UNITED STATES
SECURITIES AND EXCHANGE COMMISSION



Annual report pursuant to Section 13 of the
Securities Exchange Act of 1934
For the fiscal year ended March 31, 2004

Commission File No. 0-27404





|PFF BANCORP, INC.(exact name of registrant as specified in its charter)                 
|----------------------------------------------------------------------------------------
|DELAWARE                                                                                
|(State or other jurisdiction of
      incorporation or organization)                    
|                                                                                        
|350 South Garey Avenue, Pomona, California 91766(Address of principal executive offices)
|                                                                                        
|Registrant's telephone number, including area code: (909)
      623-2323                
|Securities registered pursuant to Section 12(b) of the
      Act: None                  
|Securities registered pursuant to Section 12(g) of the
      Act:                       
|                                                                                        
|Common Stock, par value $0.01 per share(Title of class)                                 



Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes XNo .



Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-K or
any amendment to this Form 10-K.   X.



Indicate by check mark whether the registrant is an
accelerated filer (as defined in Exchange Act



The aggregate market value of the voting and non-voting
common equity held by non-affiliates of the registrant on September 30, 2003 was
$601,274,209, which was based upon the last sales price as quoted on the New
York Stock Exchange on that date.

The number of shares of common stock outstanding as of May
31, 2004: 16,782,526.

Documents Incorporated by Reference

Portions of the Registrant's Proxy Statement to be filed with
the Securities and Exchange Commission in connection with the Annual Meeting of
Stockholders to be held September 14, 2004 and any adjournment thereof and which
is expected to be filed with the Securities and Exchange Commission on or about
July 29, 2004, are incorporated by reference in Part III hereof.



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TABLE OF CONTENTSPART I
    PAGEItem 1.
    Business
    3General
    3Lending Activities
    5Loan and Lease Portfolio Composition
    5Origination, Sale, Servicing and Purchase of Loans
    8One-to-Four Family Residential Mortgage Lending
    9Multi-Family Lending
    10Commercial Real Estate Lending
    11Construction and Land Lending
    11Leases
    12Consumer and Other Lending
    12Commercial Lending
    12Allowance for Loan and Lease Losses
    15Non-Accrual, TDRs and Past-Due Loans
    20Foreclosed Assets and Real Estate Activities
    24Investment Activities
    24Sources of Funds
    29Subsidiary Activities
    33Regulation and Supervision
    35Federal and State Taxation
    45Item 2.
    Properties
    46Item 3.
    Legal Proceedings
    46Item 4.
    Submission of Matters to a Vote of Security Holders
    46PART IIItem 5.
    Market for Registrant's Common Equity, Related Stockholder Matters and
      Issuer Purchases of Equity Securities
    47Item 6.
    Selected Financial Data
    49Item 7.
    Management's Discussion and Analysis of Financial Condition and
      Results of Operations
    52Critical Accounting Policies
    52Asset/Liability Management
    52Item 7A.
    Quantitative and Qualitative Disclosures About Market Risk
    66Item 8.
    Financial Statements and Supplementary Data
    67Item 9.
    Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure
    112Item 9A.
    Controls and Procedures
    112PART IIIItem 10.
    Directors and Executive Officers of the Registrant
    112Item 11.
    Executive Compensation
    112Item 12.
    Security Ownership of Certain Beneficial Owners and Management and
      Related Stockholder Matters
    112Item 13.
    Certain Relationships and Related Transactions
    113PART IVItem 14.
    Principal Accountant Fees and Services
    113Item 15.
    Exhibits, Financial Statement Schedules, and Reportson Form 8-K
    114


2

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PART I

Forward-Looking Statements

"Safe Harbor" statement under the Private
Securities Litigation Reform Act of 1995: This Form 10-K contains
forward-looking statements that are subject to risks and uncertainties,
including, but not limited to, changes in economic conditions in our market
areas, changes in policies by regulatory agencies, the impact of competitive
loan products, loan demand risks, the quality or composition of our loan or
investment portfolios, fluctuations in interest rates and changes in the
relative differences between short and long-term interest rates, levels of
nonperforming assets and operating results, the impact of terrorist actions on
our loan originations and loan repayments and other risks detailed from time to
time in our filings with the Securities and Exchange Commission. We caution
readers not to place undue reliance on forward-looking statements. We do not
undertake and specifically disclaim any obligation to revise any forward-looking
statements to reflect the occurrence of anticipated or unanticipated events or
circumstances after the date of such statements. These risks could cause our
actual results for fiscal year 2005 and beyond to differ materially from those
expressed in any forward-looking statements by, or on behalf of, us.

As used throughout this report, the terms "we",
"our", "us" or the "Company" refer to PFF Bancorp,
Inc. and its consolidated subsidiaries.

Item 1. Business.

General



We operate under a community banking business model. This
business model focuses on the origination of commercial, construction and land
(primarily residential tract construction), commercial real estate and equity
based consumer loans (collectively the "Four-Cs"), one-to-four family
residential mortgages and to a lesser degree, multi-family residential loans and
leases. We engage in secondary market activities, primarily the purchase of
one-to-four family residential mortgages to supplement internal origination
activities. To a lesser degree, we invest in mortgage-backed securities ("MBS")
and other investment securities (collectively "securities").

3

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Our revenues are derived principally from interest on our
loans and leases, and to a lesser extent, fee income and interest and dividends
on securities. Our primary sources of funds are:

|Deposits,                                                                  | Federal Home Loan Bank Advances ("FHLB")
          and other borrowings.
|-------------------------------------------------------------------------- | ------------------------------------------------------------------------
|Principal and interest payments on loans, leases
          and securities, |                                                                         

Scheduled payments on loans, leases and securities are a
relatively stable source of funds, while prepayments on loans, leases,
securities and deposit flows are subject to significant fluctuation. We engage
in trust activities through our trust department and offer certain annuity and
mutual fund non-deposit investment products and investment and asset management
services through our subsidiaries.

Available Information

Under the Securities Exchange Act of 1934 Sections 13 and
15(d), periodic and current reports must be filed with the SEC. We
electronically file the following reports with the SEC: Form 10-K (Annual
Report), 10-Q (Quarterly Report), DEF 14A (Proxy Statement), and Form S-3 and
8-A (Registration Statements). We may also file additional SEC forms, when
necessary. The SEC maintains an internet site, www.sec.gov, in which all
forms filed electronically may be accessed.

Internet Website

We maintain a website with the address

Market Area and Competition

Our lending, deposit gathering and trust activities are
concentrated in eastern Los Angeles, San Bernardino, Riverside and northern
Orange counties. We also originate loans on a wholesale basis throughout
Southern California and have expanded our lending to markets outside of Southern
California on a limited basis. Our deposit gathering is concentrated in the
communities surrounding our full service banking branches.

Our primary market area is highly competitive for financial
services, we face significant competition both in originating loans and leases,
and in attracting deposits. We face direct competition from a significant number
of financial institutions operating in our market area, many with a statewide,
regional or national presence. Many of these financial institutions are
significantly larger and have greater financial resources than us. Our
competition for loans and leases comes principally from commercial banks,
savings and loan associations, mortgage banking companies, credit unions and
insurance companies. Our most direct competition for deposits has historically
come from commercial banks and savings and loan associations. In addition, we
are facing an increase in competition for deposits and other financial products
from non-bank institutions such as brokerage firms and insurance companies in
such areas as short-term money market funds, mutual funds and annuities.
Additionally, our operations are significantly influenced by general economic
conditions, the monetary and fiscal policies of the federal government and the
regulatory policies of governmental authorities. Our deposit flows and the costs
of interest-bearing liabilities are influenced by interest rates on competing
investments and general market interest rates. Similarly, our loan volumes and
yields on loans, leases and securities and the level of prepayments on loans,
leases and securities are affected by market interest rates, as well as
additional factors affecting the supply of, and demand for, housing and the
availability of funds.

4

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Trust and Investment Advisory Activities

Through our trust operations we have additional fiduciary
responsibilities in our capacity as trustee, executor, administrator, guardian,
custodian, record keeper, agent, registrar, advisor and manager. The trust
assets are not our assets and are not included in our balance sheet. Trust fee
income for the years ended March 31, 2004, 2003 and 2002 was $2.5 million, $2.1
million and $2.1 million, respectively. See "Notes to Consolidated
Financial Statements - Note 20: Trust Operations." Pursuant to federal
securities laws, the Bank operates with a Registered Investment Advisor ("RIA")
designation. During April 2002, as a part of our strategy to increase fee income
associated with our wealth management and advisory services, we formed Glencrest
as a wholly-owned subsidiary of the Bancorp. In addition to providing investment
advice to independent third parties, Glencrest provides investment advisory
services to the Bank for which it is paid a fee. The Bank provides fee based
custody services for Glencrest. The positioning of Glencrest, as an entity with
an identity separate and distinct from the Bank, enables Glencrest to more
effectively market its advisory services to higher net worth individuals and
institutions.

Lending Activities

Unless otherwise noted, the qualitative discussion of lending activities
included herein refers to the Bank. We also engage in certain limited lending
activities through DBS, which are discussed separately under
"Activities-DBS". All quantitative data presented in this section
includes the accounts of the Bank and DBS.

