   -------------    ----------   -----------   ----------
   Total interest-earning assets.....................  $ 9,175,918  $ 8,916,209      $   129,823  $    116,527  $    13,359
                                                        ==========   =============    ==========   ===========   ==========

Interest-bearing liabilities:
  Demand accounts....................................  $ 1,515,358  $ 1,515,358      $        --  $         --  $        --
  Fixed rate term certificates.......................    4,374,523    4,271,539           94,962         7,893          129
  FHLB advances......................................    1,490,000    1,455,000           15,000        20,000           --
  Reverse repurchase agreements......................      978,448      978,448               --            --           --
  Senior debt                                              100,000           --               --       100,000         --
                                                        ----------   -------------    ----------   -----------   ----------
   Total interest-bearing liabilities................  $ 8,458,329  $ 8,220,345      $   109,962  $    127,893  $       129
                                                        ==========   =============    ==========   ===========   ==========

Interest-sensitivity GAP.............................  $   717,589  $   695,864      $    19,861  $    (11,366) $    13,230
                                                        ==========   =============    ==========   ===========   ==========

Interest-sensitivity GAP as a percentage of
   total assets......................................                      7.49%            0.21%       (0.12)%        0.14%
                                                                     =============    ==========   ===========   ==========
Cumulative interest-sensitivity GAP..................                                $   715,725  $    704,359  $   717,589
                                                                                      ==========   ===========   ==========
Cumulative interest-sensitivity
   GAP as a percentage of total assets...............                                       7.70%         7.58%        7.72%
                                                                                      ==========   ===========   ==========
</TABLE>

     In order to minimize the impact of rate fluctuations on income, our goal is
to  keep  the  one-year  GAP at less  than  20% of  total  assets  (positive  or
negative).  At December 31, 2006,  our one-year GAP ratio was a positive  $695.9
million or 7.49% of total  assets.  This  compares  with a positive GAP ratio of
4.20% of total assets at December 31, 2005 and a positive GAP ratio of 10.67% of
total  assets at December 31,  2004.  The positive  one-year GAP at December 31,
2006  increased  from  the  December  31,  2005  level  due  to an  increase  in
interest-earning deposits and investments at the end of the year.

     Another measure of interest rate risk, which is required to be performed by
OTS-regulated  institutions,  is an analysis  specified  by OTS Thrift  Bulletin
TB-13a,   "Management  of  Interest  Rate  Risk,  Investment   Securities,   and
Derivatives  Activities".  Under this  regulation  institutions  are required to
establish  limits  on the  sensitivity  of their  net  interest  income  and net
portfolio value to changes in interest rates. Such changes in interest rates are
defined as instantaneous and sustained  movements in interest rates in 100 basis
point increments.

     The  following  table  shows the  estimated  impact of a parallel  shift in
interest rates on our net portfolio  value at December 31, 2006 and December 31,
2005:
                                                  Percentage
                                       Change in Net Portfolio Value(1)
                                       --------------------------------
           Change in Interest Rates         2006            2005
             (In Basis Points)             ------          ------
                   +300..............       (11)%            (3)%
                   +200..............        (4)%            (2)%
                   +100..............        (1)%            (1)%
                  --100..............        (2)%            (9)%
                  --200 .............        (4)%           (14)% (2)
                  --300 .............        (4)%           (13)% (2)

 (1)  The percentage change represents the projected change in the net portfolio
      value of the Bank in a stable  interest  rate  environment  versus the net
      portfolio  value  in the  various  rate  scenarios.  The OTS  defines  net
      portfolio  value as the present value of expected cash flows from existing
      assets  minus the  present  value of  expected  cash flows  from  existing
      liabilities.

 (2)  A downward shift in interest rates of 200 basis points or 300 basis points
      at December 31, 2005 levels would have resulted in negative interest rates
      in many cases. Therefore, modeling the impact of such declines at December
      31, 2005 was not meaningful or practical.

<PAGE>

The following table shows the contract terms and fair value of our
interest-earning assets and interest-bearing liabilities as of December 31, 2006
categorized by type and expected maturity for each of the next five years and
thereafter:
<TABLE>

                                                   Expected Maturity Date as of December 31, (1)
                                  --------------------------------------------------------------------------------------
                                                                                                   Total        Fair
                                     2007       2008       2009      2010       2011  Thereafter   Balance      Value
                                  ---------   --------   --------  --------   -------  --------   ---------    --------
<S>                               <C>         <C>         <C>       <C>       <C>       <C>       <C>         <C>

 Interest-earning assets:
 Loans receivable:
  Adjustable rate loans:
   Single family................  $2,179,852  $1,431,003  $950,923  $631,704  $419,484  $824,650  $6,437,616  $6,671,076
   Average interest rate........        8.35%       8.35%     8.36%     8.36%     8.36%     8.38%       8.36%
   Multi-family.................     412,915     321,726   297,160   243,901   174,219   359,830   1,809,751   1,847,532
   Average interest rate........        7.10%       7.11%     7.23%     7.14%     6.19%     7.09%       7.11%
   Commercial and industrial....      36,755      29,437    22,358    17,978    12,950    42,009     161,487     168,364
   Average interest rate                7.68%       7.65%     7.62%     7.64%     7.63%     7.66%      7.66%
  Fixed rate loans:
   Single family................       2,680       1,579       932       564       341       513       6,609       6,638
   Average interest rate........        6.77%       6.74%     6.70%     6.68%     6.68%     6.65%       6.73%
   Multi-family.................         620         435       477       351       102       230       2,215       2,217
   Average interest rate........        6.29%       6.20%     6.80%     6.43%     5.89%     6.58%       6.42%
   Commercial and industrial....      10,617      12,684     8,708       854       677     1,542      35,082      35,848
   Average interest rate........        7.72%       7.64%     7.83%     7.96%     7.99%     7.85%       7.73%
   Other Loans..................       1,736         867       567       370       241       436       4,217       4,254
   Average interest rate........        4.70%       6.16%     6.16%     6.16%     6.16%     6.16%       5.56%
  Non-mortgage loans:
   Commercial business loans....      20,771      21,494    22,280    19,214        --        --      83,759      83,363
   Average interest rate........        8.25%       8.25%     8.25%     8.25%     0.00%     0.00%       8.25%
   Construction loans...........          --          --        --        --        --        --          --          --
   Average interest rate........          --          --        --        --        --        --          --          --
   Consumer loans...............      10,277      11,633    12,116    10,502        --        --      44,528      46,021
   Average interest rate........        9.08%       9.13%     9.18%     9.23%     0.00%     0.00%       9.15%
  Mortgage-backed securities:
    Adjustable..................      14,091      10,658     8,126     6,180     4,687    13,441      57,183      57,183
     Average interest rate......        5.38%       5.38%     5.38%     5.38%     5.38%     5.38%      5.38%
  Fixed:                                   9           5        --        --        --        --          14          14
   Average interest rate........        8.00%       8.00%     0.00%     0.00%     0.00%     0.00%       8.00%
  FHLB stock....................     118,979                                                         118,979    118,979
   Average interest rate........        5.37%                                                           5.37%
  FHLB and other
    interest-earning deposits...     102,628          --        --        --        --        --     102,628     102,628
   Average interest rate........        4.96%       0.00%     0.00%     0.00%     0.00%     0.00%       4.96%
  Investment securities:
   Collateralized mortgage
    obligations.................       8,213       8,091     8,544     9,024     9,531   268,447     311,850     311,850
   Average interest rate........        5.47%       5.47%     5.47%     5.47%     5.48%     5.57%       5.55%
                                   ---------  --------  --------  --------  -------   --------  ---------  --------
 Total interest-earning
    assets......................  $2,920,143  $1,849,612 $1,332,191 $940,642  $622,232 $1,511,098  $9,175,918 $9,455,967
                                   =========   ========= =========  ========   ======= =========   =========   =========

 Interest-bearing
    liabilities:
 Deposits:
  Checking accounts.............    $534,270          --        --        --        --        --    $534,270     534,270
  Average interest rate.........        0.09%       0.00%     0.00%     0.00%     0.00%     0.00%       0.09%
  Savings accounts..............     981,088          --        --        --        --        --     981,088     981,088
  Average interest rate.........        3.86%       0.00%     0.00%     0.00%     0.00%     0.00%       3.86%
  Certificate accounts..........   4,271,539      85,149     9,813     4,796     2,581       645   4,374,523   4,373,474
  Average interest rate.........        5.10%       4.99%     4.30%     4.02%     4.49%     4.31%       5.09%
 Borrowings:
  FHLB advances.................   1,455,000      10,000     5,000    20,000        --        --   1,490,000   1,489,528
  Average interest rate.........        5.31%       5.43%     5.49%     6.20%     0.00%     0.00%       5.33%
  Reverse repurchase
   agreements...................     978,448          --        --        --        --        --     978,448     977,009
  Average interest rate.........        5.37%       0.00%     0.00%     0.00%     0.00%     0.00%       5.37%
  Senior debentures.............          --          --        --        --        --   100,000     100,000     102,835
  Average interest rate.........        0.00%       0.00%     0.00%     0.00%     0.00%     5.94%       5.94%
                                   ---------    --------  --------  --------   -------   -------   ---------    --------
 Total interest-bearing
  liabilities...................  $8,220,345     $95,149   $14,813   $24,796    $2,581  $100,645  $8,458,329  $8,458,204
                                   =========    ========  ========  ========   =======  ========   =========   =========
</TABLE>
     (1) Expected maturities are contractual maturities adjusted for prepayments
of principal.  We use certain  assumptions  to estimate fair values and expected
maturities. For assets, expected maturities are based upon contractual maturity,
projected  repayments and  prepayments of principal.  The prepayment  experience
used is based on the Bank's  historical  experience.  Our average CPR  (Constant
Prepayment  Rate) is 33% for the adjustable  single family portfolio and 20% for
its adjustable  multi-family  and commercial real estate  portfolios.  For fixed
rate  loans,  the  Bank's  average  CPR is 38%  and  24%  respectively.  We used
estimated deposit runoff based on available industry information.

                                  STOCK PRICES

     The common  stock of  FirstFed  Financial  Corp.  is traded on the New York
Stock  Exchange  under the trading  symbol  "FED".  The  quarterly  high and low
information  presented  below is based on  information  supplied by the New York
Stock Exchange.

     We have never declared or paid a cash dividend to our stockholders.

     As of February 26, 2007,  1,327,779 shares of our stock remain eligible for
repurchase under our authorized repurchase program.  During the first two months
of 2007,  we  repurchased  144,300  shares of our stock at an  average  price of
$63.10.  We did  not  repurchase  any of our  stock  in  2006  or  2005,  and we
repurchased 696,900 shares of our stock during 2004.
<TABLE>

                           PRICE RANGE OF COMMON STOCK

         First Quarter   Second Quarter   Third Quarter   Fourth Quarter
         High    Low      High    Low      High   Low      High    Low
<S>     <C>     <C>      <C>     <C>      <C>     <C>     <C>     <C>

2006    $64.85  $55.45   $65.30  $51.80   $60.60  $50.01  $68.41  $55.40
2005     55.25   49.60    60.35   47.84    65.32   52.26   57.44   49.05
2004     46.38   40.40    46.15   38.16    49.16   41.23   54.30   48.50
2003     31.30   26.41    35.57   29.86    41.50   34.77   49.05   39.93
2002     27.00   24.58    29.90   26.26    28.89   23.89   29.15   23.92
</TABLE>



ITEM 8. -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>

                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
                    (Dollars in thousands, except share data)


                                                       December 31,     December 31,
                                                          2006             2005
<S>                                                    <C>             <C>
                                                      ------------   --------------
ASSETS

Cash and cash equivalents........................  $     151,090  $        93,192
Investment securities, available-for-sale (at
  fair value)                                            311,850          294,017
   (Notes 2 and 10)..............................
Mortgage-backed securities, available-for-sale
  (at fair value) (Notes 3  and 10)..............         57,197           74,254
Loans receivable, held-for-sale (fair value of
  $143,141 and $2,893)  (Note 4).................        140,860            2,873
Loans receivable, net of general allowance for
  loan losses of $109,768 and $97,558 (Notes 4,        8,376,592        9,678,260
  9, and 10) ....................................
Accrued interest and dividends receivable........         54,812           48,973
Real estate owned (Note 5).......................          1,094               --
Office properties and equipment, net (Note 6)....         16,569           15,759
Investment in Federal Home Loan Bank (FHLB)
  stock, at cost (Notes 7, 9, and 10)............        118,979          205,696
Other assets.....................................         66,544           43,925
                                                      ------------   --------------
                                                   $   9,295,587  $    10,456,949
                                                      ============   ==============

LIABILITIES

Deposits (Note 8)................................  $   5,889,881  $     4,371,657
FHLB advances (Notes 7 and 9) ...................      1,490,000        4,155,500
Securities sold under agreements to repurchase           978,448        1,163,684
  (Note 10)......................................
Senior debentures (Note 11)......................        100,000          100,000
Accrued expenses and other liabilities...........        132,543           95,269
                                                      ------------   --------------
                                                       8,590,872        9,886,110
                                                      ------------   --------------

COMMITMENTS AND CONTINGENT LIABILITIES
 (Notes 1, 4, 6 and 14)

STOCKHOLDERS' EQUITY (Notes 1, 2, 3, 13 and 14)

Common stock, par value $0.01 per share;
  Authorized 100,000,000 shares; issued
  23,842,934 and 23,761,825 shares, outstanding              238              238
  16,648,338 and 16,567,229 shares...............
Additional paid-in capital.......................         49,610           44,147
Retained earnings................................        772,537          640,900
Unreleased shares to employee stock
  ownership plan ................................         (2,050)          (1,104)
Treasury stock, at cost, 7,194,596 shares........       (113,776)        (113,776)
Accumulated other comprehensive income, net of            (1,844)             434
  taxes..........................................
                                                      ------------   --------------
                                                         704,715          570,839
                                                      ------------   --------------
                                                     $   9,295,587  $    10,456,949
                                                      ============   ==============
</TABLE>

The accompanying notes are an integral part of these consolidated
financial statements.









<TABLE>
                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
                        CONSOLIDATED STATEMENTS OF INCOME
                          YEAR ENDED DECEMBER 31, 2006, 2005 AND 2004 (Dollars
                in thousands, except per share data)

                                                  2006        2005         2004
                                              -----------  ----------   ----------
<S>                                            <C>        <C>           <C>
Interest and dividend income:
   Interest on loans......................  $    682,716 $   471,725 $    256,597
   Interest on mortgage-backed securities.         2,899       2,825        3,312
   Interest and dividends on investments..        27,007      16,556       11,518
                                              -----------  ----------   ----------
      Total interest income...............       712,622     491,106      271,427
                                              -----------  ----------   ----------
Interest expense:
   Interest on deposits (Note 8)..........       220,932      97,857       42,159
   Interest on borrowings (Notes 9 and 10)       194,118     151,333       59,031
                                              -----------  ----------   ----------
      Total interest expense..............       415,050     249,190      101,190
                                              -----------  ----------   ----------

Net interest income.......................       297,572     241,916      170,237
   Provision for loan losses (Note 4).....        12,400      19,750        3,000
                                              -----------  ----------   ----------
Net interest income after provision for
   loan losses                                   285,172     222,166      167,237
                                              -----------  ----------   ----------
Non-interest income:
   Loan servicing and other fees..........         2,589       1,325          840
   Retail office fees.....................         6,596       5,804        5,639
   Gain on sale of loans..................         6,223         125        5,434
   Real estate operations, net (Note 5)...          (14)       2,013          308
   Other operating income.................           842         499          370
                                              -----------  ----------   ----------
      Total non-interest income...........        16,236       9,766       12,591
                                              -----------  ----------   ----------
Non-interest expense:
   Salaries and employee benefits (Note 14)       45,969      45,061       40,907
   Occupancy (Note 6).....................        10,687       9,726        8,691
   Advertising............................         1,248         754          705
   Amortization of core deposit intangible         1,995       1,995        1,995
   Federal deposit insurance..............         1,393         504          388
   Legal..................................         1,467       1,381        1,686
   Other operating expense................        14,689      14,060       12,000
                                              -----------  ----------   ----------
      Total non-interest expense..........        77,448      73,481       66,372
                                              -----------  ----------   ----------

Income before income taxes................       223,960     158,451      113,456
Income taxes (Note 12)....................        94,870      66,753       47,614
                                              -----------  ----------   ----------
                                              -----------  ----------   ----------
Net income................................  $    129,090 $    91,698 $     65,842
                                              ===========  ==========   ==========

Earnings per share: (Notes 1, 14 and 16)
   Basic..................................  $       7.79 $      5.55 $       3.95
                                              ===========  ==========   ==========
   Diluted................................  $       7.65 $      5.43 $       3.85
                                              ===========  ==========   ==========

Weighted average shares outstanding:
   Basic..................................    16,571,488   16,518,300   16,679,927
                                              ===========  ==========   ==========
   Diluted................................    16,865,105   16,887,951   17,090,227
                                              ===========  ==========   ==========
</TABLE>


The accompanying notes are an integral part of these consolidated
financial statements.


