UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

For the quarter ended March 31, 2004

For the transition period from __________to __________ .
Commission File Number 0-1100

HAWTHORNE FINANCIAL CORPORATION

     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 o

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

     Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock as of the latest practicable date: The Registrant had 11,808,871 shares of Common Stock, $0.01 par value, per share outstanding as of April 30, 2004.

HAWTHORNE FINANCIAL CORPORATION

FORM 10-Q INDEX
For the quarter ended March 31, 2004

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS

Certain statements in this filing constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which involve risks and uncertainties. Our actual results may differ significantly from the results discussed in such forward-looking statements. Factors that might cause such a difference include, but are not limited, to general economic conditions in our market area, particularly changes in economic conditions in the real estate industry or real estate values in our market, changes in market interest rates, loan prepayments continuing at the current pace or increasing, increased competition in the Company’s niche markets that impacts pricing and/or credit standards, risk associated with credit quality, outcome of pending litigation, inherent market risk associated with treasury activities, risks associated with management’s investment strategy and other factors discussed in our reports filed with the Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K for the year ended December 31, 2003.

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HAWTHORNE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

See Accompanying Notes to Consolidated Financial Statements

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HAWTHORNE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

See Accompanying Notes to Consolidated Financial Statements

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HAWTHORNE FINANCIAL CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

See Accompanying Notes to Consolidated Financial Statements

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HAWTHORNE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

See Accompanying Notes to Consolidated Financial Statements

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HAWTHORNE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

See Accompanying Notes to Consolidated Financial Statements

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HAWTHORNE FINANCIAL CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Summary of Significant Accounting Policies

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

     The unaudited interim consolidated financial statements contain all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary to present fairly the Company’s results for the interim periods presented. These consolidated financial statements for the three months ended March 31, 2004, are not necessarily indicative of the results that may be expected for any other interim period or the full year ending December 31, 2004.

     Certain information and note disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

Recent Accounting Pronouncements

     In November 2002, the FASB issued Interpretation (FIN) No. 45, “Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others,” an interpretation of SFAS Nos. 5, 57 and 107, and rescission of FIN No. 34, “Disclosure of Indirect Guarantees of Indebtedness of Others.” FIN No. 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of the interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, while the provisions of the disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. Adoption of such interpretation did not have a material impact on the results of operations, financial position or cash flows.

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

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

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

Note 2 — Reclassifications

     Certain amounts in the 2003 consolidated financial statements have been reclassified to conform to classifications in 2004.

Note 3 — Three-For-Two Stock Split

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

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

Note 4 — Earnings Per Share Calculation

     The following table sets forth the Company’s earnings per share calculations for the quarter ended March 31, 2004 and 2003. In the following table, (1) “Warrants” refer to the Warrants issued by the Company in December 1995, which are currently exercisable and which expire December 11, 2005, and (2) “Options” refer to stock options previously granted to employees and directors of the Company and which were outstanding at each measurement date.

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Book Value Calculation:

Stock Option Plans

     SFAS No. 123, “Accounting for Stock-Based Compensation,” permits entities to apply the provisions of Accounting Principles Board Opinion No. 25 (“APB 25”), and related interpretations. SFAS No. 123 requires proforma disclosure of net income and, if presented, earnings per share, as if the fair value based method of accounting defined in this statement had been applied. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price, rather than recognizing the fair value of all stock-based awards on the date of grant as compensation expense over the vesting period. The Company has elected to apply the provisions of APB 25 and provide the proforma disclosure requirements of SFAS No. 123.

     If compensation costs for the Stock Incentive Plan and Stock Option Plans had been determined based on the fair value at the grant date for awards for the quarters ended March 31, 2004 and 2003, consistent with the provisions of SFAS No. 123, the Company’s net income and net earnings per share would have been reduced to the proforma amounts as follows.

     The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. There were no grants issued during the quarter ended March 31, 2004 and March 31, 2003.

     On May 21, 2001, the Company adopted the Hawthorne Financial Corporation 2001 Stock Incentive Plan (“Stock Incentive Plan”), which assumed all outstanding stock options that had previously been issued to directors and employees of the Company under its prior two stock option plans and added 375,000 shares for future grants. The Stock Incentive Plan provides for the grant of incentive and nonqualified stock options and other stock-related compensation to employees, the non-employee directors, consultants and other independent advisors who provide services to the Company. At December 31, 2003, the Stock Incentive Plan provides for the issuance of 1,528,350 maximum aggregate shares of Company common stock upon the exercise of awards granted under the plan. The exercise price of any option generally may not be less than the fair market

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value of the common stock on the date of grant, although under limited circumstances, set forth in the Stock Incentive Plan, the exercise price may be as low as 85% of the fair market value of the Common Stock on the grant date, and the term of any option may not exceed 10 years. As of March 31, 2004, the number of stock options available under the Stock Incentive Plan was 191,886.