Loan and Lease Portfolio Composition. Our loan portfolio
consists primarily of conventional first mortgage loans secured by one-to-four
family residences. At March 31, 2004, we had total gross loans and leases
outstanding of $3.69 billion, of which $1.71 billion or 46% were one-to-four
family residential mortgage loans. The remainder of the portfolio consisted of
$1.08 billion of construction and land loans, or 29% of total gross loans and
leases; $473.4 million of commercial real estate loans, or 13% of total gross
loans and leases; consumer loans of $177.9 million or 5% of total gross loans
and leases; commercial business loans and leases of $158.4 million or 4% of
total gross loans and leases; and $92.7 million of multi-family mortgage loans,
or 3% of total gross loans and leases. At March 31, 2004, approximately $3.44
billion or 93% of our total loans and leases had adjustable interest rates in
accordance with the following table:

Index
      Balance
      Percent of Loans with Adjustable Interest Rates by
        Index(Dollars in thousands)Constant Maturity Treasury ("CMT")
      $ 1,760,521
      51.3
      %Wall Street Journal Prime ("Prime")
      1,183,017
      34.411th District Cost of Funds ("COFI")
      295,492
      8.6PFF Bank & Trust Base Rate(1)
      99,459
      2.9Various other indices
      96,925
      2.8$ 3,435,414
      100.0
      %(1) Approximates Prime




Our portfolio of adjustable rate loans and leases included
approximately $1.48 billion of loans (40% of total gross loans and leases) whose
rates are fixed for an initial term of three to seven years prior to
transitioning to a semi-annual or annually adjustable rate loan ("hybrid
ARMs"). Our hybrid ARMs are primarily indexed to the one year CMT.

The types of loans and leases that we may originate are
subject to federal and state laws and regulations. Interest rates charged by the
Bank on these products are affected by the demand for such loans and leases, the
supply of money available for lending purposes and the rates offered by
competitors. These factors are, in turn, affected by, among other things,
economic conditions, monetary policies of the Federal government, including the
Federal Reserve Board, and legislative tax policies.

5

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The following table sets forth the composition of our loan and lease
portfolio in dollar amounts and as a percentage of the portfolio at the dates
indicated.

|                                              | At March 31,          
|--------------------------------------------- | ----------------------
|                                              | 2004                  
|                                              | Amount                
|                                              | (Dollars in thousands)
|                                              |                       
|Real estate: (1)                              |                       
|Residential:                                  |                       
|One-to-four family                            | $ 1,711,985           
|Multi-family                                  | 92,706                
|Commercial real estate                        | 473,374               
|Construction and land                         | 1,077,630             
|Commercial loans and leases                   | 158,391               
|Consumer                                      | 177,880               
|Total loans and leases, gross                 | 3,691,966             
|                                              |                       
|Undisbursed loan funds                        | (504,868)             
|Net premiums (discounts) on loans and leases  | (182)                 
|Deferred loan and lease origination fees, net | (4,660)               
|Allowance for loan and lease losses           | (30,819)              
|Total loans and leases, net                   | 3,151,437             
|Less: Loans held for sale                     | (2,119)               
|Loans and leases receivable, net              | $ 3,149,318           
|(1) Includes
      loans held for sale.       |                       

6

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Loan Maturity. The following table shows the contractual maturity of our
loan and lease portfolio at March 31, 2004.



|                                    | At March 31, 2004              
|----------------------------------- | -------------------------------
|                                    | One-to-
      Four
      Family
|                                    | (Dollars in thousands)         
|                                    |                                
|Amounts due: (1)                    |                                
|One year or less                    | $ 2,806                        
|After one year:                     |                                
|More than one year to three years   | 611                            
|More than three years to five years | 2,707                          
|More than five years to ten years   | 11,987                         
|More than ten years to twenty years | 157,512                        
|More than twenty years              | 1,536,362                      
|Total due after March 31, 2005      | 1,709,179                      
|Total amount due                    | 1,711,985                      
|Less:                               |                                
|Undisbursed loan funds              | -                              
|Net discounts on loans and leases   | (182)                          
|Deferred loan origination fees, net | 856                            
|Allowance for loan and lease losses | (415)                          
|Total loans and leases, net         | 1,712,244                      
|Loans held for sale                 | (2,119)                        
|Loans and leases receivable, net    | $ 1,710,125                    
|(1) Includes loans held for sale    |                                

7

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The following table sets forth at March 31, 2004, the
  dollar amount of total gross loans and leases receivable contractually due
  after March 31, 2005, and whether such loans and leases have fixed or
  adjustable interest rates.



|                                        | Due after March 31, 2005
|--------------------------------------- | ------------------------
|                                        | Fixed                   
|                                        | (Dollars in thousands)  
|                                        |                         
|Real estate loans: (1)                  |                         
|Residential:                            |                         
|One-to-four family                      | $ 119,074               
|Multi-family                            | 1,196                   
|Commercial real estate                  | 7,676                   
|Construction and land                   | 4,115                   
|Commercial loans and leases             | 45,623                  
|Consumer                                | 61,930                  
|Total gross loans and leases receivable | $ 239,614               
|(1) Includes loans held for
      sale. |                         

Origination, Sale, Servicing and Purchase of Loans. Our
lending activities are conducted primarily by loan representatives through our
27 banking branches, our loan origination center in Rancho Cucamonga,
California, a regional lending office in Sacramento, California and approved
wholesale brokers. We originate one-to-four family first trust deed residential
mortgages through brokers and internal sources while maintaining a greater focus
on the origination of Four-C loans. We also originate equity-based consumer
loans through wholesale brokers. All loans and leases we originate, either
through internal sources or through wholesale brokers, are underwritten pursuant
to our internal policies and procedures. We originate both adjustable-rate and
fixed-rate loans. Our ability to originate loans and leases is influenced by
general economic conditions affecting housing, business and consumer activities
as well as the relative customer demand for fixed-rate or adjustable-rate loans
and leases, which is affected by the current and expected future levels of
interest rates.

Loan and lease originations were $2.17 billion for the fiscal
year ended March 31, 2004 ("fiscal 2004") compared to $1.87 billion
for fiscal year ended March 31, 2003 ("fiscal 2003"). Originations of
the Four-Cs aggregated $1.82 billion or 84% of total originations for fiscal
2004 compared to $1.54 billion or 82% of total originations for fiscal 2003.
Given the high levels of principal paydowns on all segments of the portfolio
during fiscal 2004, in order to meet our growth objectives, we chose to increase
our investment in the Four-C's and utilize one-to-four family mortgages as a
preferable alternative to accumulating excessive levels of short-term liquidity
or lower yielding investment securities.

Reflecting the dramatically lower interest rate environment,
the weighted average initial contract rate on total originations was 5.88% for
fiscal 2004, compared to 6.36% for fiscal 2003.

It is our general policy to sell substantially all of the 15
and 30-year fixed-rate mortgage loans that we originate and retain substantially
all of the adjustable-rate mortgage loans and leases that we originate. We
generally retain servicing of the loans sold. At March 31, 2004, we were
servicing $119.6 million of loans for others. See "Loan Servicing."
When loans are sold on a servicing retained basis, we record gains or losses
from the sale based on the difference between the net sales proceeds and the
allocated basis of the loans sold. We capitalize mortgage servicing rights
("MSR") when loans are sold with servicing rights retained. The total
cost of the mortgage loans designated for sale is allocated to the MSR and the
mortgage loans without the MSR based on their relative fair values. MSR are
included in the financial statements in the category "Prepaid expenses and
other assets." We had $333,000 of MSR as of March 31, 2004, compared to
$357,000 at March 31, 2003. Impairment losses, if any, are recognized through a
valuation allowance, with any associated provision recorded as a component of
loan servicing fees. Impairment losses of $126,000, $151,000 and $423,000 were
recorded during the fiscal years ended March 31, 2004, 2003 and 2002,
respectively. At March 31, 2004, there were $2.1 million of mortgage loans
categorized as held for sale consisting of fixed-rate one-to-four family
residential mortgage loans.

8

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To supplement loan production, based upon our investment
needs and market opportunities, we engage in secondary marketing activities,
including the purchase of whole or participating interests in loans originated
by other institutions. We intend to continue to purchase various types of loans
originated by other institutions both in our primary market area and, to a
limited extent, other geographic areas throughout the country depending on
market opportunities. We generally purchase loans with servicing retained by the
seller.

The following table sets forth our loan originations, purchases, sales and
principal repayments for the periods indicated.

|                                                                                                                              | For the Years Ended March 31,
|----------------------------------------------------------------------------------------------------------------------------- | -----------------------------
|                                                                                                                              | 2004                         
|                                                                                                                              | (Dollars in thousands)       
|                                                                                                                              |                              
|Beginning balance (1)                                                                                                         | $ 2,692,277                  
|Loans and leases originated:                                                                                                  |                              
|One-to-four family                                                                                                            | 334,051                      
|Multi-family                                                                                                                  | 15,871                       
|Commercial real estate                                                                                                        | 168,562                      
|Construction and land                                                                                                         | 1,254,181                    
|Commercial loans and leases                                                                                                   | 229,221                      
|Consumer                                                                                                                      | 164,752                      
|Total loans and leases originated                                                                                             | 2,166,638                    
|Loans purchased                                                                                                               | 787,751                      
|Sub-total                                                                                                                     | 5,646,666                    
|Less:                                                                                                                         |                              
|Principal payments                                                                                                            | (2,349,947)                  
|Sales of loans                                                                                                                | (42,209)                     
|Transfer to assets acquired
      through foreclosure and loans charged-off                                                   | (4,890)                      
|Change in undisbursed loan funds                                                                                              | (98,959)                     
|Change in allowance for loan and
      lease losses                                                                           | 302                          
|Other (2)                                                                                                                     | 474                          
|Total loans and leases                                                                                                        | 3,151,437                    
|Loans held for sale, net                                                                                                      | (2,119)                      
|Ending balance loans and leases receivable, net                                                                               | $ 3,149,318                  
|(1) Includes loans
      held for sale.                                                                                      
|(2) Includes net
      capitalization of fees and amortization of premium or accretion of
      discount on loans and leases.