<PAGE>

                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                            AND COMPREHENSIVE INCOME
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                    (Dollars in thousands, except share data)
<TABLE>
                                                                                                            Accumulated
                                                                     Retained                                  Other
                                                    Additional       Earnings      Unreleased              Comprehensive
                                          Common     Paid-In      (Substantially   Shares to    Treasury   Income Net of
                                           Stock     Capital        Restricted)       ESOP       Stock        Taxes         Total
                                          -------   ----------   ---------------   ----------   --------   -------------   ---------
<S>                                     <C>       <C>            <C>             <C>          <C>          <C>           <C>
Balance, Dec.31, 2003................... $    235  $    37,733    $      483,360  $      (125) $ (85,727)   $      1,091  $ 436,567
Comprehensive income:
 Net income.............................       --           --            65,842           --         --              --     65,842
   Change in net unrealized gain
     on securities available for
     sale, net of tax effect............       --           --                --           --         --            (204)      (204)
                                                                                                                           ---------
     Total comprehensive income.........                                                                                     65,638
 Exercise of employee stock options.....        2        1,979                --           --         --              --      1,981
Net decrease in unreleased
 shares to the ESOP.....................       --          (52)               --           72         --              --         20
Benefit from stock option tax
 adjustment.............................       --        1,317                --           --         --              --      1,317
Common stock repurchased
 (696,900 shares).......................       --           --                --           --    (28,049)             --    (28,049)
                                          -------   ----------   ---------------   ----------   --------   -------------   ---------
Balance, December 31, 2004..............      237       40,977           549,202          (53)  (113,776)            887    477,474
Comprehensive income:
 Net income.............................       --           --            91,698           --         --              --     91,698
   Change in net unrealized gain
     on securities available for
     sale, net of tax effect............       --           --                --           --         --            (453)      (453)
                                                                                                                           ---------
     Total comprehensive income.........                                                                                     91,245
Exercise of employee stock options......        1        1,193                --           --         --              --      1,194
Net increase in unreleased shares
   to the ESOP..........................       --          146                --       (1,051)        --              --       (905)
Benefit from stock option tax
   adjustment...........................       --        1,831                --           --         --              --      1,831
                                          -------   ----------   ---------------   ----------   --------   -------------   ---------
Balance, December 31,  2005.............      238       44,147           640,900       (1,104)  (113,776)            434    570,839
Adjustments pursuant to SAB No. 108,
net of tax effect:
      FHLB stock dividends..............       --           --            (1,288)          --         --              --     (1,288)
      SERP adjustment...................       --           --               160           --         --              --     160
      Tax liabilities...................       --           --             3,675           --         --              --      3,675
Comprehensive income:
   Net income...........................       --           --           129,090           --         --              --    129,090
   Change in net unrealized gain
     on securities available for
     sale, net of tax effect............       --           --                --           --         --            (129)      (129)
   SERP adjustment......................       --           --                --           --         --          (2,149)    (2,149)
                                                                                                                           ---------
     Total comprehensive income.........       --           --                --           --         --              --    126,812
Exercise of employee stock options......       --        1,643                --           --         --              --      1,643
Stock option expense....................       --        1,880                --           --         --              --      1,880
Net increase in unreleased shares
   to the ESOP..........................       --          350                --         (946)        --              --      (596)
Benefit from stock option tax
   adjustment...........................       --        1,590                --           --         --              --      1,590
                                          -------   ----------   ---------------   ----------   --------   -------------   ---------
Balance, December 31, 2006.............. $    238  $    49,610    $      772,537  $    (2,050) $(113,776)   $     (1,844) $ 704,715
                                          =======   ==========   ===============   ==========   ========   =============   =========
</TABLE>

       The accompanying notes are an integral part of these consolidated
                             financial statements.
<PAGE>
                    FIRSTFED FINANCIAL CORP.  AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                                 (In thousands)
<TABLE>
                                                     2006         2005         2004
                                                  ----------   ----------   ----------
  <S>                                           <C>          <C>          <C>
   CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income..................................  $   129,090  $    91,698  $    65,842
   Adjustments to reconcile net  income to
    net cash provided by operating activities:
     Net change in loans held-for-sale.........     (137,987)      (2,873)         492
     Stock option compensation.................        1,880           --           --
     Depreciation and amortization.............        2,252        1,879        1,335
     Provision for loan losses.................       12,400       19,750        3,000
     Amortization of fees and
       premiums/discounts......................       51,228       46,593       14,215
     (Increase) decrease in interest income
       accrued in excess of borrower payments..     (153,177)     (57,136)      (1,545)
     Gain on sale of real estate held for
       investment..............................           --       (2,245)          --
     Gain on sale of real estate owned.........         (325)          --         (496)
     Gain on sale of loans.....................       (6,223)        (125)      (5,434)
     FHLB stock dividends......................       (9,542)      (6,555)      (3,863)
     Change in deferred taxes..................      (16,217)     (14,148)      (8,430)
     Increase in interest and dividends
       receivable..............................       (5,839)     (24,858)      (7,174)
     Increase in interest payable..............       35,824       45,275        7,356
     Amortization of core deposit intangible
       asset...................................        1,995        1,995        1,995
     (Increase) decrease in other assets.......       (5,142)      13,102        9,037
     Increase (decrease) in accrued expenses
       and other liabilities...................          148        6,133       (6,817)
                                                  ----------   ----------   ----------
      Total adjustments........................     (228,725)      26,787        3,671
                                                  ----------   ----------   ----------
      Net cash (used in) provided by operating
        activities.............................      (99,635)     118,485       69,513
                                                  ----------   ----------   ----------

   CASH FLOWS FROM INVESTING ACTIVITIES:

     Loans made to clients and principal
       collections on loans, net ..............    1,421,427   (2,780,889)  (2,428,998)
     Loans purchased...........................         (366)        (132)        (422)
     Deferred loan origination costs...........      (24,996)     (79,651)     (49,314)
     Proceeds from sales of real estate........          695        2,887        1,820
     Purchase of real estate held for
       investment..............................           --       (1,869)        (986)
     Proceeds from maturities and  principal
       reductions on investment securities,
       available-for-sale......................       86,630      123,843       64,379
     Principal reductions on mortgage-backed
       securities, available-for-sale..........       17,014       22,266       37,178
     Purchases of investment securities,
       available-for-sale......................     (104,791)    (167,930)    (198,494)
     Redemptions (purchases) of FHLB stock, net       96,259      (55,716)     (51,787)
     Purchases of premises and equipment.......       (3,062)      (1,757)      (6,648)
                                                  ----------   ----------   ----------
      Net cash provided by (used in) investing
       activities..............................    1,488,810   (2,938,948)  (2,633,272)
                                                  ----------   ----------   ----------

   CASH FLOWS FROM FINANCING ACTIVITIES:
     Net increase in deposits..................    1,518,224      610,492    1,222,767
     Net (decrease) increase in short term
       borrowings..............................   (2,765,736)   2,407,584    1,586,978
     Net decrease in long term borrowings......      (85,000)    (180,000)    (212,000)
     Proceeds from stock options exercised.....        1,644        1,194        1,981
     Purchases of treasury stock...............           --           --      (28,049)
     Net (decrease) increase in advance
     payments by borrowers for taxes
       and insurance...........................       (3,949)       2,474        3,254
     Other.....................................        3,540        3,568        2,853
                                                  ----------   ----------   ----------
      Net cash (used in) provided by financing
      activities...............................   (1,331,277)   2,845,312    2,577,784
                                                  ----------   ----------    ---------

     Net increase in cash and cash equivalents.       57,898       24,849       14,025
     Cash and cash equivalents at beginning of
       period..................................       93,192       68,343       54,318
                                                  ----------   ----------   ----------
     Cash and cash equivalents at end of period  $   151,090  $    93,192  $    68,343
                                                  ==========   ==========   ==========
</TABLE>

                 The accompanying notes are an integral part of
                    these consolidated financial statements.


<PAGE>

                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Summary of Significant Accounting Policies

     The  following  is a summary  of the  significant  accounting  policies  of
FirstFed  Financial Corp.  ("Company")  and its  wholly-owned  subsidiary  First
Federal Bank of California ("Bank").

Uses of Estimates

     In preparing consolidated financial statements in conformity with generally
accepted accounting principles ("GAAP") and general practices within the banking
industry,  management is required to make estimates and assumptions  that affect
the  reported  amounts of assets and  liabilities  as of the date of the balance
sheet and reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those  estimates.  Material  estimates that are
particularly  susceptible to  significant  change in the near term relate to the
determination  of the  allowance  for  loan  losses,  the  determination  of the
expected lives of residential loans used to amortize deferred  origination costs
and the valuation of deferred tax assets.

 Principles of Consolidation and Nature of Operations

     The consolidated  financial  statements include the accounts of the Company
and its  subsidiary,  the Bank. The Bank maintains 32 retail banking  offices in
Southern  California  and 6  lending  offices  in  both  Southern  and  Northern
California.  The Bank's  primary  business  consists of attracting  deposits and
wholesale  borrowings  and using  those  funds to  originate  loans  secured  by
mortgages on real estate,  consumer loans and business loans. All  inter-company
balances and transactions have been eliminated in  consolidation.  Certain items
in the 2005 and 2004 consolidated financial statements have been reclassified to
conform to the 2006 presentation.

Cash and Cash Equivalents

     For purposes of reporting  cash flows,  cash and cash  equivalents  include
cash, overnight  investments and securities purchased under agreements to resell
with  maturities  within 90 days of the date of purchase.  The amounts  advanced
under  agreements  to  resell  securities   (repurchase   agreements)  represent
short-term   investments.   During  the  agreement  period  the  securities  are
maintained by the dealer under a written  custodial  agreement  that  explicitly
recognizes the Bank's  interest in the  securities.  The Bank had $62,000,000 in
agreements to resell  securities at December 31, 2006.  There were no agreements
to resell securities at December 31, 2005. The Bank also had overnight  deposits
with the  Federal  Home Loan Bank which  totaled  $40,628,000  and  $42,607,000,
respectively at December 31, 2006 and December 31, 2005.

Financial Instruments

     GAAP requires the  disclosure  of the fair value of financial  instruments,
whether or not recognized on the  Consolidated  Balance  Sheets,  whenever it is
practicable  to  estimate  the value.  A  significant  portion of our assets and
liabilities  are  financial  instruments  as defined  under GAAP.  Fair  values,
estimates  and  assumptions  are set forth in Note 17,  Fair Value of  Financial
Instruments.

Risks Associated with Financial Instruments

     The credit risk of a financial  instrument is the  possibility  that a loss
may result from the failure of another party to perform in  accordance  with the
terms of the contract.  The most  significant  credit risk  associated  with the
Bank's   financial   instruments  is  concentrated  in  its  loans   receivable.
Additionally,  the Bank is  subject to credit  risk on  certain  loans sold with
recourse.  The Bank has  established a system for monitoring the level of credit
risk in the loan portfolio and for loans sold with recourse.

     The market risk of a financial  instrument is the  possibility  that future
changes  in market  prices may reduce  the value of a  financial  instrument  or
increase the  contractual  obligations  of the Bank.  The Bank's  market risk is
primarily  concentrated in its loans  receivable.  When a borrower fails to meet
the contractual  requirements of his or her loan agreement,  the Bank is subject
to the market risk of the collateral  securing the loan.  Likewise,  the Bank is
subject to the  volatility  of real estate  prices  with  respect to real estate
acquired by foreclosure.  The Bank's securities classified as available-for-sale
are traded in active  markets.  The value of these  securities is susceptible to
the fluctuations of the market.

 Interest Rate Risk

     Financial  instruments are subject to interest rate risk to the extent that
they re-price on a frequency,  degree or basis that varies from market  pricing.
Interest rate risk occurs to the degree that interest-earning assets re-price on
a different frequency or schedule than  interest-bearing  liabilities.  The loan
portfolio  tends to lag market interest rates by 60 to 90 days. The Bank closely
monitors the pricing sensitivity of its financial instruments.

<PAGE>
(1) Summary of Significant Accounting Policies (continued)

 Concentrations of Credit Risk

     Concentrations of credit risk would exist for groups of borrowers when they
have similar  economic  characteristics  that would cause their  ability to meet
contractual obligations to be similarly affected by changes in economic or other
conditions.  The ability of the Bank's  borrowers to repay their  commitments is
contingent  on  several  factors,   including  the  economic  condition  in  the
borrowers'  geographic  area  and  the  individual  financial  condition  of the
borrowers.  The  Company  generally  requires  collateral  or other  security to
support  borrower  commitments  on loans  receivable.  This  collateral may take
several forms.  Generally,  on the Bank's mortgage loans, the collateral will be
the  underlying   mortgaged   property.   The  Bank's  lending   activities  are
concentrated in California. However, in December 2006, the Bank began soliciting
loans from mortgage brokers in four other states: Washington, Oregon, Nevada and
Utah. It is the Bank's  initial  intent to originate  these loans for sale only.
There were no loans  originated in those four states during 2006.  The Bank does
not have significant exposure to any individual client.

     The Bank's  primary  product  consists of adjustable  rate loans secured by
residential  real estate.  An increasing  portion of the Bank's  interest income
results  from  interest  accrued  in  excess  of  borrower  payments   (negative
amortization).   Adjustable   rate  loans,   in  large  part,   permit  negative
amortization  up to a certain  defined  level,  and the  payment  on such  loans
adjusts  periodically in accordance  with the terms of the loan  documents.  For
loans with an 80% or less loan-to-value ratio at origination,  the lifetime loan
balance cap can range from 110% to 125% of the original loan balance.  For loans
with a loan-to-value  ratio over 80% at  origination,  the lifetime loan balance
cap is limited to 110% of the original loan balance. In the event of an economic
downturn,  which may  result in loss of income to  borrowers,  borrowers  may be
unable  to  make  higher  payments  that  may  result  from  such   adjustments.
Additionally,  a downturn  affecting the market value of the  collateral for the
Bank's loans  combined  with a larger  principal  balance that can result from a
negatively  amortizing loan, may result in a loss of adequate  security for such
loans.  The  confluence of these  economic  conditions  could have a significant
effect on the Bank's net income.

 Securities Purchased under Agreements to Resell

     The Bank  invests  in  securities  purchased  under  agreements  to  resell
("repurchase  agreements").  The Bank obtains  collateral for these  agreements,
which  normally  consists  of  U.S.  treasury   securities  or   mortgage-backed
securities guaranteed by agencies of the U.S. government. The collateral is held
in the custody of a trustee, who is not a party to the transaction. The duration
of these  agreements  is  typically  1 to 30  days.  The Bank  deals  only  with
nationally  recognized  investment  banking firms as the counterparties to these
agreements. The Company's investment in repurchase agreements consists solely of
securities purchased under agreements to resell identical securities.

 Investments and Mortgage-Backed Securities

     Investment  securities  principally  consist  of U.S.  Treasury  and agency
securities,  collateralized mortgage obligations and mortgage-backed securities.
Mortgage-backed  securities  are created  when the Bank  exchanges  pools of its
loans for mortgage-backed securities.

     The Bank classifies all of its investments and  mortgage-backed  securities
as "available-for-sale" based upon a determination that such securities might be
sold at a future date or that there may be foreseeable circumstances under which
the Bank would sell such securities.

     Securities  designated  as  available-for-sale  are recorded at fair value.
Changes in the fair value of such securities  available-for-sale are included in
stockholders'    equity   as   unrealized    gains    (losses)   on   securities
available-for-sale,  net  of  taxes.  Unrealized  losses  on  available-for-sale
securities,  reflecting a decline in value,  judged to be other than  temporary,
are charged to income in the Consolidated Statements of Income. Unrealized gains
or  losses  on   available-for-sale   securities  are  computed  on  a  specific
identification  basis. Premiums and discounts on investment securities available
for sale are amortized  utilizing the interest method over the contractual  term
of the assets.  Interest income on securities is accrued on the unpaid principal
balance.  The Bank did not hold any trading  securities  at December 31, 2006 or
2005.

Loans Held-for-Investment

     The  Bank's  loan  portfolio  is  primarily   comprised  of  single  family
residential  loans  (one-to-four  units),  and multi-family  loans (five or more
units).  Loans  are  generally  recorded  at the  contractual  amounts  owed  by
borrowers,  less unearned  loan fees and  allowances  for loan losses.  Interest
income on loans is accrued on the unpaid principal balance.

Loans Held-for-Sale

     Loans that may be sold prior to maturity are  classified as  held-for-sale.
These  loans are  carried  at the lower of  carrying  value or fair  value on an
aggregate  basis by type of asset.  For loans,  fair value is  calculated  on an
aggregate basis as determined by current market investor yield requirements.

(1) Summary of Significant Accounting Policies (continued)

Impaired Loans

     The Bank evaluates  loans for  impairment  whenever the  collectibility  of
contractual principal and interest payments is questionable.  A loan is impaired
when,  based on current  circumstances  and events, a creditor will be unable to
collect all amounts contractually due under a loan agreement.