Note 5 — Commitments and Contingencies

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

Note 6 — Off-Balance Sheet Activity

     The Company is a party to credit-related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. Financial instruments include letters of credit (“LCs”). These commitments involve, to varying degrees, elements of credit and interest rate risk (“IRR”) in excess of the amount recognized in the consolidated statements of financial condition. The contractual amounts of the commitments reflect the extent of involvement the Company has in the financial instruments. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments. There were no outstanding LCs issued by the Bank at March 31, 2004 and 2003.

     As of March 31, 2004, the Federal Home Loan Bank (“FHLB”) issued six LCs for a total of $203.5 million. The purpose of the LCs is to fulfill the collateral requirements for six deposits totaling $185.0 million placed by the State of California with the Bank. The LCs are issued in favor of the State Treasurer of the State of California and mature over the next six months. The maturities coincide with the maturities of the State’s deposits. There are no issuance fees associated with these LCs; however, the Bank pays a maintenance fee of 15 basis points per annum monthly.

     At March 31, 2004, the Bank had commitments to fund the undisbursed portion of existing construction and land loans of $147.2 million and income property and residential loans of $3.5 million. The Bank’s commitments to fund the undisbursed portion of existing lines of credit totaled $7.0 million. The Bank follows the same credit policies in making commitments as it does for on-balance sheet instruments.

     In addition, as of March 31, 2004, the Bank had commitments to fund approximately $72.6 million in approved loans.

Note 7 — Stockholders’ Equity

     There were no share repurchases during the quarter ended March 31, 2004. Pursuant to the pre-merger agreement with Commerical Capital Bancorp, Inc., the Company is precluded from repurchasing shares. As of March 31, 2004, cumulative repurchases were 2,100,516 shares at an average price of $15.15. See “Note 21 – Subsequent Event” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

Note 8 — Junior Subordinated Debentures and Mandatorily Redeemable Trust Preferred Securities

     In 2001 and 2002, the Company organized 4 statutory business trusts and wholly owned subsidiaries of the Company (the “Capital Trusts”), which issued an aggregate of $51.0 million of fixed and floating rate trust preferred securities. The trust preferred securities, which were issued in separate private placement transactions, represent undivided preferred beneficial interests in the assets of the respective trusts. Trust preferred securities accrue and pay distributions periodically at specified annual rates as provided in the indentures. The trusts used the net proceeds from the offering to purchase a like amount of Junior Subordinated Debentures (the “Debentures”) of the Company. The Company is the owner of all the beneficial interests represented by the Common Securities of the Capital Trusts (collectively, the “Common Securities” and together with the Junior Subordinated Debentures the “Trust Securities”). The Capital Trusts exist for the sole purpose of issuing the Trust Securities and investing the proceeds thereof in fixed rate and floating rate, junior subordinated deferrable interest debentures issued by the Company. The Company’s obligations under the Junior Subordinated Debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the obligations of the trusts. The trust preferred securities are mandatorily redeemable upon the maturity of the Debentures, or upon earlier redemption as provided in the indentures. The Company has the right to redeem the Debentures in whole (but not in part) on or after specific dates, at a redemption price specified in the indentures plus any accrued but unpaid interest to the redemption date.

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     The table below sets forth information concerning the Company’s trust preferred securities as of March 31, 2004.

(Dollars in thousands)

(1) Exercise of the call option on all of the junior subordinated debentures is at par.

     Interest rates on the $42.0 million variable rate trust preferred securities reset semi-annually.

     Prior to the issuance of FIN No. 46, the 4 wholly-owned grantor trusts were considered consolidated subsidiaries of the Company; the $51.0 million of trust preferred securities as of December 31, 2003 was included in Hawthorne Financial Corporation and Subsidiary consolidated balance sheet in the liabilities section, under the caption “Capital securities,” and the retained common capital securities of the grantor trusts were eliminated against the Company’s investment in the issuer trusts. Distributions on the trust preferred securities were recorded as interest expense on the consolidated statement of income.

     With the adoption of FIN No. 46R, the Company deconsolidated the 4 grantor trusts as of March 31, 2004. As a result, the junior subordinated debentures issued by the Company to the grantor trusts, totaling $52.6 million, are reflected in the consolidated balance sheet in the liabilities section at March 31, 2004, under the caption “Junior subordinated debentures.” The Company recorded interest expense on the corresponding junior subordinated debentures in the consolidated statements of income. The Company also recorded $1.6 million in other assets in the consolidated balance sheet at March 31, 2004 for the common capital securities issued by the issuer trusts.