One-to-Four Family Residential Mortgage Lending. A
majority of our fixed - rate and adjustable -rate mortgage originated loans are
concentrated in our primary market area and are mostly secured by one-to-four
family residences. Loan originations are obtained from our loan representatives
and their contacts with the local real estate industry, existing or past
customers and members of the local communities. We currently offer a number of
adjustable-rate mortgage loan programs with interest rates that adjust monthly,
semi-annually or annually. A portion of our adjustable-rate mortgage loans have
introductory terms below the fully indexed rate. In underwriting such loans, we
qualify the borrowers based upon the fully indexed rate. At the end of the
introductory period, such loans will adjust either monthly, semi-annually or
annually according to their terms. Our adjustable-rate mortgage loans generally
provide for periodic and overall caps on the increase or decrease in interest
rate at any adjustment date and over the life of the loan. We currently have a
number of mortgage loan programs that may be subject to negative amortization.
Negative amortization involves a greater risk because during a period of higher
interest rates the loan principal may increase above the amount originally
advanced, which may increase the risk of default. However, we believe that the
risk of default is reduced by negative amortization caps, underwriting criteria
and the stability provided by payment schedules. At March 31, 2004, the
outstanding principal balances of loans subject to negative amortization totaled
$218.6 million, (including $11.7 million of loans serviced by others in which we
have purchased a participating interest) or 13% of total one-to-four family
residential mortgage loans. At March 31, 2004, the total outstanding negative
amortization on these loans (excluding the $11.7 million of loans serviced by
others) was $570,000. The negative amortization is generally capped at 110% of
the original loan amount. At March 31, 2004, loans with original maturities of
over 30 years totaled $55.8 million.

9

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Our policy is to originate one-to-four family residential
mortgage loans in amounts up to 89% of the lower of the appraised value or the
selling price of the property securing the loan and up to 95% of the appraised
value or selling price if private mortgage insurance is obtained. The mortgage
loans and leases we originate generally include due-on-sale clauses which
provide us with the contractual right to deem the loan immediately due and
payable in the event the borrower transfers ownership of the property without
our consent. Due-on-sale clauses are an important means of adjusting the rates
on our fixed-rate mortgage loan portfolio and we have generally exercised our
rights under these clauses when it has been advantageous for us to do so.

At March 31, 2004, our one-to-four family residential
mortgage loans totaled $1.71 billion or 46% of total gross loans and leases. Of
the $1.71 billion, 10% or $178.4 million were loans secured by
non-owner-occupied investment properties and 9% or $154.5 million were loans on
owner-occupied second homes.

Non-owner-occupied properties, particularly those classified
as investment properties, are generally considered to involve a higher degree of
credit risk than loans secured by owner-occupied properties because repayment is
generally dependent upon the property producing sufficient cash flow to cover
debt service and other operating expenses.

Multi-Family Lending. We originate multi-family mortgage
loans generally secured by properties located in Southern California. Loans
secured by multi-family properties are typically amortized for 25 to 30 years
and have a 10-year maturity. We offer a loan plan that adjusts annually based on
the one-year CMT Index plus a spread. We also offer hybrid adjustable rate
mortgages on multi-family properties. These loans typically have an interest
rate floor and a lifetime interest rate cap of five percent above the start
rate. In reaching our decision on whether to make a multi-family loan, we
consider a number of factors including: the net operating income of the
mortgaged premises before debt service and depreciation; the debt service ratio
(the ratio of net operating income to debt service); and the ratio of loan
amount to appraised value. Pursuant to our current underwriting policies, a
multi-family mortgage loan may only be made in an amount up to 80% of the
appraised value of the underlying property. In addition, we generally require a
debt service ratio of at least 110%. Properties securing these loans are
appraised and title insurance is required on all loans.

When evaluating a multi-family loan, we also consider the
financial resources and income level of the borrower, the borrower's experience
in owning or managing similar properties, and our lending experience with the
borrower. Our underwriting policies require that the borrower be able to
demonstrate strong management skills and that the property have positive cash
flow after debt service. The borrower is required to present evidence of the
ability to repay the mortgage and a history of making mortgage payments on a
timely basis. In making our assessment of the creditworthiness of the borrower,
we generally review the financial statements, employment and credit history of
the borrower, as well as other related documentation.

Our multi-family loan portfolio at March 31, 2004 totaled
$92.7 million or 3% of total gross loans and leases. At March 31, 2004, 40% our
multi-family loans were adjustable-rate indexed to COFI, 49% were indexed to the
one-year CMT, 1% were fixed rate and the remaining 10% were indexed to various
other indices. Our largest multi-family loan at March 31, 2004, had an
outstanding balance of $5.4 million and is secured by an apartment complex with
54 units located in Los Angeles, California.

Loans secured by multi-family residential properties
generally involve a greater degree of risk than one-to-four family residential
mortgage loans. Because payments on loans secured by multi-family properties are
often dependent on the successful operation or management of the properties,
repayment of such loans may be subject to a greater extent to adverse conditions
in the real estate market or the economy. We seek to minimize these risks
through our underwriting policies, which require such loans to be qualified at
origination on the basis of the property's income and debt service ratio.

10

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Commercial Real Estate Lending. We originate commercial
real estate loans that are generally secured by properties such as small office
buildings or retail facilities located in Southern California. Our underwriting
policies provide that commercial real estate loans may be made in amounts up to
75% of the appraised value of the property. Competitive market factors have also
prompted us to originate such loans with fixed rates of interest. Maturities on
commercial real estate loans are generally 10 years with 25 to 30 year
amortization, although these loans may be made with maturities up to 30 years.
Our underwriting standards and procedures are similar to those applicable to our
multi-family loans, whereby we consider the net operating income of the property
and the borrower's expertise, credit history and profitability. We generally
require that the properties securing commercial real estate loans have debt
service ratios of at least 120%.

At March 31, 2004, our commercial real estate loan portfolio
was $473.4 million, or 13% of total gross loans and leases. At March 31, 2004,
77% of these loans were indexed to the one-year CMT, 8% were indexed to COFI,
11% were indexed to the Monthly Average U.S. Treasury, 3% were indexed to Prime
and 1% were fixed rate. The largest commercial real estate loan in our portfolio
at March 31, 2004 was $15.8 million and is secured by three multi-tenant
retail/office buildings located in La Jolla, California.

Loans secured by commercial real estate properties are
generally larger and involve a greater degree of risk than one-to-four family
residential mortgage loans. Because payments on loans secured by commercial real
estate properties are often dependent upon the successful operation and
management of the properties, repayment of such loans may be influenced to a
great extent by conditions in the real estate market or the economy. We seek to
minimize these risks through our underwriting standards, which require such
loans to be qualified on the basis of the property's income and debt service
ratio.

Construction and Land Lending. Our construction loans
primarily are made to finance tract construction of one-to-four family
residential properties. These loans are generally indexed to Prime, have
maturities of two years or less and generally include extension options of six
to eighteen months upon payment of an additional fee. Our policies provide that
construction loans may be made in amounts up to 75% of the appraised value of
the property for construction of commercial properties, up to 80% for
multi-family properties and up to 85% for one-to-four family residences. Land
loans are underwritten on an individual basis, but generally do not exceed 65%
of the actual cost or current appraised value of the property, whichever is
less. We require an independent appraisal of the property and generally require
personal guarantees. Loan proceeds are disbursed as construction progresses and
as inspections warrant. Our inspectors generally visit projects twice a month to
monitor the progress of construction.

We have expanded, on a selective basis, construction lending
to western states other than California. Such expansion has been undertaken with
developers with whom we have had long-term lending relationships. As of March
31, 2004, we had construction loans outstanding for development of residential
properties located in Nevada, Utah and Arizona totaling $47.3 million, $23.0
million of which was disbursed, the remainder of our construction loans were for
development of real estate located in California. The largest credit exposure in
the construction loan portfolio as of March 31, 2004 consists of a loan for
$21.9 million for the development of 152 condominium units in Murrieta,
California. The disbursed balance of this loan at March 31, 2004, was $9.0
million. The second largest credit exposure in our construction and land
portfolio at March 31, 2004, was a $17.9 million loan secured by seven free
standing industrial buildings located in San Leandro, California. The largest
land loan in our portfolio at March 31, 2004 was a loan for $17.5 million for
241 proposed single family lots located in Beaumont, California. The disbursed
balance on this land loan at March 31, 2004 was $5.2 million. At March 31, 2004,
our construction and land loan portfolio was $1.08 billion or 29% of total gross
loans and leases, $572.8 million of which was disbursed. At March 31, 2004, the
aggregate balance of loans for the construction of properties other than
one-to-four family residences was $161.7 million, $83.3 million of which was
disbursed. The aggregate balance of land loans was $194.8 million, $129.6
million of which was disbursed.

11

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Construction financing is generally considered to involve a
higher degree of credit risk than long-term financing on improved,
owner-occupied real estate. Mitigation of risk of loss on a construction loan is
dependent largely upon the accuracy of the initial estimate of the property's
value at completion of construction or development compared to the estimated
cost (including interest) of construction. If the estimate of value proves to be
inaccurate, we may be confronted with a project, when completed, having a value
that is insufficient to assure full repayment of our loan.

Leases. We offer lease products that are, at the present
time, originated on our behalf by leasing companies and either funded directly
by us or purchased from the leasing companies subsequent to funding. In these
transactions we recognize income using the effective interest method applied to
the amount we pay for the lease. Each of these transactions must satisfy our
underwriting standards for creditworthiness. The originating leasing company
remains the legal owner of the leased equipment and pledges its legal interest
in the equipment to further secure the transaction. As of March 31, 2004 and
2003, our lease portfolio was $6.7 million and $1.8 million, respectively.

Consumer and Other Lending

The equity lines of credit we offer generally have
introductory terms below the fully indexed rate. At the end of the introductory
period, the lines of credit will adjust monthly based on changes in the Prime
rate. These lines of credit provide for overall caps/floors on the
increase/decrease in interest rates over the life of the loan.