     When a loan is considered  impaired,  the Bank measures impairment based on
the present  value of expected  future cash flows (over a period not to exceed 5
years) discounted at the loan's effective interest rate. However, if the loan is
"collateral-dependent"  or a probable foreclosure,  impairment is measured based
on the fair value of the  collateral.  When the measure of an  impaired  loan is
less than the recorded  investment  in the loan,  the Bank records an impairment
allowance  equal to the excess of its recorded  investment  in the loan over its
measured value.

     Cash payments  received from impaired loans are recorded in accordance with
the contractual  terms of the loan. The principal portion of the payment is used
to reduce the  principal  balance of the loan,  whereas the interest  portion is
recognized as interest income.

Non-Accrual Loans

     The Bank establishes allowances for delinquent interest equal to the amount
of  accrued  interest  on all loans 90 days or more past due or in  foreclosure.
This practice  effectively places such loans on non-accrual status for financial
reporting purposes.  Loans are returned to accrual status only when the ultimate
collectibility of current interest is no longer in doubt.

Allowances for Loan Losses

     The Bank maintains a general valuation allowance for loan losses due to the
inherent  risks  in  the  loan  portfolio  that  have  yet  to  be  specifically
identified.  The Bank's loan portfolio is stratified based on factors  affecting
the perceived level and concentration of risk, such as type of collateral, level
of loan  documentation,  the  borrowers  credit  rating,  year  of  origination,
original  loan-to-value  ratio, the level of negative  amortization,  geographic
location and trends and delinquencies.

     The  appropriate  level of general  valuation  allowance is  calculated  by
applying reserve factors to the various stratifications identified above.. These
reserve factors represent the expected  likelihood of default  multiplied by the
expected rate of loss.  The expected  rates of loss and default are based on the
Bank's historical loss experience and adjusted for current conditions and trends
in the Bank's lending areas.

     Based on this methodology,  the Bank recorded $12,400,000,  $19,750,000 and
$3,000,000 in loan loss provisions during 2006, 2005 and 2004, respectively.

     The Bank originates loans with a reduced level of documentation. On "Stated
Income/Stated  Asset"  ("SISA")  loans,  the borrower  includes  information  on
his/her  level of income and assets that is not subject to  verification  by the
Bank. On "Stated  Income/Verified  Assets" ("SIVA") loans, the borrower includes
information  on his/her level of income and that  information  is not subject to
verification  while  information  provided by the borrower on his/her  assets is
verified.  For "No Income/No Asset" ("NINA") loans, the borrower is not required
to submit information on his/her level of income or assets.  However, all single
family loans,  including NINA loans, require credit reports and appraisals.  All
multi-family  loans and other real estate loans all require  complete  customary
documentation from the borrowers.

     The  Bank  attempts  to  mitigate  the  inherent  risk  of  making  reduced
documentation loans by evaluating the other credit characteristics of the loans,
such as the  creditworthiness  of the borrower and the loan-to-value ratio based
on the collateral's  appraised value at the origination date. One measure of the
creditworthiness  of the borrower is the  borrower's  FICO score, a standardized
credit scoring system developed by Fair Isaac Corporation.

     The  determination of the Bank's general allowance for loan losses is based
on estimates  that are  affected by changes in the regional or national  economy
and  market  conditions.  Management  believes,  based on  economic  and  market
conditions,  that the  general  allowance  for loan  losses  is  adequate  as of
December 31, 2006 and 2005. Should there be an economic or market downturn or if
market interest rates increase  significantly,  a material increase in the level
of loan defaults and charge-offs could result.

     The  Bank  establishes  a  specific  reserve  to  charge-off   assets  with
identified weaknesses that render all or part of the asset uncollectible.

<PAGE>
(1) Summary of Significant Accounting Policies (continued)

Loan Origination Fees and Costs

     Loan  origination  fees and  certain  direct  loan  origination  costs  are
deferred and recognized  over the lives of the related loans as an adjustment of
loan yields using the interest method.  Loan  origination  costs for residential
loans obtained from  wholesale loan brokers will generally  include fees paid to
those brokers, resulting in loan origination costs exceeding loan fees received.
These excess loan  origination  costs are amortized as an adjustment to the loan
yield based on the expected lives of the related loans, including an estimate of
the  prepayment  speeds on the  portfolio.  When a loan is  repaid or sold,  any
unamortized net deferred fee balance is included in the Consolidated  Statements
of Income.

Gain or Loss on Sale of Loans

     Mortgage  loans are primarily sold on a  servicing-released  basis and cash
gains or losses are recognized immediately in the Statements of Income. The Bank
has   previously   sold   mortgage   loans   and   loan   participations   on  a
servicing-retained  basis with yield  rates to the buyer  based upon the current
market  rates  which may differ  from the  contractual  rate earned on the loans
sold. Under GAAP,  servicing assets or liabilities and other retained  interests
are required to be recorded as an allocation of the carrying amount of the loans
sold  based on the  estimated  relative  fair  values of the loans  sold and any
retained interests,  less liabilities  incurred.  Servicing assets are evaluated
for impairment based on the asset's fair value. The Bank estimates fair value by
discounting cash flows from servicing assets using discount and prepayment rates
that the Bank believes market  participants  would use. Servicing assets arising
from the sale of loans  are  included  in other  assets  and were  $107,000  and
$172,000 at December 31, 2006 and 2005,  respectively.  No additional  servicing
assets were  originated  in 2006,  2005 or 2004.  There was no impairment of the
Bank's servicing assets during 2006, 2005, and 2004.

Core Deposit Intangible

     Loans, deposits and other assets and liabilities assumed in connection with
acquisitions  are accounted for under the purchase method of accounting.  Assets
and  liabilities  are  recorded  at  their  fair  values  as of the  date of the
acquisition  and the excess cost over fair values of the assets and  liabilities
is  classified  as a  core  deposit  intangible  asset.  The  Company  amortizes
intangible  assets on a straight-line  basis over their estimated  useful lives,
which is seven years. The balance of the core deposit intangible at December 31,
2006 was  $1,343,000.  There was no  impairment  of the  Company's  core deposit
intangible at December 31, 2006.

     The following is a projection of estimated amortization of the core deposit
intangible for the years ended December 31, (in thousands):

                        2007........................ $    879
                        2008........................      464
                                                     --------
                                                     $  1,343
                                                     ========
Real Estate

     Real estate  acquired in settlement  of loans ("REO")  consists of property
acquired  through  foreclosure  proceedings  or by deed in lieu of  foreclosure.
Generally, all loans greater than 60 days delinquent are placed into foreclosure
and, if  necessary,  a specific  valuation  allowance is  established.  The Bank
acquires  title  to the  property  in  most  foreclosure  actions  that  are not
reinstated  by the  borrower.  Once real estate is acquired in  settlement  of a
loan,  the  property is  recorded as REO at the lower of carrying  value or fair
market  value,  less  estimated  selling  costs.  Fair value is determined by an
appraisal obtained at foreclosure. The REO balance is reduced for any subsequent
declines in fair value.  The Bank may also acquire real estate in  settlement of
judgments.  These properties are reported as Real Estate Held for Investment and
are also recorded at the lower of carrying value or fair value.

     The recognition of gain on the sale of real estate is dependent on a number
of factors relating to the nature of the property, terms of sale, and any future
involvement  of the Bank or its  subsidiaries  in the property  sold.  If a real
estate  transaction  does not meet  certain  down  payment,  cash  flow and loan
amortization  requirements,  any gain would be deferred and recognized  under an
alternative method.

     The Bank also  acquires  real  estate in  settlement  of  judgments.  These
properties are classified as real estate held for investment.

Depreciation and Amortization

     Depreciation  of office  properties and equipment is provided by use of the
straight-line  method over the  estimated  useful  lives of the related  assets,
which  range  from 3 to 30 years.  Amortization  of  leasehold  improvements  is
provided by use of the  straight-line  method over the lesser of the life of the
improvement or the term of the lease.
<PAGE>

(1) Summary of Significant Accounting Policies (continued)

Securities Sold Under Agreements to Repurchase

     The Company enters into sales of securities  under agreements to repurchase
("reverse repurchase agreements").  Reverse repurchase agreements are treated as
financing  arrangements  and,  accordingly,  the  obligations  to repurchase the
securities  sold are  reflected as  liabilities  in the  Consolidated  Financial
Statements.    The   loans,    mortgage-backed    securities   and   investments
collateralizing  reverse  repurchase  agreements  are delivered to several major
brokerage firms who arrange the transactions. The assets collateralizing reverse
repurchase  agreements  are  reflected in the Company's  Consolidated  Financial
Statements. The brokerage firms may loan such securities to other parties in the
normal course of their  operations and agree to return the identical  securities
to the Company at the maturity of the agreements.

Income Taxes

     The Company files a  consolidated  Federal income tax return and a combined
California  franchise  tax  report  with the Bank and the  Bank's  subsidiaries.
Income taxes are  accounted  for using the asset and  liability  method.  In the
asset and liability method,  deferred tax assets and liabilities are established
as of the reporting date for the  realizable  cumulative  temporary  differences
between the financial reporting and tax return basis of the Company's assets and
liabilities.  The tax rates  applied are the statutory  rates  expected to be in
effect when the temporary differences are realized or settled.

Stock Option Plans

     The Company adopted the fair value provisions of SFAS No. 123R, Share-Based
Payments,  on January 1, 2006, using the modified prospective  transition method
described in SFAS No. 148,  Accounting for  Stock-Based  Compensation-Transition
and   Disclosure.   Prior  to   January   1,   2006,   the   Company   used  the
intrinsic-value-based  method of accounting  prescribed by Accounting Principles
Board (APB)  Opinion  No. 25,  Accounting  for Stock  Issued to  Employees,  and
related  interpretations  including FASB  Interpretation  No. 44, Accounting for
Certain  Transactions  involving Stock  Compensation,  an  interpretation of APB
Opinion  No. 25,  issued in March  2000,  to account  for its  fixed-plan  stock
options.  Under this  method,  compensation  expense was recorded on the date of
grant only if the current  market  price of the  underlying  stock  exceeded the
exercise  price.  SFAS  No.  123,   Accounting  for  Stock-Based   Compensation,
established  accounting and  disclosure  requirements  using a  fair-value-based
method of accounting for stock-based employee  compensation plans. As allowed by
SFAS No.  123,  prior to January 1,  2006,  the  Company  had  adopted  only the
disclosure  requirements of SFAS No. 123. See Note 14 for a detailed  discussion
of stock options.

Earnings Per Share

     The Company  reports both basic and diluted net  earnings per share.  Basic
net  earnings  per share is  determined  by dividing net earnings by the average
number of shares of common  stock  outstanding,  while  diluted net earnings per
share is determined by dividing net earnings by the average  number of shares of
common  stock  outstanding  adjusted  for the  dilutive  effect of common  stock
equivalents.

     Earnings per common share have been computed based on the following:

                                             Year Ended December 31,
                                         ----------------------------------
                                            2006        2005        2004
                                         ---------   ---------   ----------
                                         (In thousands, except share data)

  Net income.......................     $  129,090  $   91,698  $    65,842
                                         =========   =========   ==========

  Average number of common shares
    outstanding......................   16,571,488  16,518,300   16,679,927
  Effect of dilutive options.........      293,617     369,651      410,300
                                        ----------  ----------   ----------
   Average number of common shares
    outstanding used to calculate
    diluted earnings per common share   16,865,105  16,887,951   17,090,227
                                        ==========  ==========   ==========

     There were 134,820  anti-dilutive shares excluded from the weighted average
shares outstanding  calculation during 2006 and no anti-dilutive shares excluded
during 2005 or 2004.
<PAGE>
(1) Summary of Significant Accounting Policies (continued)

Comprehensive Income

     Accounting  principles  generally  require  that  the  recognized  revenue,
expenses,  gains and losses be included in net income.  Although certain changes
in assets and liabilities, such as unrealized gains and losses on available-for-
sale securities,  are reported as a separate  component of the equity section of
the  Consolidated  Balance  Sheets,  such  items,  along  with net  income,  are
components  of  comprehensive  income.  There  were  $305,000  and  $434,000  of
unrealized  gains  on   available-for-sale   securities  in  Accumulated   Other
Comprehensive  Earnings as of  December  31,  2006 and 2005,  respectively.  The
Company  adopted SFAS No. 158 as of December 31, 2006,  which resulted in a $2.1
million  reduction  in  Accumulated  Other  Comprehensive  Earnings  in the 2006
Consolidated  Balance  Sheet  related  to  the  Bank's  Supplemental   Executive
Retirement Plan.

Segment Information and Disclosures

     GAAP establishes  standards to report  information about operating segments
in annual financial  statements and requires  reporting of selected  information
about operating segments in interim reports to stockholders. It also establishes
standards for related disclosures about products and services,  geographic areas
and major clients. The Company manages its business as one segment.

Derivative Instruments

     The Company accounts for derivative instruments in accordance with SFAS No.
133, Accounting for Derivative  Instruments and Hedging Activities as amended. A
derivative is considered  either an asset or liability in the balance sheets and
measured at fair value.  If a derivative is  designated as a hedging  instrument
the changes in fair value of the  derivative are either (a) recognized in income
in the period of change  together with the offsetting gain or loss on the hedged
item  or  (b)  reported  as  a  component  of  other  comprehensive  income  and
subsequently reclassified into income when the hedged risk affects income. For a
derivative  not  designated as a hedging  instrument,  changes in fair value are
recognized  in income in the period of change.  As of  December  31,  2006,  the
Company had no  commitments  to originate  loans held for sale,  and had no loan
sale commitments that would qualify as derivatives under SFAS No. 133.

Litigation

     The Company is engaged in various legal  actions  incident to the nature of
its business. Management is of the opinion that none of the litigation will have
a material effect on the Company's Consolidated Balance Sheets and Statements of
Income.

Recent Accounting Pronouncements

     In  February  2007,  SFAS  Statement  No.  159,  The Fair Value  Option for
Financial  Assets  and  Financial  Liabilities-Including  an  amendment  of FASB
Statement  No. 115, was issued.  This  statement  permits  entities to choose to
measure many financial  instruments  and certain other items at fair value.  The
objective  is to improve  financial  reporting by  providing  entities  with the
opportunity  to mitigate  volatility  in reported  earnings  caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting  provisions.  This  statement is effective for  financial  statements
issued for fiscal years beginning after November 15, 2007.  Management  plans to
adopt this statement on January 1, 2008 but does not expect a material impact on
its financial results.

     In September  2006,  SFAS  Statement  No. 158,  Employers'  Accounting  for
Defined  Benefit  Pension  and Other  Postretirement  Plans,  was  issued.  This
statement amends FASB Statement No. 87, Employees' Accounting for Pensions, FASB
Statement No. 88,  Employers'  Accounting for  Settlements  and  Curtailments of
Defined Benefit Pension Plans and for Termination  Benefits,  FASB Statement No.
106, Employers'  Accounting for Postretirement  Benefits Other than Pensions and
FASB Statement No. 132 Revised,  Employers' Disclosures about Pensions and Other
Postretirement   Benefits.  This  statement  requires  that  the  overfunded  or
underfunded  status of a defined benefit  postretirement  plan be measured as of
year end and be recognized  as an asset or liability in the Bank's  Consolidated
Balance Sheet and to recognize changes in the funded status in the year in which
the changes occur through comprehensive income. The funded status is measured as
the difference  between the plan's assets at fair market value and the projected
benefit  obligation.  This information was previously  disclosed in the notes to
financial  statements but was not reflected in the  Consolidated  Balance Sheet.
This  statement is effective for fiscal years ending after December 15, 2006. In
connection  with our  adoption  of SFAS No.  158,  we  recorded  a $3.7  million
increase to our SERP liability,  which resulted in a $2.1 reduction, net of tax,
reduction  in  Accumulated  Other  Comprehensive  Earnings on the Consolidated
Balance Sheet.

     In September  2006,  SFAS Statement No. 157, Fair Value  Measurements,  was
issued. This statement defines fair value, establishes a framework for measuring
fair value in generally accepted  accounting  principles and expands disclosures
about fair value measurements.  The statement clarifies that assumptions used in
measuring fair value should consider the risk inherent in a particular valuation
technique  as well  as  credit  and  non-performance  risk.  This  statement  is
effective  for  financial  statements  issued for fiscal years  beginning  after
November 15, 2007.  Management  plans to adopt this statement on January 1, 2008
but does not expect a material impact on its financial results.

<PAGE>

(1) Summary of Significant Accounting Policies (continued)

     In September 2006, the SEC issued Staff  Accounting  Bulletin No. 108 ("SAB
108"),  "Considering  the Effects of Prior Year  Misstatements  When Quantifying
Misstatements  in Current  Year  Financial  Statements",  providing  guidance on
quantifying   financial   statement   misstatement  and  implementation   (e.g.,
restatement or cumulative effect to assets,  liabilities and retained  earnings)
when first applying this guidance.  SAB 108 is effective for fiscal years ending
after  November 15, 2006. In connection  with the adoption of SAB 108 during the
fourth quarter of 2006, the Bank changed its practice for recording dividends on
Federal  Home Loan Bank stock and also  adjusted  its  liabilities  for  accrued
income taxes and pension costs as of January 1, 2006.  These changes resulted in
a $2.5 million net increase in retained  earnings as of January 1, 2006.  If the
Bank had  continued  to follow its previous  practice of recording  dividends on
FHLB stock, interest on investments would have been $613 thousand lower in 2006.
The Bank now records the dividend  when the final  dividend  amount is declared.
The Bank had  previously  accrued  the  dividend  when  the  FHLB  declared  the
estimated  dividend  amount.  Also  related to the  adoption of SFAS No. 108, we
reversed a $275,000  excess SERP accrual with an offset to retained  earnings as
of January 1, 2006. The Company believes the net effect of these adjustments was
not  material,  either  quantitatively  or  qualitatively,  in any of the  years
affected.