     On July 2, 2003, the Federal Reserve Bank issued Supervisory Letter SR 03-13 clarifying that Bank Holding Companies should continue to report trust preferred securities in accordance with current Federal Reserve Bank instructions which allows trust preferred securities to be counted in Tier 1 capital subject to certain limitations. The Federal Reserve has indicated it will review the implications of any accounting treatment changes and, if necessary or warranted, will provide appropriate guidance. The Company’s trust preferred securities are recorded on the Holding Company’s books and are therefore not included in the Bank’s Tier 1 capital.

Note 9 — Business Combinations, Goodwill and Intangible Assets

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

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

     The Company’s intangible assets, other than goodwill, are amortized over their estimated useful lives. Premiums and discounts on loans are amortized on a loan-by-loan basis, using the effective interest method over the estimated lives of the loans. Discounts on deposits and FHLB advances are amortized over the respective estimated lives using the effective interest method. Amortization of premiums and discounts are reflected in interest income or interest expense depending on the classification of the related asset or liability.

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     The following table summarizes the Company’s intangible assets as of March 31, 2004.

     As of March 31, 2004, the Company’s only intangible assets that are currently being amortized are core deposit intangibles, with $104 thousand in amortization expense charged to operating expense during the quarter ended March 31, 2004.

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

Note 10 — Other

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

     Proxy materials have been mailed to shareholders’ and the special shareholder meeting has been scheduled for May 25, 2004. As previously indicated, the acquisition is scheduled for this summer, subject to final regulatory and shareholder approvals.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

     The Company’s only operating segment is the Bank, which is headquartered in El Segundo, California. The Bank currently operates 15 branches in the coastal counties of Southern California, from Westlake Village at the western edge of Los Angeles County to Mission Bay in San Diego County. The Company specializes in real estate secured loans within the markets it serves, including: 1) permanent loans collateralized by single family residential property, 2) permanent loans secured by multi-family residential and commercial real estate and 3) loans for the construction of multi-family residential, commercial and individual single family residential properties and the acquisition and development of land for the construction of such projects. The Company funds its loans predominantly with retail deposits generated through its 15 full service retail offices and FHLB advances.

     On January 27, 2004, the Company entered into an Agreement and Plan of Reorganization (“Agreement”) with Commercial Capital Bancorp (“CCBI”) and CCBI Acquisition Corporation, pursuant to which Hawthorne will be acquired by CCBI. Under the terms of the agreement, which has been unanimously approved by the Boards of Directors of both companies, shareholders of Hawthorne will receive 1.933 shares of CCBI common stock in exchange for each share of Hawthorne stock. Proxy materials have been mailed to shareholders’ and the special shareholder meeting has been scheduled for May 25, 2004. As previously indicated, the acquisition is scheduled for this summer, subject to final regulatory and shareholder approvals.

CRITICAL ACCOUNTING POLICIES

Allowance for Credit Losses

     Management evaluates the allowance for credit losses in accordance with GAAP, within the guidance established by SFAS No. 5, “Accounting for Contingencies,” and SFAS No. 114, as amended by SFAS No. 118, “Accounting by Creditors for Impairment of a Loan,” Staff Accounting Bulletin (“SAB”) 102, “Selected Loan Loss Allowance Methodology and Documentation Issues,” as well as standards established by regulatory Interagency Policy Statements on the Allowance for Loan and Lease Losses (“ALLL”). The allowance for credit losses represents management’s estimate of probable losses inherent in the Bank’s loan portfolio as of the balance sheet date. Management evaluates the adequacy of the allowance on a quarterly basis by reviewing its loan portfolio to identify these inherent losses and to assess the overall probability of collection of the loans in the portfolio. Included in this quarterly review is the monitoring of delinquencies, default and historical loss experience, among other factors impacting portfolio risk. The Bank’s methodology for assessing the appropriate allowance level consists of several components, which include the allocated general valuation allowance (“GVA”), specific valuation allowances (“SVA”) for identified loans and the unallocated allowance.

     Management establishes SVAs for credit losses on individual loans when it has determined that recovery of the Bank’s gross investment is not probable and when the amount of loss can be reasonably determined. SFAS No. 114 defines loan impairment as the existence of uncertainty concerning collection of all principal and interest per the contractual terms of a loan. Nonaccrual loans and loans which are considered troubled debt restructures (“TDR”) are typically impaired and analyzed individually for SVAs. For collateral dependent loans, impairment is typically measured by comparing the loan amount to the fair value of collateral (determined via appraisals and/or internal valuations), less costs to sell, with a SVA established for the shortfall amount. Other methods can be used to estimate impairment (market price or present value of expected future cash flows discounted at the loan’s original interest rate). As of March 31, 2004, there were no loans requiring an SVA.