Our policy is to originate equity loans and lines of credit
up to 100% of the appraised value of the property securing the loan. Loans
secured by a second lien on property and with higher loan-to-value ratios are
generally considered to involve a higher degree of credit risk than loans
secured by a first lien position or with a lower loan to value. These loans are
priced to compensate for these higher risks. Up to April 2004, we also
originated a limited number of equity loans with loan-to-value ratios up to
125%. These loans were originated for the secondary market and all of the
originations were sold upon funding to a third party investor. During April
2004, we determined that these high loan-to-value activities were inconsistent
with our community banking business model and we closed the lending office that
originated such loans. During the fiscal years ended March 31, 2004, 2003 and
2002, this lending office generated total revenue of $438,000, $394,000 and
$299,000, respectively and incurred total operating expenses of $411,000,
$375,000 and $368,000, respectively.

At March 31, 2004, our total consumer loan portfolio was
$177.9 million or 5% of total gross loans and leases, composed of $140.9 million
in home equity lines of credit and $37.0 million in secured and unsecured
personal loans and lines of credit. At March 31, 2004, 62% of these loans were
indexed to Prime, 36% were fixed rate, 1% were indexed to COFI and 1% were
indexed to various other indices.

Commercial Lending. During the past seven years, we have
expanded our operations to include lending to small and medium-sized businesses.
Loan products include working capital lines of credit, equipment term loans,
Small Business Administration ("SBA") and other government loan
guarantee programs, and contractor financing for residential housing
rehabilitation. Our commercial lending operations also include wholesale lending
for business equipment finance and leasing companies, as well as syndications
and participations with local and national business lenders.

As of March 31, 2004, our total commercial loan and lease
commitments were $289.7 million, of which $158.4 million or 4% of total gross
loans and leases were outstanding. At March 31, 2004, 63% of the commercial
loans outstanding were indexed to the PFF Bank & Trust Base Rate (which
approximates Prime), 6% were indexed to Prime and the remaining 31% were fixed
rate. At March 31, 2004, the largest amount of commercial loans outstanding to
one borrower was $12.3 million to a family owned business engaged in the sales,
leasing and manufacturing of hot food catering trucks and other commercial
vehicles. The loans to this borrower are secured by the assignment of leases and
underlying equipment. The second largest extension of commercial credit to one
borrower was $9.5 million to a provider of capital equipment leasing and
financial services.

12

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Commercial business lending is generally considered to
involve a higher degree of credit risk than secured real estate lending.
Commercial business loans may be originated on an unsecured basis or may be
secured by collateral that is not readily marketable. We generally require
personal guarantees on our commercial business loans. The risk of default by a
commercial business borrower may be influenced by numerous factors which may
include the strength of the worldwide, regional or local economies or sectors
thereof, changes in technology or demand for particular goods and services and
the ongoing ability of the commercial business borrower to successfully manage
the business. Because of these risks, we monitor the performance of our
commercial business loans and the underlying businesses and individuals with a
different focus than is typical of traditional one-to-four family residential
mortgage lending. The monitoring of commercial business loans typically involves
the periodic review of the financial statements and on-site visits to the
businesses to which credit has been extended.

The following table presents a by-industry breakdown of our
commercial lending portfolio.

|Industry                                          | Balance
      Outstanding | Percent of
      Total Balance
      Outstanding | Total
      Commitment | Number of
      Loans and Leases | Average
      Balance
      Outstanding | Largest
      Commitment
|------------------------------------------------- | ------------------------- | ------------------------------------------------ | ---------------------- | -------------------------------- | --------------------------------------- | ------------------------
|                                                  | (Dollars in thousands)   
|Real Estate Rental and Leasing                    | $ 45,562                  | 28.8%                                            | $ 95,925               | 182                              | $ 250                                   | $ 19,496                
|Finance, insurance & Real estate                  | 21,831                    | 13.8                                             | 41,214                 | 136                              | 161                                     | 3,587                   
|Construction                                      | 18,372                    | 11.6                                             | 36,963                 | 151                              | 122                                     | 2,910                   
|Professional, Scientific and Technical Services   | 15,052                    | 9.5                                              | 19,297                 | 72                               | 209                                     | 2,367                   
|Manufacturing                                     | 12,669                    | 8.0                                              | 18,424                 | 108                              | 117                                     | 2,704                   
|Wholesale trade                                   | 9,481                     | 6.0                                              | 9,745                  | 66                               | 144                                     | 1,151                   
|Retail trade                                      | 6,704                     | 4.2                                              | 8,822                  | 74                               | 91                                      | 876                     
|Health Care and Social Assistance                 | 6,573                     | 4.1                                              | 15,389                 | 69                               | 95                                      | 2,000                   
|Transportation,
      communication and utilities | 1,667                     | 1.1                                              | 1,745                  | 34                               | 49                                      | 300                     
|Other Services                                    | 20,480                    | 12.9                                             | 42,291                 | 269                              | 545                                     | 5,000                   
|                                                  |                           |                                                  |                        |                                  |                                         |                         
|Total                                             | $158,391                  | 100.0%                                           | $289,815               | 1,161                            |                                         |                         

13

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Loan Approval Procedures and Authority. The Board of
Directors establishes our lending policies and delegates lending authority and
responsibility to the Loan Origination and Asset Review Committee ("LOARC"),
the Management Loan Committee and specified officers of the Bank. The LOARC
includes four of the six outside Directors of the Bank as well as selected
senior management staff. All loans and leases must be approved by a majority of
a quorum of the designated committee, group of officers or by the designated
individual. The following committees, groups of officers and individual officers
are granted the authority to approve and commit the Bank to the funding of the
following categories of loans and leases:

Bank Loan Approval AuthorityLoan Type
      Up to $499,999
      Up to $999,999
      $1.0 million to $9,999,999
      $10.0 million or GreaterMortgage loans and leases
      Bank's Staff Underwriters
      Major Loan Manager, Senior Executive Vice-President, Chief Lending
        Officer or certain Departmental Managers
      Major Loan Committee
      LOARC


Loan Type
      Up to $999,999
      $1.0 million to $4,999,999
      $5.0 million or GreaterCommercial Business Loans
      Commercial Credit Administrator or Chief Lending Officer
      Management Loan Committee
      LOARC


Loan Type
      Up to $499,999
      Up to $999,999
      $1.0 million or GreaterConsumer Loans
        (Real Estate)
      Bank's Staff Underwriters
      Major Loan Manager, Senior Executive Vice-President, Chief Lending
        Officer, certain Departmental Managers
      LOARC


Loan Type
      Up to $50,000
      $50,000 or GreaterConsumer Loans
        (non-real estate)
      Bank's Staff Underwriters and certain Departmental Managers
      Major Loan Manager, Senior Executive Vice-President or Chief Lending
        Officer or Management Loan Committee


The Bank will not make loans and leases-to-one borrower that
are in excess of regulatory limits. Pursuant to OTS regulations, loans and
leases-to-one borrower cannot exceed 15% of the Bank's unimpaired capital and
surplus. At March 31, 2004, the Bank's limit on loans and leases-to-one
borrower was $45.5 million.

Loan Servicing. We service mortgage loans for others.
Loan servicing includes collecting and remitting loan payments, accounting for
principal and interest, making inspections of mortgaged premises as required,
contacting delinquent mortgagors, supervising foreclosures and property
dispositions in the event of unremedied defaults, making certain borrower
insurance and tax payments are made and generally administering the loans. All
of the loans currently being serviced for others are loans that we have sold. At
March 31, 2004, we were servicing $119.6 million of loans for others. We do not
purchase servicing rights related to mortgage loans originated by other
institutions.

14

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Delinquencies and Classified Assets

For commercial business loans, we conduct an ongoing review
of all loans 15 or more days delinquent. The procedures we undertake with
respect to delinquencies may vary depending on the nature of the loan, the
period of delinquency, and the quality of collateral or guaranties. We generally
send the borrower a notice of non-payment within 15 days after the due date and
subsequent notices thereafter. In the event that payment is not then received,
the responsible loan officer contacts the borrower directly and may notify
guarantors and grantors of collateral that the loan is delinquent. The loan
officer may review the loan documentation and secure additional collateral or
sources of repayment. Delinquent loans and leases may be classified as other
than a "pass" credit, in order to provide management visibility,
periodic reporting, and appropriate reserves. Legal recourse is considered and
promptly undertaken if alternate repayment sources cannot be identified. At 90
days past due, the loan will be placed on non-accrual status.

Allowance for Loan and Lease Losses ("ALLL"). We
evaluate the adequacy of the ALLL quarterly for the purpose of maintaining an
appropriate allowance to provide for losses inherent in the loan and lease
portfolio. A key component to the evaluation is the internal asset review
process.

The Internal Asset Review Department ("IARD")
conducts independent reviews to evaluate the credit risk and quality of our
assets. IARD reports to the Internal Asset Review Committee ("IARC").
The IARC is chaired by the IAR Manager and includes the Bank's Credit Risk
Officer, General Counsel, Controller, Chief Appraiser, and Loan Service Manager.
The Bank's Chief Executive Officer, Chief Operating Officer and Chief Lending
Officer attend as non-voting members. IARC meets quarterly to review the
recommendations from the IARD for asset classifications and valuation
allowances. The IARD reports quarterly to the Board of Director's Loan
Origination and Asset Review Committee regarding overall asset quality, the
adequacy of valuation allowances, and adherence to policies and procedures
regarding asset classification and valuation.