     In June 2006, the FASB issued  Interpretation  (FIN) No. 48, Accounting for
Uncertainty in Income Taxes, an  interpretation  of FASB Statement No. 109, that
clarifies  the  accounting  for  uncertainties  in income  taxes  recognized  in
accordance  with SFAS No.  109.  The  interpretation  prescribes  a  recognition
threshold and measurement attribute for the recognition and measurement of a tax
position  taken or expected to be taken in a tax return.  Companies are required
to  determine  whether it is more  likely than not that a tax  position  will be
sustained  upon  examination  based  on the  technical  merits  of the  position
(assuming the taxing authority has full knowledge of all relevant facts). If the
tax  position  meets the more likely than not  criteria,  the  position is to be
measured at the largest amount of benefit that is greater than 50 percent likely
to be realized upon settlement with the taxing authorities. Neither the Company,
or the Bank and its  subsidiaries,  have an uncertain tax position as defined by
FIN No. 48.  Therefore,  the Company does not expect the adoption of FIN No. 48,
which is effective for financial  statements  issued for fiscal years  beginning
after December 15, 2006, to have a material impact on the consolidated financial
statements or results of operations.

     In March  2006,  SFAS  Statement  No.  156,  Accounting  for  Servicing  of
Financial  Assets,  was issued.  This  statement  amends FASB Statement No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities,  which requires that all separately recognized servicing assets and
servicing  liabilities be initially measured at fair value, if practicable.  The
Bank has not sold any  loans or  financial  assets  that  have  resulted  in the
recognition  of any servicing  assets or  liabilities  since this  statement was
adopted.

     In February  2006,  SFAS  Statement No. 155  Accounting  for Certain Hybrid
Financial  Instruments was issued. This statement amends FASB Statement No. 133,
Accounting  for  Derivative  Instruments  and Hedging  Activities,  and No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities.  This  statement's  objective  with respect to Statement  133 is to
permit  fair value  re-measurement  for any  hybrid  financial  instrument  that
contains an embedded  derivative  that otherwise would require  bifurcation.  It
also  eliminated  the guidance in  Statement  133  Implementation  Issue No. D1,
Application  of Statement 133 to Beneficial  Interest in  Securitized  Financial
Assets,  which  provided  that a beneficial  interest in  securitized  financial
assets is not subject to the provisions of Statement 133. The primary  objective
of this  statement  with respect to Statement No. 140,  Accounting for Transfers
and Servicing of Financial  Assets and  Extinguishments  of  Liabilities,  is to
eliminate a restriction on the passive  derivative  instrument  that a qualified
special-purpose entity (SPE) may hold. The Bank has no derivative instruments or
hedging activity within the scope of this statement.

     Effective January 1, 2006, the Bank adopted a change in financial reporting
practice  implemented  by the  Office of Thrift  Supervision  (OTS),  the Bank's
primary  regulator.  The  OTS  changed  its  financial  reporting  practice  for
classifying  loan  prepayment  fees and late  payment  charges to record them as
interest income rather than non-interest  income. This adjustment by the OTS led
to a change in industry  practice in the reporting of loan  prepayment  fees and
late payment charges.  Accordingly,  the Consolidated  Statements of Income have
been updated to include these fees with interest  income.  The change results in
loan prepayment fees being  classified in the same category as the  amortization
of deferred  origination  costs.  Prepayment  fees are designed to reimburse the
Bank  for  loan  origination  costs  if the  loan is  repaid  prior  to the Bank
recovering   these  costs  through  the  interest   spread  on  the  loan.   The
reclassification  of these fees had no impact on net income,  but did affect key
financial data, such as the yield on interest-earning  assets, the interest rate
spread and the effective net spread.  Prepayment fees were $30.4 million,  $20.5
million and $8.0  million in 2006,  2005 and 2004,  respectively.  Late  payment
charges were $1.2 million,  $999  thousand and $706  thousand in 2006,  2005 and
2004, respectively.

<PAGE>

 (2) Investment Securities

     Investment securities,  available-for-sale,  are recorded at fair value and
summarized below for the periods indicated:
<TABLE>
                                                   At December 31, 2006
                                     -------------------------------------------------
                                                     Gross       Gross
                                     Historical   Unrealized   Unrealized      Fair
                                        Cost         Gains       Losses        Value
                                     ----------   ----------   ----------   ----------
                                                      (In thousands)
<S>                                <C>          <C>          <C>          <C>
Collateralized Mortgage
  Obligations...................... $   311,467  $       742  $      (359) $   311,850
                                     ==========   ==========   ==========   ==========

                                                   At December 31, 2006
                                     -------------------------------------------------
                                                     Gross       Gross
                                     Historical   Unrealized   Unrealized      Fair
                                        Cost         Gains       Losses        Value
                                     ----------   ----------   ----------   ----------
                                                      (In thousands)
Collateralized Mortgage
 Obligations....................... $   293,453  $       846  $      (282) $   294,017
                                     ==========   ==========   ==========   ==========
</TABLE>


     Collateralized   Mortgage   Obligations  at  December  31,  2006  all  have
contractual  maturities greater than 6 years and have expected maturities within
five years.  There were no sales of investment  securities  during 2006, 2005 or
2004.  Accrued interest on investments was $1,726,000 and $1,231,000 at December
31, 2006 and 2005, respectively.

(3) Mortgage-backed Securities

     Mortgage-backed securities, available-for-sale, have contractual maturities
from 17 months to 353 months and are summarized below at the dates indicated:
<TABLE>

                                                   At December 31, 2006
                                     -------------------------------------------------
                                                     Gross       Gross
                                     Historical   Unrealized   Unrealized      Fair
                                        Cost         Gains       Losses        Value
                                     ----------   ----------   ----------   ----------
                                                      (In thousands)
<S>                                <C>          <C>          <C>          <C>

FNMA............................... $     3,897  $        10  $        --  $     3,907
FHLMC..............................      53,157          133           --       53,290
                                     ----------   ----------   ----------   ----------
                                    $    57,054  $       143  $        --  $    57,197
                                     ==========   ==========   ==========   ==========

                                                   At December 31, 2006
                                     -------------------------------------------------
                                                     Gross       Gross
                                     Historical   Unrealized   Unrealized      Fair
                                        Cost         Gains       Losses        Value
                                     ----------   ----------   ----------   ----------
                                                      (In thousands)

FNMA............................... $     4,661  $        12  $        --  $     4,673
FHLMC..............................      69,407          174           --       69,581
                                     ----------   ----------   ----------   ----------
                                    $    74,068  $       186  $        --  $    74,254
                                     ==========   ==========   ==========   ==========
</TABLE>


     Accrued  interest   receivable   related  to   mortgage-backed   securities
outstanding  at  December  31,  2006 and 2005  totaled  $496,000  and  $480,000,
respectively.

<PAGE>

(4) Loans Receivable

     The following is a summary of loans receivable at the periods indicated:

                                                    At December 31,
                                                  -----------------------
                                                     2006       2005
                                                  ----------   ----------
                                                      (In thousands)
Real estate loans:
First trust deed residential loans:
     One-to-four units ..................        $ 6,444,225  $ 7,361,476
     Five or more units .................          1,811,966    1,942,021
                                                  ----------   ----------
     Residential loans ..................          8,256,191    9,303,497
  Other real estate loans:
     Commercial and industrial ..........            196,569      257,560
     Construction .......................                 --        4,910
     Second trust deeds .................              3,392        6,505
                                                  ----------   ----------
  Real estate loans .....................          8,456,152    9,572,472
Non-real estate loans:
  Deposit accounts.......................                825          595
  Commercial business loans  ............             83,759       80,186
  Consumer...............................             44,528       57,399
                                                  ----------   ----------
     Loans receivable ...................          8,585,264    9,710,652
Less:
  General loan valuation allowance.......            109,768       97,558
  Valuation allowances for impaired loans                 --           --
  Deferred loan origination (costs) fees.            (41,956)     (68,039)
                                                  ----------   ----------
     Subtotal ...........................          8,517,452    9,681,133
Less:
   Loans held-for-sale...................            140,860        2,873
                                                  ----------   ----------
Loans receivable, net....................        $ 8,376,592  $ 9,678,260
                                                  ==========   ==========

     The Bank originates loans with reduced levels of borrower  documentation at
origination.  On "Stated  Income/Stated  Asset"  ("SISA")  loans,  the  borrower
includes  information  on his/her level of income and assets that is not subject
to verification. On "Stated Income/Verified Assets" ("SIVA") loans, the borrower
includes  information  on  his/her  level  of  income  that  is not  subject  to
verification, but his/her assets are verified. For "No Income/No Asset" ("NINA")
loans,  the borrower is not required to submit  information  on his/her level of
income or assets.  The  underwriting  of these loans is based on the  borrower's
credit score and credit history,  intended  occupancy,  reasonableness of stated
income  and  the  value  of  the  collateral.  Adjustments  to  interest  rates,
loan-to-values  and  required  credit  scores are made on these types of reduced
documentation  loans in order to compensate for any additional risks the lack of
documentation may pose. At December 31, 2006, approximately 12%, 33%, and 35% of
the single family loan  portfolio  was  comprised of NINA,  SIVA, or SISA loans,
respectively.  This  compares  to 11%,  32%,  and 38% of the single  family loan
portfolio being NINA,  SIVA, or SISA loans  respectively,  at December 31, 2005.
The portfolios of multi-family  and other real estate loans all require complete
and customary documentation from the borrowers.

     At  December  31,  2006 and 2005,  negative  amortization,  included in the
balance of loans receivable, totaled $215,799,000 and $62,622,000, respectively.
The  portfolio  of  single  family  loans  with a  one-year  fixed  payment  was
$4,621,706,000 at December 31, 2006, and $4,630,320,000 as of December 31, 2005.
The portfolio of single family loans with a three-to-five year fixed payment was
$1,822,519,000  as of December 31, 2006, and  $2,693,273,000  as of December 31,
2005.

      During 2005 the Bank created $1,289,659,000 in mortgage-backed securities
with loans from its multi-family loan portfolio for use in collateralized
borrowing arrangements. Because the Bank retained full recourse on the loans,
the mortgage-backed securities continue to be accounted for as loans receivable
in the accompanying Consolidated Balance Sheet. There were no mortgage-backed
securities created with loans originated by the Bank in 2006 or 2004. There were
no sales of mortgage-backed securities during 2006, 2005 or 2004.

     The Bank had adjustable loans totaling $8,391,073,000 and $9,302,600,000 at
December 31, 2006 and 2005, respectively.

     The Bank had outstanding  commitments to fund $213,735,000 and $599,433,000
in real estate loans at December  31, 2006 and December 31, 2005,  respectively.
All of these loans had variable interest rates. The Bank classified $140,860,000
and  $2,873,000  as  loans  held  for  sale  at  December  31,  2006  and  2005,
respectively. There were no formal outstanding commitments to sell these loans.
<PAGE>

(4) Loans Receivable (continued)

     The Bank had undisbursed  commercial and  construction  loan funds totaling
$75,665,000  at  December  31,  2006  and  $62,544,000  at  December  31,  2005.
Undisbursed  consumer  loan  funds  totaled  $121,690,000  and  $136,219,000  at
December 31, 2006 and December 31, 2005, respectively.

     Accrued interest  receivable  related to loans  outstanding at December 31,
2006 and 2005 totaled $53,359,000 and $45,186,000, respectively.

     Loans  delinquent  greater than 90 days or in foreclosure  were $18,497,000
and  $4,966,000  at December  31, 2006 and 2005,  respectively,  and the related
allowance for delinquent interest was $769,000 and $147,000, respectively.

     Loans made to directors and executive  officers (senior vice presidents and
above)  totaled  $6,404,000  and  $4,043,000  at  December  31,  2006 and  2005,
respectively.

      See Notes 9 and 10 for loans pledged as security for borrowings as of
December 31, 2006.

     The  following is a summary of the  activity in the general loan  valuation
allowance and valuation allowances for impaired loans for the periods indicated:
<TABLE>

                                                            Valuation
                                                            Allowances
                                                General        for
                                                Valuation    Impaired
                                                Allowance      Loans      Total
                                                ---------   ----------   --------
                                                          (In thousands)
<S>                                           <C>         <C>          <C>
Balance at December 31, 2003..............     $   75,238  $       496  $  75,734
  Provision for loan losses...............          3,000           --      3,000
  Charge-offs.............................            (19)          --        (19)
  Recoveries..............................            456           --        456
                                                ---------   ----------   --------
Balance at December 31, 2004..............         78,675          496     79,171
  Provision for loan losses...............         18,650        1,100     19,750
  Charge-offs.............................           (168)      (1,596)    (1,764)
  Recoveries..............................            401           --        401
                                                ---------   ----------   --------
Balance at December 31, 2005..............         97,558           --     97,558
  Provision for loan losses...............         12,400           --     12,400
  Charge-offs.............................           (203)          --       (203)
  Recoveries..............................             13           --         13
                                                ---------   ----------   --------
Balance at December 31, 2006..............     $  109,768  $        --  $ 109,768
                                                =========   ==========   ========
</TABLE>

     Loans serviced for others totaled  $128,939,000 and $89,074,000 at December
31, 2006 and 2005, respectively.  Loans serviced for others at December 31, 2006
included $52,471,000 of loans serviced under interim servicing agreements.

     The Bank has  certain  loans  that  were sold with  recourse.  These  loans
totaled $53,245,000 and $59,856,000 at December 31, 2006 and 2005, respectively.
The  maximum  potential  recourse  liability  associated  with  loans  sold with
recourse was  $15,471,000  and $16,197,000 at December 31, 2006 and December 31,
2005,  respectively.  Because no additional  losses are expected on these loans,
the repurchase liability associated with these loans was eliminated during 2004.

     The following is a summary of impaired loans,  net of valuation  allowances
for impairment, at the dates indicated:
                                                   At December 31,
                                                  ------------------
                                                    2006       2005
                                                  --------   -------
                                                   (In thousands)

                 Non-accrual loans.............. $   2,544  $  3,027
                 Other impaired loans...........     2,894        --
                                                  --------   -------
                 Total impaired loans........... $   5,438  $  3,027
                                                  ========   =======

     The Bank  considers a loan  impaired  when  management  believes that it is
probable  that the Bank will not be able to collect  all  amounts  due under the
contractual terms of the loan. Estimated impairment losses are recorded as
<PAGE>

(4) Loans Receivable (continued)

     separate valuation  allowances and may be subsequently  adjusted based upon
changes in the  measurement  of  impairment.  Impaired  loans,  disclosed net of
valuation allowances, include non-accrual major loans (commercial business loans
with an outstanding  principal amount greater than or equal to $500,000,  single
family loans greater than or equal to $1,000,000 and income  property loans with
an outstanding  principal amount greater than or equal to $1,500,000),  modified
loans,  and major loans less than 90 days  delinquent  in which full  payment of
principal and interest is not expected to be received.

     The  following  is a summary of  information  pertaining  to  impaired  and
non-accrual loans:

                                                      At December 31,
                                                   ---------------------
                                                      2006       2005
                                                   ----------  ---------
                                                      (In thousands)

        Impaired loans without a valuation
          allowance ............................  $     5,438 $    3,027
        Impaired loans with a valuation
          allowance.............................  $        -- $       --
        Valuation allowances related to
          impaired loans........................  $        -- $       --

         Total non-accrual loans................  $    18,497 $    4,966


                                             Year Ended December 31,
                                         ---------------------------------
                                            2006        2005        2004
                                         ---------   ---------   ---------
                                                    (In thousands)

  Average investment in impaired loans$     6,767 $     2,649 $     1,467
  Total interest income recognized on $       689 $       174 $        22
impaired loans.....................
  Interest income recognized on a cash
   basis on impaired loans.........   $       562 $       166 $        22


      There were no commitments to lend additional funds to borrowers whose loan
terms had been modified for any of these periods.

(5) Real Estate

      The Bank had $1,094,000 and $0 of real estate owned as of December 31,
2006 and 2005, respectively. The Bank did not own any real estate held for
investment as of December 31, 2006 or 2005.

      The following table summarizes real estate operations, net:
                                                 For the Year Ended December
                                                             31,
                                                -----------------------------
                                                  2006       2005     2004
                                                --------   --------  --------
                                                      (In thousands)
Net income from operations:
  Gain on sale of REO.....................    $     325 $        - $     496
  Gain on sale of real estate held for                -      2,245         -
investment.....................
  Other REO operations....................         (339)      (232)     (188)
                                                --------   --------  --------
     Real estate operations, net .........    $     (14)$    2,013 $     308
                                                ========   ========  ========

      The Bank acquired $1,461,000 of real estate during settlement of loans
during 2006 and none during 2005 and 2004.