     The Bank maintains an allowance for credit losses, GVA, which is not tied to individual loans or properties. GVAs are maintained for each of the Bank’s principal loan portfolio components and supplemented by periodic additions through provisions for credit losses. In measuring the adequacy of the Bank’s GVA, management considers 1) the Bank’s historical loss experience for each loan portfolio component and in total, 2) the historical migration of loans within each portfolio component and in total, 3) observable trends in the performance of each loan portfolio component, and 4) additional analyses to validate the reasonableness of the Bank’s GVA balance, such as the FFIEC Interagency “Examiner Benchmark” and review of peer information. The GVA includes an unallocated amount, based upon management’s evaluation of various conditions, such as general economic and business conditions affecting our key lending areas, the effects of which may not be directly measured in the determination of the GVA formula and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits or portfolio components. Management currently intends to maintain an unallocated allowance, up to 5% of the total GVA, for the inherent risk associated with imprecision in estimating the allowance, and an additional amount of approximately 5% of the total GVA to account for the economic uncertainty in Southern California until economic or other conditions warrant a reassessment of the level of the unallocated GVA. However, if economic conditions were to deteriorate beyond the weaknesses currently identified by management, it is possible that the GVA would be deemed insufficient for the inherent

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losses in the loan portfolio and further provision might be required. This could negatively impact earnings for the relevant period. See “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations, Critical Accounting Policies – Allowance for Credit Losses” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

     Management believes that the allowance for credit losses of $32.8 million at March 31, 2004, is adequate to absorb the losses that, in the opinion and judgment of management, are known and inherent in the Bank’s loan portfolio.

Nonaccrual Loans

     The Bank generally ceases to accrue interest on a loan when: 1) principal or interest has been contractually delinquent for a period of 90 days or more, unless the loan is both well secured and in the process of collection; or, 2) full collection of principal and/or interest is not reasonably assured. In addition, classified construction loans for which interest is being paid from interest reserve loan funds, rather than the borrower’s own funds, may also be placed on nonaccrual status. A nonaccrual loan may be restored to accrual status when delinquent principal and interest payments are brought current, the loan is paying in accordance with its payment terms for a period, typically between three to six months, and future monthly principal and interest payments are expected to be collected.

Real Estate Owned

     Properties acquired through foreclosure, or deed in lieu of foreclosure (“real estate owned,” “REO”), are transferred to REO and carried at the lower of cost or estimated fair value less the estimated costs to sell the property (“fair value”). The fair value of the property is based upon a current appraisal. The difference between the fair value of the real estate collateral and the loan balance at the time of transfer is recorded as a loan charge-off if fair value is lower. The determination of a property’s estimated fair value incorporates 1) revenue projected to be realized from disposal of the property, 2) construction and renovation costs, 3) marketing and transaction costs and 4) holding costs (e.g., property taxes, insurance and homeowners’ association dues). Any subsequent declines in the fair value of the REO property after the date of transfer are recorded through a write-down of the asset. In accordance with SFAS No. 66, “Accounting for Sales of Real Estate,” if the Bank originates a loan to facilitate the sale of the REO property, revenue recognition upon disposition of the property is dependent upon the sale having met certain criteria relating to the buyer’s initial investment in the property sold. Gains and losses from sales of REO properties are reflected in “Income/(loss) from real estate owned, net” in the consolidated statements of income.

Investment Securities

     The Bank is permitted to invest in a variety of investment securities, including U.S. Government and agency backed securities, mortgage-backed securities and investment grade securities. The investment policy of the Bank is that the investment portfolio provide and maintain liquidity, produce favorable returns on investments without incurring unnecessary interest rate or credit risk, while complementing the Bank’s lending activities. Management monitors the Bank’s investment activities to ensure that they are consistent with the Bank’s established guidelines and objectives. Purchase premiums and discounts are recognized in interest income using the interest method over the estimated lives of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. See “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations, Critical Accounting Policies – Investment Securities” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

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

Intangible Assets

     As a result of the adoption of SFAS No. 142, “Goodwill and Other Intangible Assets,” which eliminates amortization of goodwill, the Company is required to evaluate goodwill annually, or more frequently if impairment indicators arise. See “Notes to Consolidated Financial Statements - Note 1 – Summary of Significant Accounting Policies” and “Notes to Consolidated Financial Statements - Note 7 – Business Combinations, Goodwill and Acquired Intangible Assets” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