IARD adheres to an internal asset review system and loss
allowance methodology designed to provide for timely recognition of problem
assets and adequate valuation allowances to cover asset losses. Our asset
monitoring process includes the use of asset classifications to segregate the
assets, largely loans, leases and real estate, into various risk categories. We
use the various asset classifications as a means of measuring risk and
determining the adequacy of valuation allowances by using an eight-grade system
to classify assets. The current grades are: Pass 1; Pass 2; Pass 3; Pass 4;
Special Mention; Substandard; Doubtful; and Loss. Substandard, Doubtful, and
Loss assets are considered "classified assets" for regulatory
purposes. A brief description of these grades follows:

- The four Pass classification grades represent a level of credit quality,
    which ranges from no well-defined deficiency or weakness to some noted
    weakness, yet risk of default is expected to be remote.
- A Special Mention asset does not currently expose us to a sufficient
    degree of risk to warrant an adverse classification, but does possess a
    correctable deficiency or potential weakness deserving management's close
    attention.
- Substandard assets have a well-defined weakness or weaknesses. They are
    characterized by the distinct possibility that some loss will be sustained
    if the deficiencies are not corrected.
- An asset classified Doubtful has all the weaknesses inherent in those
    classified Substandard with the added characteristic that the weaknesses
    make collection or liquidation in full, on the basis of currently existing
    facts, conditions and values, highly questionable and improbable. Doubtful
    is considered to be a temporary classification until resolution of pending
    weakness issues enables the potential for loss to be more clearly evaluated.
- That portion of an asset classified Loss is considered uncollectible and
    of so little value that its continuance as an asset is not warranted. A Loss
    classification does not mean that an asset has absolutely no recovery or
    salvage value, but rather it is not reasonable to defer charging off all or
    that portion of the asset deemed uncollectible even though partial recovery
    may be effected in the future.

15

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The total ALLL is comprised of general and specific valuation
allowances:

- General valuation allowance ("GVA"): This element takes into
    consideration losses that are imbedded within the portfolio but have not yet
    been realized. The total GVA estimate involves a high degree of management
    judgment based upon many considerations. The process involves the
    segregation of the loan and lease portfolio by type and assigned
    classification grade. Loss factors are applied to each portfolio segment and
    are estimated based upon actual loss experience, current trends, and other
    considerations. This process excludes loans for which specific valuation
    allowances have been established.

The GVA also includes an allocation for large borrower
  risk. We have a number of borrowers who, individually or in the aggregate

- Specific valuation allowances ("SVA"): A loan or lease is
    impaired when, based on current information and events, it is probable that
    a creditor will be unable to collect all amounts due according to the
    contractual terms of the loan agreement. When we determine that a loss is
    probable, an SVA is established for the amount of the loss by determining
    the difference between our recorded investment in the loan and the estimated
    net realizable value. If the loan is determined to be "troubled
    collateral dependent" the fair value of the collateral is used to
    determine the SVA

At March 31, 2004, our ALLL totaled $30.8 million or 0.84% of
gross loans and leases and 226% of non-performing loans compared to $31.1
million or 0.99% of gross loans and leases and 168% of non-performing loans at
March 31, 2003. At March 31, 2004, we had non-performing loans of $13.6 million
or 0.37% of gross loans and leases compared to $18.6 million or 0.59% of gross
loans and leases at March 31, 2003. See "Non-Accrual and Past Due
Loans." We will continue to monitor and modify the ALLL based upon economic
conditions, loss experience, changes in portfolio composition, and other
factors.

16

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The following table sets forth activity in our allowance for
loan and lease losses for the periods indicated.



|                                                              | For the Year Ended March 31, |  
|------------------------------------------------------------- | ---------------------------- | -
|                                                              | 2004                         |  
|                                                              | (Dollars in thousands)       |  
|                                                              |                              |  
|Beginning balance                                             | $ 31,121                     |  
|Provision for loan and lease losses                           | 2,725                        |  
|Charge-offs:                                                  |                              |  
|Real estate:                                                  |                              |  
|One-to-four family                                            | (194)                        |  
|Multi-family                                                  | -                            |  
|Commercial real estate                                        | -                            |  
|Construction and land                                         | -                            |  
|Commercial loans and leases                                   | (3,584)                      |  
|Consumer                                                      | (489)                        |  
|Total                                                         | (4,267)                      |  
|Recoveries                                                    | 1,240                        |  
|Ending balance                                                | $ 30,819                     |  
|Net charge-offs to average gross loans and leases outstanding | 0.09                         | %

For the fiscal years ended March 31, 2004, 2003 and 2002, the
provisions for loan and lease losses approximated the levels of net charge-offs.
During these periods, the proportion of the loan and lease portfolio comprised
by the Four-Cs increased from 47% at March 31, 2002, to 53% at March 31, 2003,
and decreased to 51% at March 31, 2004. The probable loss exposure on the
Four-Cs generally exceeds that of the residential mortgage portfolio. As a
result, if the level of probable losses were to remain constant between periods
for all segments of the portfolio, an increase in the Four-Cs would be expected
to result in an increase in the allowance for loan and lease losses. However,
based upon a reduction in historical loss experience and a reduction in our
estimate of incurred losses inherent in the loan and lease portfolio after
giving consideration to current economic conditions, we have reduced the
probable loss rates used in determining the GVA. In determining the amount of
the GVA, we stratify our loan portfolio into approximately 105 segments based
upon loan type, internal classification, etc. Each of these strata is assigned a
separate probable loss factor.

The table below summarizes the ranges of these probable loss
factors for each of our loan categories.

|                       | Probable Loss Factors (basis points)
|---------------------- | ------------------------------------
|Loan Type              | Pass                                
|One-to-four family     | 2-88                                
|Multi-family           | 2-103                               
|Commercial real estate | 3-132                               
|Construction and land  | 4-161                               
|Commercial             | 13-500                              
|Consumer               | 3-2,000                             

Our determination as to the classification of our assets and
the amount of our valuation allowances is subject to review by the OTS who can
order the establishment of additional loss allowances. The OTS, in conjunction
with the other federal banking agencies, has adopted an interagency policy
statement on the allowance for loan and lease losses. The policy statement
provides guidance for financial institutions on both the responsibilities of
management for the assessment and establishment of adequate allowances and
guidance for banking agency examiners to use in determining the adequacy of
valuation allowances. The policy statement recommends that institutions have
effective systems and controls to identify, monitor and address asset quality
problems; that management analyze all significant factors that affect the
collectibility of the portfolio in a reasonable manner; and that management
establish an acceptable allowance evaluation process that meets the objectives
set forth in the policy statement. While the Bank believes that it has
established an adequate allowance for loan and lease losses, there can be no
assurance that regulators, in reviewing the Bank's loan and lease portfolio,
will not request the Bank to materially increase its allowance for loan and
lease losses, thereby negatively affecting the Bank's financial condition and
earnings. Although management believes that an adequate allowance for loan and
leases losses has been established, further additions to the level of allowance
for loan and lease losses may become necessary.

17

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Management reviews and classifies our assets monthly and
reports the results of its review to the Board of Directors. We classify assets
in accordance with the management guidelines described above. Foreclosed assets
are classified as Substandard. We utilize an internal appraisal staff and Board
approved independent appraisers to conduct appraisals at the time of foreclosure
and subsequent appraisals on assets on a periodic basis. Qualified personnel are
also utilized for annual property inspections on all income producing real
properties securing a loan balance over $2.0million and other specified
properties. Property inspections are intended to provide updated information
concerning occupancy, maintenance, current rent levels, and changes in market
conditions.

At March 31, 2004 and 2003 we had gross balances of $9.3
million and $33.9 million, respectively, of assets criticized as Special
Mention, on which there were no SVAs. The main components of assets criticized
as Special Mention at March 31, 2004 were: eight commercial business loans with
existing commitments totaling $5.3 million; and one construction loan totaling
$3.8 million.

At March 31, 2004, we had $30.1 million of assets, net of
specific allowances of $4.5 million, classified as Substandard, compared to
$37.5 million, net of specific allowances of $5.6 million, classified as
Substandard at March 31, 2003.

Included in Substandard assets at March 31, 2004 are a
construction loan aggregating $7.3 million, net of specific allowances of $2.5
million, on a project in Murrieta, California and two commercial business loans
aggregating $1.9 million, net of specific allowances of $1.8 million. See
"Non-Accrual and Past-Due Loans ."

Our present policy is generally to continue to classify a
troubled-debt restructured ("TDR") loan as Substandard until the asset
has performed at normal contract terms for a period of six to twelve months.
Where there has been a forgiveness of principal or interest, a sub-market
interest rate granted, or a substantial lengthening of the loan term due to
credit or collateral weaknesses, the loan is generally considered a TDR.
Although the regional economy, in general, was strong during fiscal 2004,we
continued to utilize early intervention and flexibility in restructuring some
troubled loans with borrowers rather than foreclosing on the underlying
properties. See "Non-Accrual and Past-Due Loans."

At March 31, 2004, there was one loan classified Doubtful
with a gross balance of $79,000 as compared to no assets classified as Doubtful
at March 31, 2003. At March 31, 2004 and 2003, there were no assets classified
as Loss.

The composition of assets classified Substandard at March 31,
2004 and 2003 is set forth on the following page.

18

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|                            | At March 31, 2004     
|--------------------------- | ----------------------
|                            | Loans and Leases      
|                            | Gross
      Balance   
|                            | (Dollars in thousands)
|Real estate:                |                       
|Residential:                |                       
|One-to-four family          | $ 1,728               
|Multi-family                | -                     
|Commercial real estate      | -                     
|Construction and land       | 20,553                
|Sub-total                   | 22,281                
|Commercial loans and leases | 10,918                
|Consumer                    | 453                   
|Total                       | $ 33,652              



|                            | At March 31, 2003     
|--------------------------- | ----------------------
|                            | Loans and Leases      
|                            | Gross
      Balance   
|                            | (Dollars in thousands)
|Real Estate:                |                       
|Residential:                |                       
|One-to-four family          | $ 3,683               
|Multi-family                | -                     
|Commercial real estate      | 1,745                 
|Construction and land       | 22,783                
|Sub-total                   | 28,211                
|Commercial loans and leases | 14,271                
|Consumer                    | 542                   
|Total                       | $ 43,024              

(1) Net balances are reduced for specific loss allowances established against
substandard loans, leases and foreclosed assets.