(6) Office Properties, Equipment and Lease Commitments

      Office properties and equipment, at cost, less accumulated depreciation
and amortization, are summarized as follows:

                                                     At December 31,
                                                   -------------------
                                                     2006       2005
                                                   --------   --------
                                                     (In thousands)

Land..........................................   $   6,713 $    6,713
Office buildings..............................       6,843      6,642
Furniture, fixtures and equipment.............      19,589     18,428
Leasehold improvements........................      10,387      9,044
Other.........................................         809        855
                                                   --------   --------
                                                    44,341     41,682
Less accumulated depreciation and amortization      27,772     25,923
                                                   --------   --------
                                                 $  16,569 $   15,759
                                                   ========   ========

      The Bank is obligated under non-cancelable operating leases for periods
ranging from five to thirty years. The leases are for certain of the Bank's
office facilities.

      Approximately half of the leases for office facilities contain five and
ten year renewal options. Minimum rental commitments at December 31, 2006 under
all non-cancelable leases are as follows (in thousands):


2007.......................$   5,502
2008........................   3,976
2009........................   1,324
2010........................     949
2011........................     569
Thereafter..................   2,020
                              -------
                           $  14,340
                              =======

      Rent expense under these leases was $5,303,000, $5,148,000 and $4,836,000
for 2006, 2005 and 2004, respectively. Certain leases require the Bank to pay
property taxes and insurance. Additionally, certain leases have rent escalation
clauses based on specified indices.

(7) Federal Home Loan Bank Stock

      The Bank's investment in FHLB stock at December 31, 2006 and 2005 was
$118,979,000 and $205,696,000, respectively. The FHLB provides a central credit
facility for member institutions. As a member of the FHLB system, the Bank is
required to own capital stock in the FHLB in an amount at least equal to the
greater of 1% of the aggregate principal amount of its unpaid home loans, home
purchase contracts and similar obligations at the end of each calendar year,
assuming for such purposes that at least 30% of its assets were home mortgage
loans, or 4.7% of its advances (borrowings) from the FHLB. The Bank was in
compliance with this requirement at December 31, 2006. The Bank's investment in
FHLB stock was pledged as collateral for advances from the FHLB at December 31,
2006 and 2005. The fair value of the Bank's FHLB stock approximates book value
due to the Bank's ability to redeem such stock with the FHLB at par value. The
Bank did not accrue any dividends on its FHLB stock at December 31, 2006. The
Bank changed its practice for accruing dividend income on FHLB stock in the
fourth quarter of 2006, as discussed in Footnote 1. The Bank also reversed
$2,223,000 of accrued FHLB stock dividends which were on the Consolidated
Balance Sheet at December 31, 2005. This resulted in a $1,288,000 reduction in
the Bank's retained earnings, net of $935,000 in deferred taxes at January 1,
2006.



(8) Deposits

      Deposit account balances are summarized as follows:

                                                   At December 31,
                                           ---------------  ---------------
                                                2006             2005
                                           ---------------  ---------------
                                            Amount     %      Amount     %
                                           --------  -----  ---------  ----
                                                (Dollars in thousands)
Variable rate non-term accounts:
Money market deposit accounts (weighted
   average rate of 4.12% and 2.80%)..     $ 887,933   15%  $ 886,592    20%
Interest-bearing checking accounts
   (weighted average rate of 0.34% and
   0.34%)............................       172,297    3     196,741     5
Passbook accounts (weighted average rate
   of 1.31% and 1.00%)...............        93,155    2     115,380     3
Non-interest bearing checking accounts      361,973    6     393,980     9
                                           --------  -----  ---------  ----
                                          1,515,358   26   1,592,693    37
                                           --------  -----  ---------  ----
Fixed-rate term certificate accounts:
Under six-month term (weighted average
   rate of 5.29% and 3.73%)..........      659,843    11     374,660     9
Six-month term (weighted average rate of
   5.11% and 3.74%)..................      724,280    12     766,527    17
Nine-month term (weighted average rate
   of 5.16% and 3.84%)...............      623,038    11     519,956    12
One year to 18-month term (weighted
   average rate of 5.05% and 3.82%)..    2,289,550    39     986,068    22
Two year to 30-month term (weighted
   average rate of 4.24% and 2.85%)..       19,904     0      43,285     1
Over 30-month term (weighted average
   rate of 3.80%     and 3.42%)......       57,908     1      88,468     2
                                           --------  -----  ---------  ----
                                         4,374,523    74   2,778,964    63
                                           --------  -----  ---------  ----

Total deposits (weighted average rate of
   4.44% and 3.00%)..................   $5,889,881   100%  $4,371,657   100%
                                           ========  =====  =========   ====

     Certificates  of deposit,  placed  through seven major  national  brokerage
firms, totaled  $2,782,669,000 and $1,675,555,000 at December 31, 2006 and 2005,
respectively.

     Cash  payments  for  interest on  deposits  (including  interest  credited)
totaled  $177,480,000,  $80,294,000 and $35,308,000  during 2006, 2005 and 2004,
respectively. Accrued interest on deposits at December 31, 2006 and 2005 totaled
$68,762,000 and $25,310,000,  respectively,  and is included in accrued expenses
and other liabilities in the accompanying Consolidated Balance Sheets.

     The following table indicates the maturities and weighted  average interest
rates of the Bank's deposits:

<TABLE>

                       Non-Term                                    There-
                       Accounts      2007      2008       2009      after     Total
                       --------   ---------  ---------  ---------  --------  --------
                                           (Dollars in thousands)
<S>                     <C>       <C>        <C>        <C>         <C>      <C>

Deposits at
  December 31, 2006.$  1,515,358 $ 4,271,539 $ 85,149    $ 9,813   $  8,022 $ 5,889,881
Weighted average
  Interest rates.....     2.54%       5.10%     4.99%      4.30%       4.19%     4.44%


</TABLE>


(8) Deposits (continued)

      The following table shows the maturity distribution of certificates of
deposit of $100,000 and greater as of December 31, 2006 (in thousands):

Maturing in:
  1 month or less..........................   $ 91,664

  Over 1 month to 3 months.................    238,392

  Over 3 months to 6 months................    266,444

  Over 6 months to 12 months...............    177,629

  Over 12 months...........................     42,939
                                              --------
   Total...................................  $ 817,068
                                              ========

     Interest expense on deposits is summarized as follows:
<TABLE>

                                                    For the Year Ended December 31,
                                                    -------------------------------
                                                      2006        2005      2004
                                                    ---------  ---------   --------
                                                             (In thousands)
<S>                                                <C>        <C>         <C>

Passbook accounts..............................  $    1,348  $   1,205  $    1,287
Money market deposits and interest-bearing
checking accounts..............................      34,164     22,585      20,953
Certificate accounts...........................     185,420     74,067      19,919
                                                    ---------  ---------   --------
                                                 $  220,932  $  97,857  $   42,159
                                                    =========  =========   ========
</TABLE>

(9) Federal Home Loan Bank Advances

      FHLB advances consist of the following at December 31:
<TABLE>

                                                                                         2006        2005
                                                                                      ----------  ---------
                                                                                          (In thousands)
   <S>                                                                                <C>         <C>
    Advances from the FHLB of San Francisco with a weighted average interest
    rate of 5.33% and 4.19%, respectively, secured by FHLB stock and certain
    real estate loans with unpaid principal balances of approximately
    $7,139,855,000 at December 31, 2006,
    advances mature through 2010................                                      $1,490,000  $4,155,500
                                                                                      ==========  ==========

</TABLE>

     At December 31, 2006 and 2005,  accrued  interest  payable on FHLB advances
totaled $5,954,000 and $14,129,000,  respectively,  which is included in accrued
expenses and other liabilities in the accompanying Consolidated Balance Sheets.

     The Bank has a credit facility with the FHLB (advances and lines of credit)
which  allow  borrowings  up to  60% of  the  Bank's  assets,  as  computed  for
regulatory  purposes.  At  December  31,  2006 the  Company's  unused  borrowing
capacity was in excess of $4.0 billion.

      The following is a summary of FHLB advance maturities at December 31, 2006
(in thousands):


                         2007......................$ 1,455,000
                         2008.......................    10,000
                         2009.......................     5,000
                         2010.......................    20,000
                         2011.......................         -
                                                      --------
                                                   $ 1,490,000
                                                      ========

     Cash  payments for interest on  borrowings  (including  reverse  repurchase
agreements  and senior  debentures  -see Notes 10 and 11) totaled  $195,740,000,
$122,075,000 and $58,248,000 during 2006, 2005 and 2004, respectively.


     Interest  expense on borrowings is comprised of the following for the years
indicated:

                                               For the Year Ended December 31,
                                               ------------------------------
                                                 2006       2005      2004
                                               --------   --------   --------
                                                        (In thousands)

FHLB advances............................   $  138,881 $  114,780 $   56,789
Reverse repurchase agreements............       49,233     35,006      1,964
Senior debentures........................        5,940      1,557          -
Other....................................           64        (10)       278
                                               --------   --------   --------
                                            $  194,118 $  151,333 $   59,031
                                               ========   ========   ========

     Other  interest  expense in 2006,  2005,  and 2004  includes  accruals  and
reversals of accrued  interest due to the Internal Revenue Service and Franchise
Tax Board and other miscellaneous items (see Note 12).

(10) Securities Sold Under Agreements to Repurchase

     The Bank enters into sales of  securities  under  agreements  to repurchase
(reverse  repurchase  agreements)  which  require  the  repurchase  of the  same
securities. Reverse repurchase agreements are treated as financing arrangements,
and the obligation to repurchase  securities sold is reflected as a borrowing in
the Consolidated Balance Sheets. The mortgage-backed  securities  underlying the
agreements  were  delivered to the dealer who arranged the  transactions  or its
trustee.

     In January of 2005, the Bank completed a loan  securitization  with FNMA in
which  $1,289,659,000 in multi-family  loans from the Bank's loan portfolio were
formed into mortgage-backed securities.  Because the Bank retained full recourse
on the securitized  loans, the  mortgage-backed  securities are accounted for as
part of the loan portfolio under Statement of Financial Accounting Standards No.
140,  Accounting for and Servicing of Financial  Assets and  Extinguishments  of
Liabilities.  These mortgage-backed  securities are also delivered to the dealer
who arranged the transactions or its trustee.

     At December 31, 2006,  $978,448,000 in reverse  repurchase  agreements were
collateralized  by  loans  with  a  fair  market  value  totaling  $917,832,000,
mortgage-backed   securities  with  a  fair  market  value  of  $46,929,000  and
investments with a fair market value totaling $73,152,000. At December 31, 2005,
$1,163,684,000  in reverse  repurchase  agreements were  collateralized by loans
with a fair market value  totaling  $1,054,179,000,  mortgage-backed  securities
with a fair market value of  $61,441,000,  investments  with a fair market value
totaling $108,772,000 and FHLB stock totaling $10,387,000.

     The weighted average interest rates for borrowings under reverse repurchase
agreements  were 5.37% and 4.04%,  at December  31, 2006 and  December 31, 2005,
respectively.

     The  following  is a  summary  of  maturities  at  December  31,  2006  (in
thousands):


                        Up to 30 days..............   $     --
                        30 to 90 days...............   580,000
                        Over 90 to 182 days.........   398,448
                                                      --------
                                                      $978,448
                                                      ========

     Accrued  interest  on  securities  sold  under  agreements  to  repurchase,
included  in  accrued  expenses  and  other   liabilities  in  the  accompanying
Consolidated  Balance  Sheets,  was  $15,138,000 and $14,590,000 at December 31,
2006 and 2005, respectively.

(11) Senior Debentures

     The  Company   completed  the  placement  of   $100,000,000   in  unsecured
fixed/floating  rate  senior  debentures  during  2005.  The first  $50,000,000,
completed in June of 2005,  is due in 2015 and has a fixed rate of 5.65% for the
first  five years and is  adjustable  afterwards  at 1.55% over the  three-month
LIBOR. The second $50,000,000, completed in December of 2005, is due in 2016 and
has a fixed rate of 6.23% for the first five years and is adjustable  afterwards
at 1.55% over the  three-month  LIBOR.  The debentures in each  transaction  are
redeemable  at par  after the  first  five  years.  Covenants  contained  in the
Indentures prohibit the Company from selling or otherwise disposing of shares of
voting  stock of the Bank or  permitting  liens on such Bank  stock  other  than
certain  permitted  liens.  The  Indentures  also  impose  certain   affirmative
covenants on the Company,  none of which has any material  adverse effect on the
Company's ability to operate its business.


(12) Income Taxes

     Income taxes (benefit) consist of the following:
                                                    Year Ended December 31,
                                                 ------------------------------
                                                   2006       2005      2004
                                                 --------   --------   --------
                                                       (In thousands)
   Current:
     Federal...............................   $   82,965 $   60,602 $   42,297
     State.................................       28,122     20,299     13,747
                                                                       --------
                                                 --------   --------
                                                 111,087     80,901     56,044
                                                 --------   --------   --------
   Deferred:
     Federal...............................      (12,775)   (11,208)    (6,842)
     State.................................       (3,442)    (2,940)    (1,588)
                                                            --------   --------
                                                 --------
                                                 (16,217)   (14,148)    (8,430)
                                                 --------   --------   --------
   Total:
     Federal...............................       70,190     49,394     35,455
     State.................................       24,680     17,359     12,159
                                                 --------   --------   --------
                                              $   94,870 $   66,753 $   47,614
                                                 ========   ========   ========

     A reconciliation  of the statutory federal corporate income tax rate to the
Company's effective income tax rate follows:
                                           Year Ended December 31,
                                          ---------------------------
                                            2006      2005     2004
                                          --------   ------  --------
                                                             --------

Statutory federal income tax rate ..         35.0%    35.0%   35.0%
Increase in taxes resulting from:
State franchise tax, net of federal           7.2      7.1     7.0
income tax benefit..................
Non-deductible stock options........          0.2      -        -
Other, net..........................           -       -        -
                                          --------   ------  --------
Effective rate......................         42.4%    42.1%   42.0%
                                          ========   ======  ========

     The  Company,  the Bank and the Bank's  subsidiaries  file a  consolidating
federal income tax return.  Each entity is  responsible  for paying its pro-rata
shares of the consolidated tax liability.  Substantially all of the income taxes
(benefit) belong to the Bank during 2006, 2005, and 2004, respectively.

     Cash  payments  for income  taxes  totaled  $111,690,000,  $76,490,000  and
$53,471,000 during 2006, 2005 and 2004, respectively.

     Income  taxes  payable  totaled  $547,000  as  of  December  31,  2006  and
$3,332,000 as of December 31, 2005.

     Listed below are the significant components of the net deferred tax (asset)
and liability:

                                                      At December 31,
                                                   --------------------
                                                      2006        2005
                                                   ---------   --------
                                                     (In thousands)
Components of the deferred tax asset:
  Bad debts..................................    $ (50,609) $  (44,721)
  Pension expense............................       (6,524)     (6,072)
  State taxes................................       (6,315)     (4,751)
  Core deposit intangible asset..............       (3,270)     (2,902)
  SERP liability adjustment..................       (1,559)          -
  Loan fees..................................      (18,235)     (7,065)
  Other......................................       (2,368)     (2,581)
                                                   ---------   --------
    Total deferred tax asset.................      (88,880)    (68,092)
                                                   ---------   --------
Components of the deferred tax liability:
  FHLB stock dividends.......................       29,529      27,242
  Tax effect of unrealized gain on
     securities available-for-sale...........          221         315
  Other......................................          328         496
                                                   ---------   --------
    Total deferred tax liability.............       30,078      28,053
                                                   ---------   --------
Net deferred tax asset.......................    $ (58,802) $  (40,039)
                                                   =========   ========

(12) Income Taxes (continued)

     The Company did not have a valuation  allowance  for the deferred tax asset
at December  31, 2006 or 2005,  as it is more likely than not that the  deferred
tax asset will be realized due to the existence of loss carry-backs and expected
future earnings.

     As  described  in Footnote 1, the Company  reversed  $3,675,000  of accrued
state and federal tax liabilities  which were on the Consolidated  Balance Sheet
at December 31, 2005.  This  resulted in a $3,675,000  increase in the Company's
retained earnings at January 1, 2006.

     The  Internal   Revenue   Service   ("IRS")  has  examined  the   Company's
consolidated  federal income tax returns for tax years up to and including 2003.
The  adjustments  proposed  by the  IRS  were  primarily  related  to  temporary
differences as to the  recognition of certain  taxable income and expense items.
While  the  Company  has  provided  for  deferred  taxes for  federal  and state
purposes,  a change in the period of  recognition  of certain income and expense
items can result in interest due to the IRS and the Franchise Tax Board ("FTB").
Interest  accruals of $62,000 and $56,000  were  recorded  during 2006 and 2005,
respectively  for  interest on amended  returns.  During 2006 and 2005  interest
payments  totaling  $0 and  $207,000,  respectively,  were  paid  to the  IRS in
settlement  of tax years 2001,  2002 and 2003.  During 2006,  interest  payments
totaling  $138,000 were paid to the FTB for tax years 1999 and 2000. The balance
of accrued  interest  payable for amended returns was $83,000 and $159,000 as of
December 31, 2006 and December 31, 2005, respectively.