Income Taxes

     Management estimates the tax provision based on the amount it expects to owe various tax authorities. In accordance with generally accepted accounting principles, merger related costs have been expensed as incurred. A significant portion of our investment advisory fees will not be payable until the transaction is completed. No tax benefit has been included in the financial statements for pre-merger related costs incurred to date, since it is presently not known, how much, if any, will be deductible for income tax purposes. Taxes are discussed in more detail in “Notes to Consolidated Financial Statements - Note

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1 – Summary of Accounting Policies” and “Notes to Consolidated Financial Statements — Note 10 – Income Taxes,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

RESULTS OF OPERATIONS

Performance Summary

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

     The Company’s results were achieved in an environment characterized by continued: low and unpredictable interest rate movements, high volumes of prepayments of loans, aggressive competition for loan originations and a high demand for fixed rate loan products. This environment presented challenges relative to growing assets that provide acceptable yields. The following describes the changes in the major components of income before income taxes for the quarter ended March 31, 2004:

•		Net interest income for the quarter was impacted by: 1) continued strong origination volume of $282.1 million, a 19% increase over the $236.5 million during the first quarter of 2003, 2) a continued low interest rate environment, 3) a 14% reduction in loan payoffs during the first quarter of 2004 compared with the fourth quarter of 2003, which contributed to net loan portfolio growth of $79.1 million from December 31, 2003, 4) the majority of ARM loans ($1.43 billion) reaching their contractual floors, 4) a 14% increase in income from the investment securities portfolio and 5) the lowering of interest rates on deposits and borrowings.
•		Deposit fee income increased by 27% during 2004, compared to the prior year as a result of the Bank’s continued implementation of new revenue generating initiatives.
•		Year-over-year provision for credit losses decreased by $0.3 million, reflecting management’s evaluation of the allowance for credit losses and the risk inherent in the Company’s portfolio. Asset quality remains strong. Nonaccrual loans decreased by $3.7 million to $5.2 million at March 31, 2004, compared to $8.9 million at December 31, 2003. Classified assets decreased by 19% to $18.8 million, or 0.7% of total Bank assets, compared to $14.4 million, or 0.5% of total Bank assets and $23.3 million, or 0.9% of total Bank assets, at December 31,

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		2003 and March 31, 2003, respectively. At March 31, 2004, the ratio of total allowance for credit losses to loans receivable, net of SVA, was 1.45%, compared to 1.53% at December 31, 2003 and 1.66% at March 31, 2003.
•		Noninterest revenue for the first quarter of 2004 increased $0.2 million, or 13%, over the same period in 2003, primarily due to $0.2 million earned on Bank Owned Life Insurance (“BOLI”) included in other assets and $0.1 million in fees earned from overdrafts, offset by a decrease of $0.1 million in prepayment fees.
•		Year-over-year total general and administrative expense (“G&A”) increased by $1.7 million primarily due to $2.0 million of pre-merger related costs. The ratio of G&A (excluding other/legal settlements) to average assets improved to 1.61% for the first quarter of 2004, compared with 1.71% for the same period of 2003.

     Key performance measurements for the first quarter of 2004 were adversely impacted by the $2.0 million of pre-merger related costs. The return on average assets (“ROA”) for the first quarter of 2004 was 0.71% (1.00%, as adjusted for the pre-merger related costs), compared with 1.06%, for the first quarter of 2003. The return on average equity (“ROE”) for the first quarter of 2004 was 10.21% (14.43% as adjusted for the pre-merger related costs), compared with a ROE of 16.46% for the first quarter of 2003.

Southern California Economic Factors

     The impact of a significant decline in the real estate market or an increase in interest rates or a reversal of the economic recovery is discussed in more detail in “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Southern California Economic Factors” in the Company’s Annual Report on Form 10K-A for the year ending December 31, 2003.

Net Interest Income

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

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     The operations of the Company are substantially dependent on its net interest income, which is the difference between the interest income earned from its interest-earning assets and the interest expense incurred on its interest-bearing liabilities. The Company’s net interest margin is its net interest income divided by its average interest-earning assets for the periods shown. Net interest income and net interest margin are affected by several factors, including (1) the level of, and the relationship between, the dollar amount of interest-earning assets and interest-bearing liabilities, (2) the relationship between the repricing or maturity of the Company’s adjustable rate and fixed rate loans and the repricing or maturity of the Company’s liabilities which include deposits, FHLB advances and junior subordinated debentures, (3) the speed at which loans and investment securities prepay, (4) the impact of internal interest rate floors and (5) the magnitude of the Company’s assets that do not earn interest, including nonaccrual loans and REO or the increases in cash surrender value earned on BOLI investments.