19

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Non-Accrual, TDRs and Past-Due Loans. The following table
sets forth information regarding non-accrual loans and assets acquired in
foreclosure and TDR loans. There were no leases that were on non-accrual status
or classified as a TDR as of March 31, 2004. There were five TDR loans
consisting of two commercial business loans, two construction loans and one
single-family loan totaling $10.1 million, net of valuation allowances of $4.0
million. One of the TDRs, a construction loan totaling $7.3 million, net of
valuation allowances of $2.5 million classified as a non-accrual loan is
discussed below. Assets acquired through foreclosure, net totaled $683,000 at
March 31, 2004, which included a single-family loan totaling $653,000 and
jewelry inventory we repossessed in June 2003 from a commercial business loan to
a jewelry store chain. The original balance of the jewelry store loan was $2.7
million, with loan charge-offs of $2.1 million, post-foreclosure write-offs of
$191,000, and net proceeds from sale of jewelry of $413,000 in fiscal 2004
resulting in a carrying value of $30,000.

Non-accrual loans totaled $13.6 million or 0.37 percent of
gross loans at March 31, 2004 as compared to $18.6 million or 0.59 of gross
loans at March 31, 2003. Included in non-accrual loans was a construction loan
located in Murrieta, California totaling $9.8 million, which has a SVA of $2.5
million, is classified as a TDR and was paid through March 2002. This loan is
secured by 20 houses, of which 18 have been sold and are in escrow. The only
other credit of $1.0 million or greater included in non-accrual loans at March
31, 2004 was a senior housing development loan totaling $1.0 million located in
Santa Ana, California. This loan was paid through September 2003. We continue to
monitor the borrowers' efforts to improve the cash flow of the housing
development.

It is our policy to cease accruing and to establish an
allowance for all previously accrued but unpaid interest on loans and leases 90
days or more past due. For the years ended March 31, 2004, 2003, 2002, 2001 and
2000, the amount of interest income that would have been recognized on
non-accrual loans, if such loans had continued to perform in accordance with
their contractual terms, was $939,000, $1.0 million,
$330,000, $733,000 and $466,000, respectively, none of which was recognized.

During the years ended March 31, 2004 and 2003, our average investment in
impaired loans and leases was $28.4 million and $34.6 million, respectively.
Interest income recorded under the accrual method during these periods was
$920,000 and $1.3 million, respectively.

20

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At March 31,2004
    2003
    2002
    2001
    2000(Dollars in thousands)Non-accrual loans (5):Residential real estate:One-to-four family
    $ 1,728
    2,776
    3,049
    5,420
    4,415Commercial real estate
    -
    -
    285
    -
    -Construction and land (3) (4)
    9,811
    11,680
    -
    4,572
    -Commercial business loans (4)
    1,644
    3,513
    65
    437
    243Consumer
    453
    603
    1,095
    1,052
    769Total
    13,636
    18,572
    4,494
    11,481
    5,427Foreclosed assets, net (1)
    683
    75
    507
    351
    1,466Non-performing assets
    $ 14,319
    18,647
    5,001
    11,832
    6,893Performing TDR loans, net (3)
    $ 2,688
    3,729
    27,941
    3,012
    1,950Non-performing TDR loans, net (4)
    $ 7,388
    -
    -
    -
    -Classified assets, gross
    $ 34,620
    43,099
    74,904
    62,102
    37,354Allowance for loan and lease losses as a
      percent of gross loans and leases receivable
    0.84%
    0.99
    1.11
    1.22
    1.09Allowance for loan and lease losses as a percent of total
      non-performing loans (2)
    226.01
    167.57
    697.80
    270.20
    512.96Non-performing loans as a percent
      of gross loans and leases receivable (2)
    0.37
    0.59
    0.16
    0.45
    0.21Non-performing assets as a percent
      of total assets (2)
    0.39
    0.59
    0.16
    0.51
    0.23(1) Foreclosed
      asset balances are shown net of related loss allowances.(2)Non-performing
    assets consist of non-performing loans and foreclosed assets. Non-performing
    loans consist of all loans 90 days or more past due and all other
    non-accrual loans.(3)At
    March 31, 2001 the Bancorp's $3.0 million loan for the Castaic development,
    a 296 home residential development located in Castaic, California is
    included in non-accrual and TDR loans. This loan was classified as impaired
    and non-accrual due to cost overruns and constructions delays. At March 31,
    2003, the Bank's loans on the Castaic development are the only loans
    reported as TDR. At March 31, 2004, the $2.7 million in performing TDR's
    represents three commercial business loans, comprised of a corporate line of
    credit totaling $3.1 million with a SVA of $1.5 million, a business loan to
    a manufacturer of electronic equipment racks totaling $1.0 million and a
    second mortgage on a single-family residential loan totaling $43,000 with a
    SVA of $24,000.(4)At
    March 31, 2004, two loans totaling $7.4 million are reported as
    non-performing TDR loans and as non-accrual loans, which consists of a $7.3
    million loan on a construction project located in Murrieta, California and a
    commercial business loan for $76,000.(5)There
    were no leases that were on non-accrual status or classified as a TDR as of
    March 31, 2004.


21

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The following table sets forth delinquencies in our loan and lease portfolio
as of the dates indicated.



|                            | At March 31, 2004                | At March 31, 2003                                      
|--------------------------- | -------------------------------- | -------------------------------------------------------
|                            | 60-89 Days                       | 90 Days or More(1)                                     
|                            | Number
      of Loans and Leases | Principal
      Balance
      of Loans and
      Leases
|                            | (Dollars in thousands)          
|                            |                                  |                                                        
|One-to-four family          | 3                                | $ 299                                                  
|Multi-family                | -                                | -                                                      
|Commercial real estate      | -                                | -                                                      
|Construction and land       | -                                | -                                                      
|Commercial loans and leases | -                                | -                                                      
|Consumer                    | -                                | -                                                      
|Total                       | 3                                | $ 299                                                  



|                            | At March 31, 2002               
|--------------------------- | --------------------------------
|                            | 60-89 Days                      
|                            | Number
      of Loans and Leases
|                            | (Dollars in thousands)          
|                            |                                 
|One-to-four family          | 5                               
|Multi-family                | -                               
|Commercial real estate      | -                               
|Construction and land       | -                               
|Commercial loans and leases | -                               
|Consumer                    | 1                               
|Total                       | 6                               

1. Loans 90 days or more past due are included in non-accrual loans. See
    "Non-Accrual and Past Due Loans."
2. At March 31, 2003, the $11.7 million of construction and land loans that
    was 90 days or more delinquent includes three loans on a residential
    development in Murrieta, California for which the Bank had determined no SVA
    was required. See
    "Lending Activities - Non-Accrual and Past Due Loans."

22

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The following tables set forth the amount of our allowance for loan and lease
losses, the percent of allowance for loan and lease losses to total allowance
and the percent of gross loans and leases to total gross loans and leases in each of the
categories listed at the dates indicated.



|                                                | At March 31,          
|----------------------------------------------- | ----------------------
|                                                | 2004                  
|                                                | Amount                
|                                                | (Dollars in thousands)
|                                                |                       
|One-to-four family                              | $ 415                 
|Multi-family                                    | 39                    
|Commercial real estate                          | 1,558                 
|Construction and land                           | 18,563                
|Commercial loans and leases                     | 9,510                 
|Consumer                                        | 734                   
|Total allowance for
      loan and lease losses | $30,819               



|                                                | At March 31,          
|----------------------------------------------- | ----------------------
|                                                | 2001                  
|                                                | Amount                
|                                                | (Dollars in thousands)
|                                                |                       
|One-to-four family                              | $ 1,549               
|Multi-family                                    | 228                   
|Commercial real estate                          | 891                   
|Construction and land                           | 17,835                
|Commercial loans and leases                     | 5,334                 
|Consumer                                        | 5,185                 
|Total allowance for
      loan and lease losses | $ 31,022              

23

---



Foreclosed Assets and Real Estate Acquired for Investment
Activities

At March 31, 2004, we had $683,000 of foreclosed assets, net
of allowances, and no real estate acquired for investment ("REI"). If
we foreclose on an asset, it is initially recorded at fair value. Subsequent to
foreclosure, we periodically perform valuations and the assets are carried at
the lower of cost or estimated fair value less costs of disposition. Valuation
adjustments to foreclosed assets are recorded through a specific valuation
allowance to "assets acquired through foreclosure, net," on our
balance sheet and a charge to "foreclosed asset operations" on our
income statement.

It is our policy to obtain an appraisal on all foreclosed
assets at the time of possession.

The following table sets forth certain information with
regard to our foreclosed assets and REI.

|                                       | At March 31,          
|-------------------------------------- | ----------------------
|                                       | 2004                  
|                                       | (Dollars in thousands)
|Foreclosed Assets                      |                       
|Assets acquired in settlement of loans | $ 889                 
|Allowance for losses                   | (206)                 
|Total foreclosed assets, net           | 683                   
|                                       |                       
|REI                                    |                       
|Properties wholly owned                | -                     
|Mezzanine real estate financing        | -                     
|Allowance for losses                   | -                     
|Total REI, net                         | -                     
|Total real estate, net                 | $ 683                 

Investment Activities

Federally chartered savings institutions have the authority
to invest in various types of liquid assets, including United States Treasury
obligations, securities of various federal agencies, certificates of deposit of
insured banks and savings institutions, bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment-grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution is otherwise
authorized to make directly.