     The Bank is required to use the specific  charge-off  method of  accounting
for bad debts for Federal income tax purposes.  Prior to 1995, the Bank used the
reserve method of accounting for bad debts.  The  Consolidated  Balance Sheet at
December 31, 2006 does not include a tax liability of $5,356,000  related to the
adjusted  base year bad debt  reserve  that was created when the Bank was on the
reserve  method.  The base year reserve is subject to recapture if: (1) The Bank
fails to qualify as a "bank"  for  federal  income  tax  purposes;  (2)  certain
distributions  are made with respect to the stock of the Bank;  (3) the bad debt
reserves are used for any purpose  other than to absorb bad debt losses;  or (4)
there is a change in federal  tax law.  Management  does not expect any of these
events to occur.

(13) Stockholders' Equity

     The Company's stock charter authorizes 5,000,000 shares of serial preferred
stock with a par value of $0.01 per share. As of December 31, 2006, no preferred
shares had been issued.

Regulatory Capital

     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 the Bank's  assets,
liabilities and certain  off-balance  sheet items as calculated under regulatory
accounting  practices.  The Bank's capital amounts and  classification  are also
subject to qualitative  judgments by the regulators about asset 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 table
below)  of  total  and  Tier  I  capital  (as  defined  in the  regulations)  to
risk-weighted  assets (as defined).  Management believes that the Bank meets all
capital adequacy requirements to which it is subject as of December 31, 2006.

     As of December 31, 2006,  the Bank was well-  capitalized  as defined under
the regulatory  framework for prompt corrective action.  There are no conditions
or events since  December  31, 2006 that  management  believes  have changed the
Bank's classification.




(13) Stockholders' Equity (continued)


                                               December 31, 2006
                                 ----------------------------------------------
                                                          Tier 1     Risk-based
                                 Tangible    Core       Risk-based    Capital
                                  Capital    Capital     Capital
                                 ----------  ---------  -----------  ----------
                                            (Dollars in thousands)
Actual capital:
   Amount...................... $ 788,611   $ 788,611  $  788,611   $ 849,821
   Ratio........................     8.49%      8.49%       16.27%      17.53%
FDICIA minimum required
capital:
   Amount...................... $ 139,393   $ 371,715  $        -   $ 387,857
   Ratio........................     1.50%      4.00%           -%       8.00%
FDICIA well-capitalized
required capital:
   Amount...................... $       -   $ 464,643  $  290,893   $ 484,822
   Ratio........................        -%      5.00%        6.00%      10.00%


                                               December 31, 2005
                                  ---------------------------------------------
                                                          Tier 1     Risk-based
                                  Tangible   Core       Risk-based    Capital
                                  Capital    Capital     Capital
                                  ---------  ---------  -----------  ----------
                                             (Dollars in thousands)
Actual capital:
   Amount...................... $  651,447  $ 651,447   $  651,447    $ 720,585
   Ratio........................      6.23%      6.23%       11.84%       13.10%
FDICIA minimum required
capital:
   Amount...................... $  156,772  $ 418,059   $        -    $ 440,213
   Ratio........................     1.50%       4.00%           -%        8.00%
FDICIA well-capitalized
required capital:
   Amount...................... $       -   $ 522,573   $  330,159    $ 550,266
   Ratio........................        -%       5.00%        6.00%       10.00%


     The  payment  of  dividends  is  subject  to  certain  federal  income  tax
consequences.  Specifically,  the Bank is  capable  of paying  dividends  to the
Company in any year without  incurring tax liability  only if such  dividends do
not exceed both the tax basis  current  year income and profits and  accumulated
tax income and profits as of the beginning of the year.

     Thirty days' prior notice to the OTS of the intent to declare  dividends is
required for the  declaration  of such  dividends by the Bank. The OTS generally
allows  a  savings   institution   which  meets  its  fully  phased-in   capital
requirements  to distribute,  without OTS approval,  dividends up to 100% of the
institution's  net income for the  applicable  calendar  year plus  retained net
income for the two prior calendar years.  However,  the OTS has the authority to
preclude the declaration of any dividends or adopt more stringent  amendments to
its capital regulations.

     The Company may loan up to $6,000,000 to the Employee Stock  Ownership Plan
("ESOP") under a line of credit loan. At December 31, 2006, the outstanding loan
to the ESOP totaled  $1,489,000.  At December 31, 2005, the outstanding  loan to
the ESOP totaled $890,000.  Interest on any outstanding loan balance is due each
December 31st.  Interest  varies based on the Bank's monthly cost of funds.  The
average rates paid during 2006 and 2005 were 4.42% and 2.91%, respectively.

     The Company  maintains a Shareholder  Rights Plan ("Rights  Plan") which is
designed to protect shareholders from attempts to acquire control of the Company
at an  inadequate  price.  Under the  Rights  Plan,  the owner of each  share of
Company  stock  received a  dividend  of one right  ("Right")  to  purchase  one
one-thousandth  of a share of a new series of preferred  stock for its estimated
long term value of $200. In the event of certain  acquisitions of 15% or more of
the voting  stock or a tender  offer for 15% or more of the voting  stock of the
Company,  each holder of a Right who exercises such Right will receive shares of
the Company  with a market  value equal to two times the  exercise  price of the
Right. Also, in the event of certain business combination transactions following
the  acquisition  by a person of 15% or more of the Company  stock,  each Rights
holder will have the right to receive upon exercise of the Right common stock of
the surviving company in such transaction having a market value of two times the
exercise price of the Right. The Company may redeem the Rights at any time prior
to such  acquisition  or  tender  offer  should  the  Board  of  Directors  deem
redemption to be in its stockholders' best interests.

(14) Employee Benefit Plans

     The Bank maintains a qualified defined  contribution plan established under
Section 401 (k) of the Internal  Revenue Code,  as amended (the "401(k)  Plan").
Participants  are permitted to make  contributions on a pre-tax basis, a portion
of which is matched by the Bank. The 401(k) Plan expense was $652,000,  $416,000
and $500,000 for 2006, 2005 and 2004, respectively.

     The Bank has a  Supplementary  Executive  Retirement Plan ("SERP") which is
unfunded and covers the individuals  currently employed by the Bank as its Chief
Executive Officer and Chief Operating Officer.  The pension expense for the SERP
was $1,526,000,  $1,476,000 and $1,381,000 in 2006, 2005 and 2004, respectively.
The expected  annual  contributions  to the SERP for the next five years will be
$287,000 in 2007, $829,000 in 2008 and $1,009,000 in each of the following three
years. In connection with the Bank's adoption of SFAS No. 158, the Bank recorded
a $3.7 million increase to its SERP liability, which resulted in a $2.1 million,
net of  tax,  reduction  in  Accumulated  Other  Comprehensive  Earnings  on the
Consolidated  Balance  Sheet.  Also related to the adoption of SFAS No. 108, the
Bank reversed a $275,000 excess SERP accrual with an offset to Retained Earnings
as of January 1, 2006.  The Bank's SERP liability at December 31, 2006 was $11.7
million  prior to the SFAS No.  108 and SFAS No. 158  adjustments  and was $15.2
million after the adjustments.

     The  discount  rates used in  determining  the  actuarial  value of benefit
obligations  were 5.75% and 5.50%,  respectively,  as of  December  31, 2006 and
2005. The rate of increase in future compensation levels used in determining the
pension cost for the SERP was 4.0% at both December 31, 2006 and 2005.  The plan
had no assets as of December 31, 2006 or 2005.

      The following table sets forth the funded status of the SERP and amounts
recognized in the Company's financial statements for the years indicated:

                                                             At December 31,
                                                           ------------------
                                                             2006       2005
                                                           --------   -------
                                                            (In thousands)
Change in Benefit Obligation
      Projected benefit obligation, beginning of the year $  14,433  $  11,748
      Service cost...................................           291        565
      Interest cost..................................           786        667
      Benefits paid..................................          (287)       (287)
      Actuarial (gain) loss..........................           (72)     1,740
                                                           --------   --------
      Projected benefit obligation, end of the year..     $  15,151  $  14,433
                                                           ========   ========

Change in Plan Assets
      Benefits Paid..................................     $    (287) $    (287)
      Employer contributions.........................           287        287
      Funded status..................................       (15,151)   (14,433)
      Unrecognized transition obligation.............           -          -
      Unrecognized prior service cost................           -          -
      Unrecognized net actuarial loss................         3,707      4,229
                                                           --------   --------
      Net amount recognized..........................     $ (11,444) $ (10,204)
                                                           ========   ========

Components of Net Periodic Benefit Cost
      Service cost...................................     $     291  $     565
      Interest cost..................................           786        667
      Amortization of unrecognized net loss..........           449        229
      Amortization of unrecognized prior service cost             -         15
                                                           --------   --------
      Pension cost...................................     $   1,526  $   1,476
                                                           ========   ========

     The projected benefit obligation,  accumulated benefit obligation, and fair
value of assets were $15,151,000,  $12,607,000 and $0 respectively,  at December
31, 2006 and $14,433,000,  $11,523,000,  and $0,  respectively,  at December 31,
2005.
     The Bank has a profit sharing plan (the "ESOP") for all eligible  employees
and officers who have  completed  one year of  continuous  service.  The ESOP is
accounted for in accordance  with AICPA  Statement of Position 93-6,  Employers'
Accounting  for  Employee  Stock  Ownership  Plans.  The  number of shares to be
released to ESOP  participants each year is determined based on the contribution
made by the Bank divided by the average market price of the Company's  stock for
the year.

     At December 31, 2006, the ESOP held 4.07% of the  outstanding  stock of the
Company.  Profit sharing expense for the years ended December 31, 2006, 2005 and
2004 was $1,548,000, $1,545,000 and $2,530,000,  respectively. The amount of the
contribution made by the Bank is determined each year by the Board of Directors,
but is not to exceed 15% of the participants' aggregated compensation.  The Bank
does not offer post-retirement benefits under this plan.

     At December 31, 2006 and 2005 total  allocated ESOP shares were 602,611 and
651,845 shares,  respectively.  At December 31, 2006 and 2005 total  unallocated
ESOP  shares  were  34,893 and 20,267  shares,  respectively.  The fair value of
unallocated  ESOP shares totaled  $2,337,000 and $1,105,000 at December 31, 2006
and 2005, respectively.

Stock Option Plans

     The Company adopted the fair value provisions of SFAS No. 123R, Share-Based
Payments, using the modified prospective transition method described in SFAS No.
148, Accounting for Stock-Based Compensation-Transition and Disclosure. Prior to
January 1, 2006, the Company used the intrinsic-value-based method of accounting
prescribed by Accounting  Principles Board (APB) Opinion No. 25,  Accounting for
Stock  Issued  to  Employees,   and  related   interpretations   including  FASB
Interpretation  No. 44,  Accounting  for Certain  Transactions  involving  Stock
Compensation,  an interpretation of APB Opinion No. 25, issued in March 2000, to
account  for its  fixed-plan  stock  options.  Under this  method,  compensation
expense was  recorded on the date of grant only if the current  market  price of
the underlying stock exceeded the exercise price.  SFAS No. 123,  Accounting for
Stock-Based  Compensation,  established  accounting and disclosure  requirements
using  a  fair-value-based   method  of  accounting  for  stock-based   employee
compensation  plans.  As allowed by SFAS No. 123,  prior to January 1, 2006, the
Company had adopted only the disclosure requirements of SFAS No. 123.

     The fair value recognition requirement applies only to new awards or awards
modified  after  January  1,  2006.  Additionally,  the fair  value of  existing
unvested awards at the date of adoption is recorded as compensation expense over
the period which an employee is required to provide  service in exchange for the
award, which, for the Company, is the vesting period of the options. The results
from  prior  periods  have  not been  restated.  As a result  of  adopting  this
statement,  the  Company  recorded  stock-based  compensation  expense  of  $1.6
million,  net  of  tax,  in  2006.  The  deferred  tax  benefit  recognized  for
stock-based compensation expense was $267 thousand in 2006.

     On April  26,  2006,  the  stockholders  of the  Company  adopted  the 2007
Non-employee Directors Restricted Stock Plan ("2007 Plan"). Under the 2007 Plan,
the  Company may grant up to 200,000  shares to  non-employee  Directors  of the
Company.  Fifty  percent  of the  restricted  shares  will vest on the  one-year
anniversary  date of the issuance and the  remaining  fifty percent will vest on
the second-year  anniversary date of the issuance.  No shares were granted as of
December 31, 2006 under the 2007 Plan.

     At December 31, 2006 the Company had options  outstanding  issued under two
share-based compensation programs, the 1994 Stock Option and Appreciation Rights
Plan ("1994 Plan") and the 1997  Non-employee  Directors  Stock  Incentive  Plan
("Directors  1997  Plan").  The  Directors  1997  Plan  has been  terminated  in
connection with  implementation of the 2007 Plan, and no new grants will be made
under the  Directors  1997 Plan.  At  December  31,  2006,  the number of shares
authorized for option awards under the 1994 Plan totaled 1,857,351.

     Under the 1994 Plan, the Company may grant options to employees of the Bank
for up to 3,000,000  shares of common stock,  subject to  limitations  set forth
under the 1994 Plan.  Options under each plan are granted with an exercise price
equal to the market price of the Company's  stock at the date of grant.  Options
granted  under the 1994 Plan  usually  vest  over a six year  period  and have a
maximum  contractual  term of 10 years. The Directors 1997 Plan provided for the
issuance of up to 400,000  shares of common stock to  non-employee  directors of
the Company.  Options  previously  granted to  non-employee  directors under the
Directors 1997 Plan vest in one year and have a maximum  contractual  term of 10
years.

     The  aggregate   intrinsic  value  of  options  exercised  was  $3,334,000,
$2,505,000 and $5,150,000 in 2006,  2005 and 2004,  respectively.  The aggregate
intrinsic  value  of  stock  options   outstanding  at  December  31,  2006  was
$17,788,000.  Cash  proceeds  received  from  options  exercised  in  2006  were
$1,644,000 and $1,194,000 in 2005.

     The fair value of each option grant in 2006, 2005 and 2004 was estimated on
the date of the grant  using  the  Black-Scholes  option  valuation  model.  The
expected  life  was  estimated  based on the  actual  weighted  average  life of
historical exercise activity of the grantee  population.  The volatility factors
were based on the historical volatilities of the Company's stock, and these were
used to  estimate  volatilities  over  the  expected  life of the  options.  The
risk-free  interest rate was the implied  yield  available on zero coupons (U.S.
Treasury  Rate) at the grant date with a  remaining  term equal to the  expected
life of the options.  Estimates of fair value are not intended to predict actual
future  events or the value  ultimately  realized by employees who receive stock
incentive awards, and subsequent events are not indicative of the reasonableness
of the  original  estimates  of fair value made by the  Company.  The  following
weighted  average  assumptions  were  used for  grants  in 2006,  2005 and 2004,
respectively: no dividend yield in any year; expected volatility of 30%, 31% and
32%; risk-free interest rates of 4.5%, 4.2% and 4.2%; and expected average lives
of 6.6 years for 2006 and 5.5 years for 2005 and 2004. The weighted-average fair
values of  options  granted  during the year are  $24.05,  $19.48 and $15.82 for
2006, 2005, and 2004,  respectively.  Forfeitures were recognized in the year of
occurrence.  It is the Company's  policy that shares issued upon the exercise of
stock options come from authorized, but previously un-issued shares.

     The following  table  summarizes  information  about stock option  activity
during the periods indicated:
<TABLE>


                                                      ---------------------------
     Options Outstanding                                2006      2005     2004
                                                      --------  --------  -------
     (Weighted average option prices)                     (In shares except
                                                           intrinsic value)
<S>                                                 <C>       <C>       <C>

Beginning of year ($29.70, $24.05, and $19.68 )..     758,081   725,458   808,248
       Granted ($58.73, $52.47, and $42.24)......     180,115   156,150   131,785
       Exercised ($20.27, $17.43, and $13.20)....     (81,109)  (68,497)  (150,011)
       Cancelled ($50.61, $35.45, and $30.67)....     (36,707)  (55,030)  (64,564)
                                                      --------  --------  -------
End of year ($36.07, $29.70, and $24.05).........     820,380   758,081   725,458
                                                      ========  ========  =======
       Shares exercisable at December 31, ($23.53,
           $20.21, and $17.39)...................     410,247   394,448   354,398
                                                      ========  ========  =======
</TABLE>

   A summary of the Company's non-vested shares during 2006 is presented below:

                                             Weighted
                                             Average
Non-vested shares:                           Grant-Date
                                  Shares     Fair Value
-------------------------------------------------------


Non-vested  at January 1, 2006.... 363,633      $15.19
Granted........................... 180,115       24.05
Vested............................ (96,908)      13.20
Forfeited......................... (36,707)      20.02
                                  --------
Non-vested at December 31, 2006... 410,453      $19.12
                                  ========



     As of December  31,  2006,  the  unrecognized  cost  related to  non-vested
share-based  compensation  plans  was  $3.0  million  to be  recognized  over  a
weighted-average period of 4.36 years.