     The Company’s net interest income of $20.9 million for the first quarter of 2004 was slightly lower than the $21.4 million in the first quarter of 2003. The decrease was primarily due to the continued low interest rate environment, which contributed to the increase in prepayments on higher yielding loans since the first quarter of 2003. The decrease in net interest income was primarily due to the Company’s yield on earning assets being reduced faster than the Company’s cost of funds. This is a result of the significant prepayments of higher yielding loans and due to the fact that 68.2% of the Company’s funding sources have rates that are contractually fixed, partially offset by $0.4 million in additional income on investments.

     The Bank is a variable rate lender, however, the current repricing behavior approximates a liability sensitive balance sheet, as the majority of its adjustable-rate loans have reached their contractual floors. As of March 31, 2004, 95.1% of the loans in the Bank’s loan portfolio were adjustable rate, of which approximately 63.6%, or $1.43 billion, have reached their internal interest rate floors and thus have taken on fixed rate characteristics. The variable rate loans are priced at a margin over various market sensitive indices, including MTA (29.5% of the portfolio), LIBOR (26.9% of the portfolio), CMT (3.3% of the portfolio), Prime (8.5% of the portfolio) and COFI (5.0% of the portfolio).

     The net balance at cost of the Company’s investment portfolio at March 31, 2004 was $370.8 million with a weighted average yield of 3.56%, compared with $326.8 million and a weighted average yield of 3.73% at March 31, 2003. The Company earned interest income of $3.4 million and $3.0 million for the first quarter of 2004 and the first quarter of 2003, respectively. As of March 31, 2004, the weighted average effective duration was 2.12. The Company classifies these investments as available-for-sale investment securities and has reflected $0.3 million in net unrealized income, net of deferred taxes, associated with the changes in the market prices in accumulated other comprehensive income as part of its stockholders’ equity at March 31, 2004.

     At March 31, 2004, 60.6% of the Bank’s interest-bearing deposits were comprised of certificates of deposit accounts (“CDs”), excluding discounts attributable to valuations from the acquisition, with a remaining weighted average term to maturity of 7 months, compared with 60.0% with a remaining weighted average term to maturity of 7 months at December 31, 2003. Generally, the Bank’s offering rates for CDs move directionally with the general level of short-term interest rates, though the level of change may vary due to competitive pressures.

     As of March 31, 2004, 100% of the Bank’s borrowings from the FHLB were fixed rate, with remaining terms ranging from 1 day to 10 years, compared with 100% with remaining terms to maturity ranging from 1 day to 8 years at December 31, 2003 and 100% with remaining terms to maturity ranging from 1 to 8 years at March 31, 2003 (though certain advances are subject to early call provisions).

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

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     Total Interest Revenue

     Overall the decrease in interest revenue of $3.5 million, or 9.2%, during the first quarter of 2004, compared with the same period in 2003, was primarily attributable to the decrease of $3.8 million in interest earned on loans receivable, principally due to the decrease in the yield on loans, partially offset by an increase of $0.4 million from investment securities.

     Contributing to the decrease in interest revenue was a 90 basis point decrease in the yield on average loans receivable, partially offset by a $66.7 million increase in average loans outstanding. The decline in the Company’s weighted average yield was a result of downward repricing of the Company’s adjustable rate loans and the weighted average interest rate (“WAIR”) on loan payoffs exceeding the WAIR on loan originations. During the quarter ended March 31, 2004, both net interest income and net interest margin continued to be adversely impacted as borrowers refinanced loans, which resulted in $166.5 million in prepayments with a WAIR of 6.35%, while new loan production of $282.1 million reflected an average yield of 4.92% during the same period. As a result, the yield on loans receivable was 5.50% during the first quarter 2004, compared to 5.58% during the prior quarter and 6.40% during the first quarter 2003.

     The increase in average investment securities of $61.2 million from the same period in 2003 was primarily due to deployment of excess liquidity and a shift in earning assets from lower yielding cash and fed funds to higher yielding investment securities. The percentage of average investment securities to average total interest-earning assets increased to 14.4% during the quarter ended March 31, 2004 from 12.7% during the same period of 2003.

     Total Interest Cost

     Overall, interest cost during the first quarter of 2004 decreased $3.0 million and the average cost of funds decreased by 65 basis points, compared to the same period of 2003. This reduction in the cost of funds was due to the combination of the continued downward pressure on interest rates, maturing certificates of deposit with higher than current market rates, increasing FHLB overnight advances, the successful reduction of 117 basis points of cost on $130 million of FHLB putable advances, and the continued emphasis on reducing the cost of funds.