The investment policy of the Bank, as established by the
Board of Directors, attempts to provide and maintain liquidity, generate a
favorable return on investments without incurring undue interest rate or credit
risk, and complement the Bank's lending activities. Specifically, the Bank's
policies generally limit investments to government and federal agency-backed
securities and other non-government guaranteed securities, including corporate
debt obligations, that are investment grade. On November 4, 1998 the OTS issued
Thrift Bulletin 73 ("TB73") "Trust Preferred Securities"
which, among other things, limits the aggregate investment in investment grade
trust preferred securities for OTS supervised institutions to 15 percent of
total capital. At March 31, 2004, the Bank's aggregate investment in trust
preferred securities was $10.2 million which represents 4% of the Bank's total
capital.

The investment powers of the Bancorp are substantially
broader than those permitted for the Bank. The investment policy of the Bancorp,
as established by our Board of Directors, while generally consistent with that
of the Bank, permits the investment by the Bancorp in equity securities and
non-rated corporate debt obligations. At March 31, 2004, the Bancorp had
investments in marketable equity securities of $8.4 million, investments in
equity mutual funds of $3.4 million and investments in corporate debt
obligations, which are investment grade trust preferred debt securities of $5.8
million.

24

---

The Bancorp's equity mutual fund investments are placed with
fund managers with whom the Bancorp's senior management is familiar. The
performance of the Bancorp's direct and mutual fund equity investments is
reviewed no less frequently than monthly by the Bancorp's senior management and
no less frequently than quarterly by the Bancorp's Board of Directors.

Unlike the securities comprising the Bank's investment
portfolio, which by their nature present little to no risk of loss of principal
or interest, the trust preferred debt securities and equity investments of the
Bancorp are subject to partial or complete diminution in market value upon the
occurrence of adverse economic events affecting the issuers of the securities.
Accordingly, these investments are periodically reviewed for any evidence of
credit deterioration.

At March 31, 2004, we had $68.7 million in investment securities consisting
primarily of investment grade corporate and U.S. agency securities. At March 31,
2004, our MBS portfolio consists of the following categories:



|MBS Category                                                                 | Balance                | Percentage of Portfolio
|---------------------------------------------------------------------------- | ---------------------- | -----------------------
|                                                                             | (Dollars in thousands)
|One year CMT (1)                                                             | $119,523               | 40.8%                  
|U.S Treasury                                                                 | 77,805                 | 26.6                   
|One year LIBOR                                                               | 44,699                 | 15.3                   
|Fixed rate (seasoned)                                                        | 27,000                 | 9.2                    
|Five to seven year balloon                                                   | 23,177                 | 7.9                    
|Six month LIBOR                                                              | 684                    | 0.2                    
|Total                                                                        | $292,888               | 100.0%                 
|                                                                             |                        |                        
|(1) As of March 31, 2004, 34% of our MBS portfolio consisted of hybrid ARMs.

At March 31, 2004, the carrying value of our MBS portfolio
totaled $292.9 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Comparison of Financial
Condition at March 31, 2004 and March 31, 2003." All of our MBS are insured
or guaranteed by the Government National Mortgage Association ("GNMA"),
the Federal National Mortgage Association ("FNMA") or the Federal Home
Loan Mortgage Corporation ("FHLMC").

Investments in MBS involve a risk that actual prepayments
will vary from the estimated prepayments over the life of the security. This may
require adjustments to the amortization of premium or accretion of discount
relating to such instruments, thereby changing the net yield on such securities.
At March 31, 2004, the aggregate net premium associated with our MBS portfolio
was $4.1 million or 1.4 percent of the aggregate unpaid principal balance on the
portfolio. There is also reinvestment risk associated with the cash flows from
such securities. In addition, the market value of such securities may be
adversely affected by changes in interest rates.

During the fiscal year ended March 31, 2004, our CMO
portfolio completely paid off primarily due to the very high level of
prepayments resulting from the low interest rate environment. Our CMO portfolio
consisted principally of monthly adjustable rate securities tied to the one
month LIBOR and Prime. Our CMOs were backed by mortgages insured by FNMA or
FHLMC. As with MBS, CMO involve a risk that actual levels of prepayments will
require an adjustment to the amortization of premium or accretion of discounts
on the security with an impact on the yield on the security. Additionally, the
structure of many CMO is such that their cash flows exhibit greater sensitivity
to changes in prepayments than do traditional MBS. The carrying value of our CMO
portfolio was $15.2 million at March 31, 2003. During the fiscal years ended
March 31, 2004, 2003 and 2002 premium amortization on our CMO portfolio was
$367,000, $1.4 million and $169,000, respectively. This reduced the average
yield on securities and interest-bearing assets by 11 basis points and 1 basis
point for fiscal 2004, 46 and 5 basis points for fiscal 2003 and 4 and 1 basis
points for the fiscal year ended March 31, 2002.

25

---



We evaluate all of our securities on an individual basis no
less frequently than quarterly for "other-than-temporary" impairment.
In conducting this evaluation, we determine the probability of collection and
the risk factors associated with collecting all amounts due according to the
contractual terms of the securities. Among the factors considered are the credit
ratings of the issuers, any call features inherent in the securities and our
intent and ability to hold the securities to maturity. At March 31, 2004, we
determined that there was no other-than-temporary impairment of any of our
securities.

The following table sets forth certain information regarding the carrying and
fair values of our mortgage-backed securities at the dates indicated.

|                         | At March 31,          
|------------------------ | ----------------------
|                         | 2004                  
|                         | Carrying
      Value  
|                         | (Dollars in thousands)
|Available-for-sale:      |                       
|GNMA                     | $ 9,510               
|FHLMC                    | 120,734               
|FNMA                     | 162,644               
|Total available-for-sale | $ 292,888             

> The following table sets forth certain information regarding the carrying and
> fair values of our investment securities
> at the dates indicated.



|                                                     | At March 31,          
|---------------------------------------------------- | ----------------------
|                                                     | 2004                  
|                                                     | Carrying
      Value  
|                                                     | (Dollars in thousands)
|                                                     |                       
|Held-to-maturity:                                    |                       
|U.S. government and
      federal agency obligations | $ 5,742               
|Total held-to-maturity                               | 5,742                 
|                                                     |                       
|Available-for-sale:                                  |                       
|Corporate debt securities                            | 51,152                
|Equity securities:                                   |                       
|Direct                                               | 8,367                 
|Mutual funds                                         | 3,438                 
|Total available-for-sale                             | 62,957                
|                                                     |                       
|Total                                                | $68,699               

26

---

The following table sets forth certain information regarding the carrying and
fair values of our collateralized

|                                     | At March 31,          
|------------------------------------ | ----------------------
|                                     | 2004                  
|                                     | Carrying
      Value  
|                                     | (Dollars in thousands)
|Available-for-sale:                  |                       
|Collateralized mortgage obligations: |                       
|FHLMC                                | $ -                   
|FNMA                                 | -                     
|Total                                | $ -                   
|                                     |                       
|                                     |                       

27

---

The table below sets forth certain information regarding the
carrying value, weighted average yields and maturities of our mortgage-backed
securities and investment securities as of March 31, 2004. The table presented
represents stated final maturities and does not reflect scheduled principal
payments.



|                                               | At March 31, 2004     
|---------------------------------------------- | ----------------------
|                                               | One Year or less      
|                                               | Carrying
  Value      
|                                               | (Dollars in thousands)
|Mortgage-backed securities:                    |                       
|Available-for-sale:                            |                       
|GNMA                                           | $ 4                   
|FHLMC                                          | 298                   
|FNMA                                           | 2,093                 
|Total mortgage-backed securities               | $ 2,395               
|                                               |                       
|Investment securities:                         |                       
|Held-to-maturity:                              |                       
|U.S. government and Federal agency Obligations | $ -                   
|Total held-to-maturity                         | -                     
|Available-for-sale:                            |                       
|Corporate debt securities                      | -                     
|Equity securities:                             |                       
|Direct                                         | -                     
|Mutual funds                                   | -                     
|Total available-for-sale                       | -                     
|Total investment securities                    | $ -                   

28

---

Sources of Funds

The following table presents our deposit activity for the periods
    indicated.

|                                      | For the Year Ended March 31,
|------------------------------------- | ----------------------------
|                                      | 2004                        
|                                      | (Dollars in thousands)      
|Net deposits                          | $ 92,456                    
|Interest credited on deposit accounts | 36,482                      
|Total increase in deposit accounts    | $128,938                    

At March 31, 2004, we had $401.3 million in certificate accounts in amounts of
$100,000 or more maturing as follows:

|Maturity Period               | Amount                 | Weighted
      Average Rate
|----------------------------- | ---------------------- | ---------------------------
|                              | (Dollars in thousands)
|Three months or less          | $ 98,633               | 2.09%                      
|Over three through six months | 122,971                | 2.05                       
|Over six through 12 months    | 52,182                 | 2.11                       
|Over 12 months                | 127,494                | 4.20                       
|Total                         | $401,280               | 2.75%                      

29

---

The following table sets forth the
distribution of our average deposit accounts for the periods indicated and the
weighted average interest rates on each category of deposits presented.



|                                      | For the Year Ended March 31,
|------------------------------------- | ----------------------------
|                                      | 2004                        
|                                      | Average
      Balance       
|                                      | (Dollars in thousands)      
|                                      |                             
|Passbook accounts                     | $ 152,423                   
|Money market savings accounts         | 535,283                     
|NOW accounts                          | 619,375                     
|Non-interest bearing accounts         | 184,762                     
|Total core deposits                   | 1,491,843                   
|                                      |                             
|Certificate accounts:                 |                             
|Variable-rate certificates of deposit | 3,990                       
|Step-up certificates of deposit       | 60,263                      
|Less than 6 months                    | 52,535                      
|6 through 11 months                   | 129,779                     
|12 through 23 months                  | 291,599                     
|24 through 47 months                  | 182,525                     
|48 months or greater                  | 155,225                     
|Other                                 | -                           
|Total certificate accounts            | 875,916                     
|Total average deposits                | $2,367,759                  