     Additional  information  with  respect  to  stock  options  outstanding  at
December 31, 2006 follows:

<TABLE>

                                                        Price Ranges
-------------------------------------------------------------------------------------------------

                                       ($10.88 - $17.25)    ($26.75 - $31.44)   ($41.70 - $59.20)
Options outstanding:
<S>                                    <C>                   <C>                 <C>

Number of outstanding shares.........       224,136            216,930              379,314
Weighted-average contractual life ...          1.98               5.37                 5.23
Weighted-average exercise price .....        $14.47             $29.09               $52.83

Options exercisable:

Number of exercisable shares.........       224,136            125,403              60,388
Weighted-average contractual life ...          1.85               4.97                7.48
Weighted-average exercise price .....        $14.47             $28.80              $46.25

</TABLE>



(14) Employee Benefit Plans (continued)

     The  pro-forma  disclosure  below is provided for 2005 and 2004 because the
Company did not adopt SFAS 123R until January 1, 2006:

                                                 Year Ended December 31,
                                                  ---------------------
                                                     2005        2004
                                                  ---------   ---------
                                                     (in thousands,
                                                 except per share data)

  Net income as reported...........             $  91,698    $   65,842

  Deduction:
    Total stock-based compensation
   expense determined under the
   fair-value-based method for all
   rewards, net of tax.............                (1,137)       (740)
                                                  ---------   ---------
                                                  ---------   ---------
    Pro forma net income...........             $  90,561    $ 65,102
                                                  =========   =========

  Earnings per share:
  Basic:
    As reported....................             $    5.55    $   3.95
    Pro forma......................             $    5.48    $   3.90

  Diluted:
    As reported....................             $    5.43    $   3.85
    Pro forma......................             $    5.38    $   3.82

(15) Parent Company Financial Information

      The following condensed parent company financial information should be
read in conjunction with the other Notes to the Consolidated Financial
Statements.

CONDENSED BALANCE SHEETS

                                                         At December 31,
                                                       -------------------
                                                         2006       2005
                                                       --------   --------
                                                          (In thousands)
Assets:
Cash.............................................    $  11,990   $ 13,235
Other assets, net................................        2,359      2,268
Investment in subsidiary.........................      790,366    655,336
                                                       --------   --------
                                                     $ 804,715   $670,839
                                                       ========   ========
Liabilities and Stockholders' Equity:
Stockholders' equity.............................      704,715    570,839
Senior notes.....................................      100,000    100,000
                                                       --------   --------
                                                     $ 804,715 $  670,839
                                                       ========   ========


                                                   Year Ended December 31,
 CONDENSED STATEMENTS OF INCOME AND             ------------------------------
      COMPREHENSIVE INCOME                        2006       2005      2004
                                                --------   --------  ---------
                                                      (In thousands)

Dividends received from Bank...............   $       -   $      -  $  30,000
Equity in undistributed net income of
subsidiary ................................     132,827     92,829     36,077
Other expense, net.........................      (3,737)    (1,131)      (235)
                                                --------   --------  ---------
Net Income.................................     129,090     91,698     65,842
Change in other comprehensive income, net of
taxes......................................      (2,278)      (453)     (204)
                                                --------   --------  ---------
Comprehensive Income.......................   $ 126,812 $   91,245 $  65,638
                                                ========   ========  =========


(15) Parent Company Financial Information (continued)

                                                  Year Ended December 31,
                                                ----------------------------
CONDENSED STATEMENTS OF CASH FLOWS                2006      2005      2004
                                                --------  --------   -------
                                                      (In thousands)
Net Cash Flows from Operating Activities:
  Net income...............................    $ 129,090  $ 91,698  $  65,842
  Adjustments to reconcile net income to
  net   cash   provided   by   operating
  activities:
    Equity in undistributed
       net income of subsidiary............     (132,827)  (92,829)   (36,077)
    Other..................................         (145)   (1,360)      (415)
                                                --------  --------   -------
    Net cash (used in) provided by operating
    activities..............................      (3,882)   (2,491)    29,350
                                                --------  --------   -------
Cash Flows from Investing Activities:
    Investment in subsidiary...............          -    (110,000)       -
    Decrease in fixed assets...............          -         -          -
                                                --------  --------   -------
    Net cash used in investing activities..          -    (110,000)       -
                                                --------  --------   -------
Cash Flows from Financing Activities:
    Purchase of treasury stock.............          -         -      (28,049)
    Proceeds from issuance of senior debt            -    100,000         -
    (Increase) decrease in unreleased shares      (946)    (1,051)        72
    Exercise of stock options..............      3,233      3,024      3,296
    Other..................................        350        146        (52)
                                                --------  --------   -------

Net cash provided by (used in) financing
   activities...............................     2,637    102,119    (24,733)
                                                --------  --------   -------
Net increase (decrease) in cash............     (1,245)   (10,372)     4,617
Cash at beginning of period................     13,235     23,607     18,990
                                                --------  --------   -------
Cash at end of period......................   $ 11,990    $13,235   $ 23,607
                                                ========  ========   =======

(16) Quarterly Results of Operations (unaudited)

      Summarized below are the Company's results of operations on a quarterly
basis for 2006, 2005, and 2004:
<TABLE>

                                                                                           Diluted
                                  Provision    Non-       Non-                 Basic       Earnings
               Interest  Interest for          Interest   Interest   Net       Earnings    per
               Income    Expense  Loan Losses  Income     Expense    Income    Per Share   Share
               --------  -------  -----------  --------   --------   --------  ---------   -------
                                (In thousands, except per share data)
<S>            <C>      <C>      <C>          <C>       <C>        <C>       <C>         <C>

First quarter
2006.........$ 169,493  $ 94,982 $  3,900      $ 2,483   $ 19,916    $ 30,774  $   1.86    $ 1.82
2005.......... 94,402     41,580    3,750        1,751     18,867      18,492      1.12      1.10
2004.......... 60,242     20,804       --        1,736     15,282      14,977      0.88      0.86
Second quarter
2006.........$ 178,513  $104,649 $  2,500      $ 4,622   $ 19,416    $ 32,479  $   1.96    $ 1.92
2005.......... 113,423    55,027    4,000        1,760     18,686      21,685      1.31      1.29
2004.......... 63,566     21,373       --        1,834     15,351      16,553      0.99      0.96
Third quarter
2006.........$ 183,473  $109,855 $  3,000      $ 4,046   $ 18,343    $ 32,462  $   1.96    $ 1.93
2005.......... 131,190    68,755    8,000        3,705     17,772      23,358      1.41      1.38
2004.......... 67,357     26,133       --        6,968     17,694      17,872      1.09      1.06
Fourth quarter
2006.........$ 181,143  $105,564 $  3,000      $ 5,085   $ 19,773    $ 33,375  $   2.01    $ 1.98
2005.......... 152,091    83,828    4,000        2,550     18,156      28,163      1.70      1.67
2004.......... 80,262     32,880    3,000        2,053     18,045      16,440      1.00      0.97
Total year
2006.........$ 712,622  $415,050 $ 12,400      $ 16,236  $ 77,448    $ 129,090 $   7.79    $ 7.65
2005.......... 491,106   249,190   19,750         9,766    73,481       91,698     5.55      5.43
2004.......... 271,427   101,190    3,000        12,591    66,372       65,842     3.95      3.85

</TABLE>


(17) Fair Value of Financial Instruments

      The following table presents fair value information for financial
instruments for which a market exists:
<TABLE>

                                                     At December 31,
                                    -------------------------------------------------
                                              2006                      2005
                                    -----------------------   -----------------------
                                    Carrying                  Carrying
                                      Value     Fair Value      Value     Fair Value
                                    ---------   -----------   ---------   -----------
                                                      (In thousands)
<S>                                <C>          <C>           <C>         <C>

Mortgage-backed securities ......   $ 57,197    $  57,197     $ 74,254     $  74,254
Collateralized mortgage
  obligations ...................    311,850      311,850      294,017       294,017
Loans held-for-sale .............    140,860      143,141        2,873         2,893
FHLB Stock.......................    118,979      118,979      205,696       205,696
</TABLE>


     The  following   table  presents  fair  value   information  for  financial
instruments shown in the Company's  Consolidated  Balance Sheets for which there
is no readily available market. The fair values for these financial  instruments
were  calculated by  discounting  expected cash flows.  Because these  financial
instruments  have not been  evaluated for possible  sale and because  management
does not intend to sell these financial  instruments,  the Company does not know
whether the fair values  shown below  represent  values at which the  respective
financial instruments could be sold.

<TABLE>

                                                      At December 31,
                                    --------------------------------------------------
                                              2006                       2005
                                    ------------------------   -----------------------
                                                 Calculated                 Calculated
                                    Historical   Fair Value    Historical     Fair
                                       Cost        Amount         Cost        Value
                                                                             Amount
                                    -----------  -----------   ----------   ----------
                                                      (In thousands)
<S>                              <C>          <C>           <C>         <C>

ASSETS
Adjustable loans:
  Single family ................. $ 6,437,616  $ 6,671,076  $  7,354,239 $  7,515,594
  Multi-family ..................   1,809,751    1,847,532     1,938,988    1,949,306
  Commercial  ...................     161,487      168,364       203,124      208,778
Fixed rate loans:
   Single family ................       6,609        6,638         7,237        7,290
   Multi-family .................       2,215        2,217         3,033        3,130
   Commercial  ..................      35,082       35,848        54,436       56,373
Commercial business loans........      83,759       83,363        80,186       85,444
Construction loans...............          --          --          4,910        5,179
Consumer loans...................      44,528       46,021        57,399       56,096
Other loans......................       4,217        4,254         7,100        7,100
Non-performing loans ............      18,497       18,497         4,966        4,966

LIABILITIES
Fixed-term certificate accounts .   4,374,523     4,373,474    2,778,964    2,768,236
Non-term deposit accounts .......   1,515,358     1,515,358    1,592,693    1,592,693
Borrowings ......................   2,568,448     2,569,372    5,419,184    5,415,365
</TABLE>


     GAAP specifies that fair values should be calculated  based on the value of
one unit. The estimates do not  necessarily  reflect the price the Company might
receive  if it  were  to sell  the  entire  holding  of a  particular  financial
instrument at one time.

     Fair value  estimates are based on the following  methods and  assumptions,
some  of  which  are  subjective  in  nature.   Changes  in  assumptions   could
significantly affect the estimates.

Cash and Cash Equivalents

     The carrying amounts  reported in the Consolidated  Balance Sheets for this
item approximate fair value.

Investment Securities and Mortgage-Backed Securities

     Fair values are based on bid quotations  received from national  securities
dealers.


(17) Fair Value of Financial Instruments (continued)

Loans Receivable

     The  portfolio  is  segregated  into those loans with  adjustable  rates of
interest  and those  with  fixed  rates of  interest.  Fair  values are based on
discounting  future cash flows by the current  rate  offered for such loans with
similar remaining maturities and credit risk. The amounts so determined for each
loan category are reduced by the Bank's allowance for loans losses which thereby
takes into consideration  changes in credit risk. At December 31, 2006, the Bank
had outstanding  commitments to fund $213,735,000 in real estate mortgage loans,
and  undisbursed   funds  totaling   $75,665,000  in  commercial  loans,  $0  in
construction  loans and  $121,690,000  in  consumer  loans and lines of  credit,
respectively.  As no fees are  received  for these loan  commitments,  any value
associated  with  the  Bank's  commitment  to  originate  these  loans  would be
immaterial.

Non-performing Loans

     The carrying amounts reported in the Consolidated  Balance Sheets for these
assets approximate fair value.

Deposits

     The fair value of deposits  with no stated term,  such as regular  passbook
accounts,  money market accounts and checking  accounts,  is defined by SFAS No.
107,  Disclosures  about Fair Value of  Financial  Instruments,  as the carrying
amounts reported in the Consolidated  Balance Sheets. The fair value of deposits
with a stated maturity, such as certificates of deposit, is based on discounting
future cash flows by the current  rate  offered for such  deposits  with similar
remaining maturities.

Borrowings

     For short-term  borrowings,  fair value  approximates  carrying value.  For
long-term  fixed  rate  borrowings,  fair value is based on  discounting  future
contractual cash flows by the current interest rate paid on such borrowings with
similar remaining maturities.






<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
FirstFed Financial Corp. and Subsidiary

     We have audited the  accompanying  consolidated  balance sheets of FirstFed
Financial Corp. and Subsidiary (the "Company") as of December 31, 2006 and 2005,
and the related  consolidated  statements  of income,  changes in  stockholders'
equity and comprehensive  income,  and cash flows for each of the three years in
the  period  ended  December  31,  2006.  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 the  standards of the Public
Company Accounting Oversight Board (United States). 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,  the consolidated  financial  statements  referred to above
present fairly,  in all material  respects,  the financial  position of FirstFed
Financial Corp. and Subsidiary as of December 31, 2006 and 2005, and the results
of its  operations  and its cash flows for each of the three years in the period
ended  December 31, 2006 in  conformity  with  accounting  principles  generally
accepted in the United States of America.

     As discussed in Note 1 to the  financial  statements,  the Company  adopted
Statement of  Financial  Accounting  Standards  (SFAS) No.  123(R),  Share-Based
Payments and SFAS No. 158, Employers' Accounting for Defined Benefit Pension and
Other  Postretirement Plans in 2006, and recorded a cumulative effect adjustment
as of January 1, 2006 in connection with the adoption of Securities and Exchange
Commission Staff Accounting  Bulletin No. 108,  Considering the Effects of Prior
Year  Misstatements  when  Quantifying  Misstatements  in Current Year Financial
Statements.

     We also have  audited,  in  accordance  with the  standards  of the  Public
Company  Accounting  Oversight  Board  (United  States),  the  effectiveness  of
FirstFed  Financial  Corp.  and  Subsidiary's  internal  control over  financial
reporting  as of December 31, 2006,  based on criteria  established  in Internal
Control--Integrated   Framework   issued   by  the   Committee   of   Sponsoring
Organizations  of the Treadway  Commission  (COSO) and our report dated February
16, 2007  expressed an  unqualified  opinion on  management's  assessment of the
effectiveness of the Company's internal control over financial  reporting and an
unqualified  opinion on the effectiveness of the Company's internal control over
financial reporting.



Grant Thornton LLP



Woodland Hills, California
February 16, 2007


<PAGE>



ITEM 9A. -- CONTROLS AND PROCEDURES

Management's Evaluation of Disclosure Controls and Procedures

 (a)  Under  the  supervision  and  with  the  participation  of  the  Company's
      management,  including  its  principal  executive  officer  and  principal
      accounting officer,  the Company conducted an evaluation of its disclosure
      controls  and  procedures,  as such term is defined  under Rule  13a-14(c)
      promulgated  under the  Securities  Exchange Act of 1934,  as amended (the
      "Exchange Act"),  within 90 days of the filing date of this report.  Based
      on  their  evaluation,  the  Company's  principal  executive  officer  and
      principal  accounting  officer  concluded  that the  Company's  disclosure
      controls  and  procedures  are  effective  to alert  them to any  material
      information   relating  to  the  Company   (including   its   consolidated
      subsidiaries) that must be included in the Company's  periodic  Securities
      and Exchange Commission filings.

 (b)  There have been no significant changes (including  corrective actions with
      regard  to  significant   deficiencies  or  material  weaknesses)  in  the
      Company's  internal controls or in other factors that could  significantly
      affect these controls subsequent to the date of the evaluation  referenced
      in paragraph (a) above.

 (c)  The Company intends to review and evaluate the design and effectiveness of
      its  disclosure  controls  and  procedures  from  time to time in order to
      improve its controls and procedures. If any deficiencies are discovered in
      the future, corrective action will be taken in order to ensure that senior
      management has timely access to all material  financial and  non-financial
      information  concerning the Company's business.  While management believes
      that the  Company's  disclosure  controls  and  procedures  are  currently
      effective to achieve these results,  future events affecting the Company's
      business  may cause  management  to modify  its  disclosure  controls  and
      procedures.


Management's Report on Internal Control over Financial Reporting

     Management  is  responsible  for  establishing  and  maintaining   adequate
internal control over financial  reporting for the Company. In order to evaluate
the effectiveness of internal control over financial  reporting,  as required by
Section 404 of the Sarbanes-Oxley  Act,  management has conducted an assessment,
including  testing,   using  the  criteria  in  Internal  Control  -  Integrated
Framework,  issued by the Committee of Sponsoring  Organizations of the Treadway
Commission  (COSO).  The  Company's  system of internal  control over  financial
reporting is designed to provide reasonable  assurance regarding the reliability
of financial reporting and the preparation of financial  statements for external
purposes in accordance with generally accepted accounting principles. Because of
its inherent  limitations,  internal  control over  financial  reporting may not
prevent  or  detect  misstatements.  Also,  projections  of  any  evaluation  of
effectiveness to future periods are subject to the risk that controls may become
inadequate  because of changes in  conditions,  or that the degree of compliance
with the policies or procedures may deteriorate.