     The 50 basis point decrease in the weighted average cost of deposits was partially offset by a $3.8 million increase in the average balance of interest-bearing deposits. The reduction in the cost of deposits was the result of the combination of the continued low short term interest rates, maturing CDs with higher than current market rates, and the planned shift in the deposit mix to a higher ratio of transaction accounts to deposits. The average balance of CDs decreased $71.8 million, to $1.01 billion with an average cost of funds of 1.92% during the quarter ended March 31, 2004, compared with $1.08 billion and a 2.42% average cost of funds during the same period of 2003. The average balance of money market accounts reflected an increase of $60.4 million, to $504.6 million with an average cost of funds of 1.89% during the quarter ended March 31, 2004, compared with $444.2 million and a 2.28% average cost of funds during the same period of 2003.

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     The average cost of FHLB advances decreased 125 basis points and was partially offset by an increase of $115.3 million in the average balance of these borrowings. The average cost of junior subordinated debentures decreased by 30 basis points; 82.2% of these debentures have adjustable rates priced at a margin over LIBOR (see Note 8—“Junior Subordinated Debentures and Mandatorily Redeemable Trust Preferred Securities” included herein).

Provision for Credit Losses

     Although the Company maintains its allowance for credit losses at a level which it considers to be adequate to provide for probable losses, based on presently known conditions, there can be no assurance that such losses will not exceed the estimated amounts, thereby adversely affecting future results of operations. The calculation of the adequacy of the allowance for credit losses, and therefore the requisite amount of provision for credit losses, is based on several factors, including underlying loan collateral values, delinquency trends and historical loan loss experience, all of which can change without notice based on market and economic conditions and other factors. See “Critical Accounting Policies” for a more complete discussion of the Bank’s allowance for credit losses.

     There were no provision for credit losses for the quarter ended March 31, 2004, compared with $0.3 million for the same period in 2003. The decrease in the provision for credit losses reflects management’s evaluation of the allowance for credit losses and the risk inherent in the Company’s portfolio. Nonaccrual loans to total assets decreased to 0.19% at March 31, 2004 from 0.33% at December 31, 2003 and 0.32% at March 31, 2003. At March 31, 2004, classified assets totaled $18.8 million, or 0.7% of total Bank assets, compared to $23.3 million, or 0.9% of total Bank assets, a year earlier. Year-to-date, classified assets have increased $4.4 million, or approximately 30.5%. At the same time, delinquent loans decreased to $4.0 million at March 31, 2004, from $6.6 million at December 31, 2003. At March 31, 2004, the ratio of total allowance for credit losses to loans receivable, net of SVA, was 1.45%, compared with 1.53% at December 31, 2003 and 1.66% at March 31, 2003.

Noninterest Revenue

     Noninterest revenue was $1.7 million for the quarter ended March 31, 2004, an increase of 12.9%, compared with $1.5 million during the same period in 2003. A significant contribution to the increase was $0.2 million in income earned during the first quarter of 2004 on $25.0 million of Bank Owned Life Insurance included in other assets since April 2003.

     Noninterest revenue also includes deposit fee income for service fees, nonsufficient fund fees and other miscellaneous check and service charges. Fee income on deposits increased 27.4%, during the quarter ended March 31, 2004, compared with the same period in 2003, as a result of the growth in core transaction deposits and new fee generating initiatives, particularly the courtesy overdraft line. Overdraft fee income of $0.3 million for the quarter ended March 31, 2004 grew by 51.0%, compared with $0.2 million for the quarter ended March 31, 2003, reflecting significant efforts to increase this recurring revenue during the past year. The Company continues to expand its household penetration and as a result, the ratio of products per household increased to 2.90 at March 31, 2004, compared with 2.77 at December 31, 2003 and 2.46 at March 31, 2003.

     Loan related and other fees were $0.8 million for the quarter ended March 31, 2004, compared with $0.9 million, during the same period of 2003 and primarily consist of fees collected from borrowers (1) for the early repayment of their loans, (2) for the extension of the maturity of loans (predominantly short term construction loans, with respect to which extension options are often included in the original term of the Bank’s loan) and (3) in connection with certain loans which contain exit or release fees payable to the Bank upon the maturity or repayment of the Bank’s loan. During the quarter ended March 31, 2004 and March 31, 2003, these fees were comprised primarily of prepayment fees resulting from the high level of refinancings. Prepayment fees totaled $0.6 million for the quarter ended March 31, 2004 and $0.7 million for the quarter ended March 31, 2003.

Real Estate Owned

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

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     During the first quarter of 2004, the Bank foreclosed on one SFR loan and incurred a $0.3 million write-down of this real estate owned property. This property was sold in April 2004 and generated net cash proceeds of $1.6 million.

Noninterest Expense

   General and Administrative Expense

     The table below details the Company’s G&A expense for the periods indicated.

     The Company remains focused on reducing G&A as a percentage of average assets while increasing productivity. G&A to average assets has continued to improve for the fifth consecutive year. The Company’s ratio of annualized G&A (excluding other/legal settlements) to average assets decreased to 1.61% for the quarter ended March 31, 2004, compared with 1.64% for the year ended December 31, 2003. The efficiency ratio (defined as general and administrative expense (excluding other/legal settlements) divided by net interest income before provision for credit losses and noninterest revenue) was 47.91% for the first quarter of 2004, compared to 48.63% for the fourth quarter of 2003 and 47.62% first quarter of 2003.

     The $1.7 million increase in G&A for the quarter ended March 31, 2004 was primarily attributable to $2.0 million in pre-merger related costs included in other/legal settlements. G&A, excluding other/legal settlements, remained flat compared to the first quarter of 2003.

     Employee expense increased $0.1 million for the quarter ended March 31, 2004, compared with the same period in 2003, primarily due to an increase in commission expense. Operating expense decreased by $0.3 million for the quarter ended March 31, 2004, compared with the same period in 2003. This decrease was primarily due to $0.2 million in appraisal expenses, $0.1 million in donations, $0.1 million in director expenses, partially offset by an increase of $0.1 million in insurance expense. Occupancy expense increased $0.2 million for the quarter ended March 31, 2004, compared with the same period in 2003, primarily due to $0.1 million in leasehold amortization.

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FINANCIAL CONDITION, CAPITAL RESOURCES & LIQUIDITY AND ASSET QUALITY

Assets

Investment Securities

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

     The following table reflects the Company’s gross unrealized losses and fair value of available-for-sale investment securities, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2004:

     The unrealized positions on our mortgage-backed securities and collateralized mortgage obligations are purely a function of the volatility with interest rates in 2004, as they have no credit risk in that they are all rated AAA by Standard & Poors, redeem at maturity or when called at par and have the implicit guarantee of the United States Treasury.

     The contractual maturities of MBS and CMO investment securities available-for-sale, excluding periodic principal payments and reductions due to estimated prepayments, at March 31, 2004 were as follows:

     At March 31, 2004, the weighted average effective duration and weighted average life of the Bank’s investment securities portfolio were approximately 2.12 and 3.28 years, respectively. The portfolio had a weighted average coupon of 4.44%. The weighted average book price of the portfolio was 101.93% (net premium of $0.5 million). At March 31, 2004, the Bank did not hold securities of any non-governmental agency issuer where the aggregate book value of such securities exceed 10% of stockholders’ equity.

     Proceeds from the sales of available-for-sale investment securities during the year were $29.2 million. The Bank recognized a net loss of $37 thousand on the sale of various investment securities ($350 thousand in realized gains and $387 thousand in realized losses) for the quarter ended March 31, 2004.

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     There were 67 securities with net balances at cost and fair value of $370.8 million and $371.3 million, respectively, at March 31, 2004 that were pledged to secure FHLB advances of $342.5 million. At December 31, 2003, 51 securities with net balances at cost and fair value of $277.6 million and $275.9 million, respectively, were pledged to secure a FHLB advance of $274.3 million.

     Risks Associated with Investment Securities. The securities in the Bank’s investment portfolio (primarily MBS) are classified as “available-for-sale.” Changes in the fair value of the investment portfolio result from numerous and often uncontrollable events such as changes in interest rates, prepayment speeds, market perception of risk in the economy and other factors. To the extent that the Bank continues to have both the ability and intent to hold these securities for yield enhancement, changes in the fair value will be included as a component of stockholders’ equity. If a decline in fair value, if any, is deemed to be “other than temporary,” it will be treated as an “impairment” and reflected in earnings. Fluctuations in interest rates may cause actual prepayments to vary from the estimated prepayments over the life of the security. This may result in adjustments to the amortization of premiums or accretion of discounts related to these instruments, consequently changing the net yield on such securities. Reinvestment risk is also associated with the cash flows from such securities.

Loans Receivable

General

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

     Loan portfolio growth was impacted by the level of loan prepayments as borrowers refinanced loans. See further discussion in the rate volume analysis, contained herein.

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