     Based  on  its  assessment,  management  has  concluded  that  the  Company
maintained  effective  internal control over financial  reporting as of December
31, 2006, based on criteria in Internal Control - Integrated Framework issued by
the COSO. Management's assessment of the effectiveness of the Company's internal
control over  financial  reporting as of December 31, 2006,  has been audited by
Grant Thornton LLP, an independent  registered public accounting firm, as stated
in their report which is included herein.

     No changes in the  Company's  internal  control  over  financial  reporting
identified  in  connection  with the  evaluation  required by Exchange  Act Rule
13a-14(c) have come to management's  attention that have materially affected, or
are reasonably likely to materially  affect, the Company's internal control over
financial reporting.

Management's Certifications

     The  certifications  of the  Company's  Chief  Executive  Officer and Chief
Financial  Officer  required  by the  Sarbanes-Oxley  Act have been  included as
Exhibits  31 and 32 in the  Company's  Form  10-K.  In  addition,  in 2006,  the
Company's  Chief Executive  Officer  provided to the New York Stock Exchange the
annual CEO  certification  regarding the Company's  compliance with the New York
Stock Exchange's corporate governance listing standards.


<PAGE>


               REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
             FIRM ON MANAGEMENT'S ASSESSMENT OF THE EFFECTIVENESS OF
         INTERNAL CONTROL OVER FINANCIAL REPORTING AND THE EFFECTIVENESS
                  OF INTERNAL CONTROL OVER FINANCIAL REPORTING

Board of Directors and Stockholders
FirstFed Financial Corp. and Subsidiary

     We have  audited  management's  assessment,  included  in the  accompanying
Management's Report on Internal Control over Financial Reporting,  that FirstFed
Financial Corp. and Subsidiary,  (the "Company")  maintained  effective internal
control over  financial  reporting  as of December  31, 2006,  based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring  Organizations  of the  Treadway  Commission  (COSO).  The  Company's
management  is  responsible  for  maintaining  effective  internal  control over
financial  reporting  and for its  assessment of the  effectiveness  of internal
control over financial reporting. Our responsibility is to express an opinion on
management's  assessment  and an opinion on the  effectiveness  of the company's
internal control over financial reporting based on our audit.

     We  conducted  our audit in  accordance  with the  standards  of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and  perform  the audit to obtain  reasonable  assurance  about  whether
effective  internal  control over  financial  reporting  was  maintained  in all
material  respects.  Our audit included  obtaining an  understanding of internal
control over financial reporting,  evaluating management's  assessment,  testing
and evaluating the design and operating  effectiveness of internal control,  and
performing   such  other   procedures   as  we   considered   necessary  in  the
circumstances.  We believe that our audit  provides a  reasonable  basis for our
opinions.

     A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial  statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial  reporting  includes those policies and procedures that (1) pertain to
the  maintenance  of records that, in reasonable  detail,  accurately and fairly
reflect the  transactions  and  dispositions  of the assets of the company;  (2)
provide  reasonable  assurance  that  transactions  are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting  principles,  and that receipts and  expenditures  of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of  unauthorized  acquisition,  use, or  disposition  of the company's
assets that could have a material effect on the financial statements.

     Because  of its  inherent  limitations,  internal  control  over  financial
reporting  may not prevent or detect  misstatements.  Also,  projections  of any
evaluation  of  effectiveness  to future  periods  are  subject to the risk that
controls may become  inadequate  because of changes in  conditions,  or that the
degree of compliance with the policies or procedures may deteriorate.

     In our opinion,  management's  assessment that FirstFed Financial Corp. and
Subsidiary  maintained effective internal control over financial reporting as of
December 31, 2006, is fairly stated, in all material respects, based on criteria
established in Internal Control Integrated  Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Also in our opinion,
FirstFed  Financial Corp. and Subsidiary  maintained,  in all material respects,
effective  internal  control over  financial  reporting as of December 31, 2006,
based on criteria established in Internal Control Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

     We also have  audited,  in  accordance  with the  standards  of the  Public
Company  Accounting  Oversight Board (United States),  the consolidated  balance
sheets of FirstFed  Financial  Corp.  and Subsidiary as of December 31, 2006 and
2005,   and  the  related   consolidated   statements  of  income,   changes  in
stockholders'  equity and comprehensive  income,  and cash flows for each of the
three years in the period ended  December 31, 2006 and our report dated February
16, 2007 expressed an unqualified opinion on those financial statements.

Grant Thornton LLP

Woodland Hills, California
February 16, 2007


<PAGE>


                                   PART III

ITEM 10. -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Information  regarding directors and executive officers appearing on page 5
of the Proxy Statement for the Annual Meeting of  Stockholders' to be held April
25, 2007 (the "Proxy Statement") is incorporated herein by reference.

ITEM 11. -- EXECUTIVE COMPENSATION

     Information  regarding executive  compensation  appearing on page 11 of the
Proxy Statement is incorporated herein by reference.

ITEM 12. -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Information  regarding  security ownership of certain beneficial owners and
management  appearing  on pages 2, 3 and 4 of the Proxy  Statement  incorporated
herein by reference.  Information  regarding securities  authorized for issuance
under equity  compensation  plans appearing on page 20 of the Proxy Statement is
incorporated herein by reference.

ITEM 13. -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information   regarding  certain  relationships  and  related  transactions
appearing on page 9 of the Proxy Statement is incorporated herein by reference.

ITEM 14. --PRINCIPAL ACCOUNTING FEES AND SERVICES

     Information  regarding principal  accounting fees and services appearing on
page 22 of the Proxy Statement is incorporated herein by reference.


<PAGE>



                                       PART IV

ITEM 15. -- EXHIBITS

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

 (1)  Financial  Statements  (included  in this 2006 Annual  Report on Form 10-K
      under Item 8)
 (2)  Exhibits as shown below

 EXHIBIT
 NUMBER
 -------------
 (3.1)Restated  Certificate of  Incorporation  filed as Exhibit 3.1 to Form 10-K
      for the fiscal year ended December 31, 1999 and incorporated by reference.
 (3.2) By-laws  filed as  Exhibit  3.2 to Form 10-Q dated  August  12,  2002 and
      incorporated by reference.
 (4.1) Amended and Restated  Rights  Agreement  dated as of September  25, 1998,
      filed  as  Exhibit  4.1 to  Form  8-A/A,  dated  September  25,  1998  and
      incorporated by reference.
 (10.1) Supplemental  Executive  Retirement Plan dated January 16, 1986 filed as
      Exhibit 10.5 to Form 10-K for the fiscal year ended  December 31, 1992 and
      incorporated by reference.
 (10.2)Change of Control Agreement effective September 26, 1996 filed as Exhibit
      10.4 to Form 10-Q for the Quarter  ended  September 30, 1996 and Amendment
      filed as Exhibits 10.3 and 10.4 for change of control to Form 10-Q for the
      Quarter ended June 30, 2001 and incorporated by reference.
 (10.3)1997  Non-employee  Directors  Stock Incentive Plan filed as Exhibit 1 to
      Form S-8 dated August 12, 1997 and Amendment filed as Exhibit 10.5 to Form
      10-Q for the Quarter ended June 30, 2001 and incorporated by reference.
 (10.4) 2007 Non-employee Directors Restricted Stock Plan filed as Appendix A to
      Schedule 14A, Proxy Statement for the Annual Stockholders' Meeting held on
      April 26, 2006 and incorporated by reference.
 (21)Registrant's sole subsidiary is First Federal Bank of California, a federal
      savings bank.
 (23)Independent Auditors' consent.
 (24) Power of Attorney (included at page 78).
 (31.1)Certification  of Chief Executive  Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.
 (31.2) Certification of Chief Financial  Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.
 (32.1)Certification  of Chief Executive  Officer pursuant to 18 U.S.C.  Section
      1350,  as adopted  pursuant  to Section 906 of the  Sarbanes-Oxley  Act of
      2002.
 (32.2) Certification of Chief Financial  Officer pursuant to 18 U.S.C.  Section
      1350,  as adopted  pursuant  to Section 906 of the  Sarbanes-Oxley  Act of
      2002.
 (99.1) Performance Graph

     This 2006 Annual Report on Form 10-K and the Proxy  Statement  have already
been  furnished to each  stockholder of record who is entitled to receive copies
thereof.  Copies of these items will be furnished without charge upon request in
writing by any  stockholder of record on March 5, 2007 and any beneficial  owner
of Company stock on such date who has not previously  received such material and
who so represents in good faith and in writing to:

                              Corporate Secretary
                              FirstFed Financial Corp.
                              401 Wilshire Boulevard
                         Santa Monica, California 90401
     Other  exhibits will be supplied to any such  stockholder at a charge equal
to the Company's cost of copying, postage, and handling.



<PAGE>



                                   SIGNATURES

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


                                       FIRSTFED FINANCIAL CORP.,
                                       a Delaware corporation

Dated this 28th day of February, 2007
                                       By: /s/ Babette E. Heimbuch
                                               -------------------
                                               Babette E. Heimbuch
                                               Chief Executive Officer

                                POWER OF ATTORNEY

Each person whose signature appears below hereby authorizes Babette E. Heimbuch
and Douglas J. Goddard, and each of them or either of them, as attorney-in-fact
to sign on his or her behalf as an individual and in every capacity stated
below, and to file all amendments to the Registrant's Form 10-K, and the
Registrant hereby confers like authority to sign and file in its behalf.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has be signed by the following persons on behalf of the Registrant and in the
capacities indicated on the 28th day of February, 2007.




SIGNATURE                       TITLE

                                Chairman of the Board and
                                Chief Executive Officer (Principal
/s/ Babette E. Heimbuch         Executive Officer)
----------------------------
    Babette E. Heimbuch

                                Director, President and Chief
/s/ James P. Giraldin           Operating Officer
----------------------------
    James P. Giraldin

                                Executive Vice President and Chief
/s/ Douglas J. Goddard          Financial Officer
----------------------------    (Principal Financial Officer)
    Douglas J. Goddard

/s/ Brenda J. Battey            Senior Vice President and Controller
----------------------------    (Principal Accounting Officer)
    Brenda J. Battey

/s/ Brian Argrett                Director
----------------------------
    Brian Argrett

/s/ Jesse Casso, Jr.             Director
----------------------------
    Jesse Casso, Jr.

/s/ Christopher M. Harding       Director
----------------------------
    Christopher M. Harding

/s/ William G. Ouchi             Director
----------------------------
    William G. Ouchi

/s/ William P. Rutledge          Director
----------------------------
    William P. Rutledge

/s/ Steven L. Soboroff           Director
----------------------------
    Steven L. Soboroff

/s/ John R. Woodhull             Director
----------------------------
   John R. Woodhull





<PAGE>


                                  Exhibit 31.1

                    CERTIFICATION OF CHIEF EXECUTIVE OFFICER


I, Babette Heimbuch, certify that:


(1) I have reviewed this annual report on Form 10-K of FirstFed Financial Corp.;


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


(3) Based on my knowledge, the financial statements, and other financial
   information included in this annual report, fairly present in all material
   respects the Consolidated Balance Sheets, Consolidated Statements of Income
   and cash flows of the registrant as of, and for, the periods presented in
   this annual report;


(4) The registrant's other certifying officer and I are responsible for
   establishing and maintaining disclosure controls and procedures (as defined
   in Exchange Act Rules 13a-14 and 15d-14) and internal control over financial
   reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
   registrant and have:

(i) Designed such disclosure controls and procedures, or caused such disclosure
   controls and procedures to be designed under our supervision, to ensure that
   material information relating to the registrant, including its consolidated
   subsidiaries, is made known to us by others within those entities,
   particularly during the period in which this annual report is being prepared;

(ii) Designed such internal control over financial reporting, or caused such
   internal control over financial reporting to be designed under our
   supervision, to provide reasonable assurance regarding the reliability of
   financial reporting and the preparation of financial statements for external
   purposes in accordance with generally accepted accounting principles;

(iii) Evaluated the effectiveness of the registrant's disclosure controls and
   procedures and presented in this report our conclusions about the
   effectiveness of the disclosure controls and procedures, as of the end of the
   period covered by this report based on such evaluation; and

(iv) Disclosed in this report any change in the registrant's internal control
   over financial reporting that occurred during the registrant's fourth fiscal
   quarter that has materially affected, or is reasonably likely to materially
   affect, the registrant's internal control over financial reporting;


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


      (i) All significant deficiencies and material weaknesses in the design or
         operation of internal control over financial reporting which are
         reasonably likely to adversely affect the registrant's ability to
         record, process, summarize and report financial information; and


      (ii) Any fraud, whether or not material, that involves management or other
         employees who have a significant role in the registrant's internal
         control over financial reporting; and


(6) The registrant's other certifying officer and I have indicated in this
   annual report whether or not there were significant changes in internal
   control over financial reporting or in other factors that could significantly
   affect internal control over financial reporting subsequent to the date of
   our most recent evaluation, including any corrective actions with regard to
   significant deficiencies and material weaknesses.


Dated this 28th day of February, 2007

                                    By: /s/ Babette E. Heimbuch
                                            -------------------
                                            Babette E. Heimbuch
                                            Chief Executive Officer


<PAGE>


                                  Exhibit 31.2

                    CERTIFICATION OF CHIEF FINANCIAL OFFICER


I, Douglas J. Goddard, certify that:


(1) I have reviewed this annual report on Form 10-K of FirstFed Financial Corp.;


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


(3) Based on my knowledge, the financial statements, and other financial
   information included in this annual report, fairly present in all material
   respects the Consolidated Balance Sheets, Consolidated Statements of Income
   and cash flows of the registrant as of, and for, the periods presented in
   this annual report;


(4) The registrant's other certifying officer and I are responsible for
   establishing and maintaining disclosure controls and procedures (as defined
   in Exchange Act Rules 13a-14 and 15d-14) and internal control over financial
   reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
   registrant and have:

(i) Designed such disclosure controls and procedures or caused such disclosure
   controls and procedures to be designed under our supervision, to ensure that
   material information relating to the registrant, including its consolidated
   subsidiaries, is made known to us by others within those entities,
   particularly during the period in which this annual report is being prepared;

(ii) Designed such internal control over financial reporting, or caused such
   internal control over financial reporting to be designed under our
   supervision, to provide reasonable assurance regarding the reliability of
   financial reporting and the preparation of financial statements for external
   purposes in accordance with generally accepted accounting principles;

(iii) Evaluated the effectiveness of the registrant's disclosure controls and
   procedures and presented in this report our conclusions about the
   effectiveness of the disclosure controls and procedures, as of the end of the
   period covered by this report based on such evaluation; and

(iv) Disclosed in this report any change in the registrant's internal control
   over financial reporting that occurred during the registrant's fourth fiscal
   quarter that has materially affected, or is reasonably likely to materially
   affect, the registrant's internal control over financial reporting;


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


      (i) All significant deficiencies and material weaknesses in the design or
         operation of internal control over financial reporting which are
         reasonably likely to adversely affect the registrant's ability to
         record, process, summarize and report financial information; and


      (ii) Any fraud, whether or not material, that involves management or other
         employees who have a significant role in the registrant's internal
         control over financial reporting; and


(6) The registrant's other certifying officer and I have indicated in this
   annual report whether or not there were significant changes in internal
   control over financial reporting or in other factors that could significantly
   affect internal control over financial reporting subsequent to the date of
   our most recent evaluation, including any corrective actions with regard to
   significant deficiencies and material weaknesses.


Dated this 28th day of February, 2007

                                    By: /s/ Douglas J. Goddard
                                            ------------------
                                            Douglas J. Goddard
                                            Chief Financial Officer


<PAGE>


                                  EXHIBIT 32.1

                                CEO CERTIFICATION

The undersigned, as Chief Executive Officer hereby certifies, to the best of her
knowledge and belief, that:

      (1)   the Form 10-K of FirstFed Financial Corp. (the "Company") for the
            annual period ended December 31, 2006 (the "Report ") accompanying
            this certification fully complies with the requirements of Section
            13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m
            or 78o(d)); and

      (2)   the information contained in the Report fairly presents, in all
            material respects, the Consolidated Balance sheets and Consolidated
            Statements of Income of the Company for such period.

This certification is made solely for purposes of complying with the provisions
of Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.

                               FIRSTFED FINANCIAL CORP.
                              Registrant


Date: February 28, 2007
                           By: /s/ Babette E. Heimbuch
                               Babette E. Heimbuch
                                          Chief Executive Officer


<PAGE>


                                  EXHIBIT 32.2


                                CFO CERTIFICATION

The undersigned, as Chief Financial Officer hereby certifies, to the best of his
knowledge and belief, that:

      (1)   the Form 10-K of FirstFed Financial Corp. (the "Company") for the
            annual period ended December 31, 2006 (the "Report ") accompanying
            this certification fully complies with the requirements of Section
            13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m
            or 78o(d)); and

      (2)   the information contained in the Report fairly presents, in all
            material respects, the Consolidated Balance sheets and Consolidated
            Statements of Income of the Company for such period.

This certification is made solely for purposes of complying with the provisions
of Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.


                                 FIRSTFED FINANCIAL CORP.
                                 ------------------------
                                 Registrant



Date: February 28, 2007
                                 By: /s/ Douglas J. Goddard
                                         ------------------
                                         Douglas J. Goddard
                                         Chief Financial Officer and
                                         Executive Vice President