30

---

The following table presents, by various rate
categories, the periods to maturity of the certificate accounts outstanding at
March 31, 2004 and the amount of certificate accounts outstanding at the dates
indicated.

|                   | Period to Maturity from March 31, 2004 | March 31,             
|------------------ | -------------------------------------- | ----------------------
|                   | Less than
      One Year               | One to
      Two Years
|                   | (Dollars in thousands)                
|                   |                                        |                       
|0.00 through 4.00% | $611,899                               | 62,950                
|4.01 through 5.00% | 19,142                                 | 21,425                
|5.01 through 6.00% | 8,052                                  | 3,707                 
|6.01 through 7.00% | 3,412                                  | 7,316                 
|7.01 through 8.00% | -                                      | -                     
|Total              | $642,505                               | 95,398                

31

---

FHLB Advances and
Other Borrowings. We utilize FHLB advances and reverse repurchase agreements
as alternative sources of funds to retail deposits. These borrowings are
collateralized by securities and, in the case of certain FHLB advances, certain
of our mortgage loans and secondarily by our investment in the capital stock of
the FHLB. See "Regulation and Supervision-Federal Home Loan Bank
System." The FHLB provides advances pursuant to several different credit
programs, each of which has its own interest rate, range of maturities and
collateralization requirements. The maximum amount that the FHLB will advance to
member institutions, fluctuates from time to time in accordance with the
policies of the FHLB. Reverse repurchase agreements take the form of sales of
securities under agreements to repurchase the identical securities at a later
date. These transactions are accounted for as financing arrangements with the
obligations to repurchase securities sold reflected as a liability while the
securities underlying the agreements remain in the respective asset account. At
March 31, 2004, we had outstanding reverse repurchase agreements of $4.0 million
at a weighted average cost of 1.67%. The use of reverse repurchase agreements
involves the risk that between the dates of "sale" and subsequent
repurchase, a decline in the market value of the underlying security may require
the sale of additional securities to the counterparty to the reverse repurchase
agreement.

At March 31, 2004,
we had outstanding FHLB advances of $845.0 million at a weighted average cost of
1.72%. The original terms of the FHLB advances outstanding at March 31, 2004
range from 22 days to 10 years. As of March 31, 2004 the Bank had maximum unused
borrowing capacity from the FHLB of San Francisco of $1.37 billion. Based upon
pledged collateral in place, the available borrowing capacity was $418.2 million
at March 31, 2004. We expect to continue to utilize FHLB advances and to a much
lesser degree reverse repurchase agreements as secondary sources of funds to
deposit liabilities. FHLB advances are utilized to balance the differential net
cash flows arising from loan, securities and deposit activities.

During fiscal 1998,
we began making increased use of putable borrowings (primarily FHLB advances).
Under the putable advance program, in exchange for a favorable interest rate on
the borrowing, we granted to the FHLB an option to "put" the advance
back to us at specified quarterly "put" dates prior to maturity but
after the conclusion of a specified lock out period. Under the putable advance
program, we obtained funds below the cost of non-putable FHLB advances, which
had fixed maturities between the first "put" date and the final
maturity date of the putable advance. In exchange for this favorable funding
rate, we are exposed to the risk that the advance is "put" back to us
following an increase in the general level of interest rates causing us to
initiate a new borrowing at a less advantageous cost. Our use of putable
advances allowed us to extend the term to maturity and initial "put"
dates of our funding in connection with increased investment in hybrid and
balloon MBS products. We have not initiated any new putable advances since May
1998. At March 31, 2004, only one putable borrowing in the amount of $15.0
million remains outstanding. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Asset/Liability
Management."
32

---

The following table sets forth
certain information regarding our borrowed funds at or for the periods ended on
the dates indicated.

|                                                                                       | At or for the Years Ended March 31,
|-------------------------------------------------------------------------------------- | -----------------------------------
|                                                                                       | 2004                               
|                                                                                       | (Dollars in thousands)             
|FHLB advances:                                                                         |                                    
|Average amount outstanding during the year                                             | $ 562,885                          
|Maximum amount outstanding at any
      month-end during the year                      | 845,000                            
|Amount outstanding at year end (1)                                                     | 845,000                            
|Average interest rate:                                                                 |                                    
|For the year                                                                           | 2.22                               
|At year end                                                                            | 1.72                               
|                                                                                       |                                    
|Reverse repurchase agreements:                                                         |                                    
|Average amount
      outstanding during the year                                       | $ 1,303                            
|Maximum amount outstanding at any
                    
      month-end during the year | 4,385                              
|Amount outstanding at year end                                                         | 4,000                              
|Average interest rate:                                                                 |                                    
|For the year                                                                           | 1.94                               
|At year end                                                                            | 1.67                               
|                                                                                       |                                    
|Promissory Note (2):                                                                   |                                    
|Average amount outstanding during the year                                             | $ 149                              
|Maximum amount outstanding at any
        month-end during the year                    | 2,600                              
|Amount outstanding at year end                                                         | 2,600                              
|Average interest rate:                                                                 |                                    
|For the year                                                                           | 7.00                               
|At year end                                                                            | 7.00                               

1. Included in the balance of FHLB advances outstanding at March 31, 2004 is
    a putable borrowing of $15.0 million bearing interest at 5.39%. The maturity
    date for this borrowing is February 12, 2008, with quarterly put dates from
    May 12, 2004 through the final maturity date.
2. The promissory note was entered into by Diversified Builder Services, Inc.
    to finance its builder service operations. The note was repaid from
    operating funds on May 13, 2004.

Subsidiary Activities

Diversified Builder
Services, Inc. ("DBS"), was incorporated in California on February
25, 2003, and commenced operations in April 2003 as a wholly owned subsidiary of
the Bancorp. DBS is a provider of financing services to home builders and land
developers, which includes real estate consulting services, property
entitlement, loan and equity placement and opportunity and mezzanine lending.
While sound in all respects, these loans typically cannot be originated by the
Bank, usually due to short time frames under which underwriting and approval
must take place. The Managing Director of DBS is the former head of the Bank's
Major Loan Department and DBS does business with borrowers with whom we have a
long standing relationship and then only with respect to properties with which
we are intimately familiar. The typical DBS loans have a term of three-to-six
months with the potential for additional extensions of up to an additional
twelve months upon payment of additional fees. DBS loans are all secured by
properties against which the loans are made and also typically include personal
guarantees. At March 31, 2004, DBS had outstanding loans of $22.5 million, net,
included in our totals for construction and land loans. DBS had $23.7 million in
total assets at March 31, 2004 and net earnings of $849,000 for fiscal 2004.
                                                                           
33

---

DBS loan approval requirements are as follows:

DBS Loan Approval AuthorityUp to $500,000
      $500,001 - $999,999
      $1.0 million - $4,999,000
      $5.0 million or greaterDBS Loans
      Any one of the following:
        Chief Executive Officer, Chief Operating Officer or Vice-President
        Managing Director
      Any two of the following:
        Chief Executive Officer, Chief Operating Officer or Vice-President
        Managing Director
      DBS Loan Committee
      DBS Loan Committee and DBS Board


The DBS Loan Committee is comprised of the following Bank Officers: Chief
Executive Officer, Chief Operating Officer, Chief Financial Officer, Controller
and the Treasurer.

Glencrest
Investment Advisors, Inc. ("GIA"), a Delaware corporation, is a
wholly owned subsidiary of the Bancorp. GIA functions as a Registered Investment
Advisor and is engaged in offering investment and asset management services to
individuals and institutions such as foundations and endowments, pension plans
and charitable organizations. As of June 30, 2002, GIA purchased PFF Financial
Services, Inc. from Pomona Financial Services, Inc. and renamed it Glencrest
Insurance Services, Inc. GIA had consolidated assets of $2.2 million at March
31, 2004 and a net loss of $1.1 million for fiscal 2004. GIA had total assets
under management of $238.3 million at March 31, 2004.

Glencrest
Insurance Services, Inc. ("GIS") a California corporation, is a
wholly owned subsidiary of GIA. Prior to July 2003, GIS operated as PFF
Financial Services, Inc. ("PFFFS"), a wholly owned subsidiary of
Pomona Financial Services, Inc. GIS sells various personal and business
insurance policies, fixed and variable annuities and mutual funds through a
relationship with a third party marketer of annuity and mutual fund non-deposit
investment products. GIS had $259,500 in total assets at March 31, 2004 and net
earnings of $136,300 for fiscal 2004.Pomona Financial Services, Inc.("PFS"),
a California corporation, is a wholly owned subsidiary of the Bank. PFS acts as
a holding company for the service corporation described below and acts as
trustee under deeds of trusts. PFS had total assets of $356,200 at March 31,
2004 and net earnings of $83,100 for fiscal 2004.
       Diversified Services, Inc. ("DSI"),
a California corporation, is a wholly owned subsidiary of PFS. DSI
had     historically participated as an investor in
residential real estate projects. DSI may consider additional real estate
activities as market conditions warrant. For the year ended March 31, 2004, DSI
had minimal activity and a nominal loss.

Personnel

As of March 31, 2004,
we had 537 full-time employees and 116 part-time employees. The employees are
not represented by a collective bargaining unit and we consider our relationship
with our employees to be good. See "Item 11 - Executive Compensation"
for a description of certain compensation and benefit programs offered to the
Bank's employees.
                                                                                   
34

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REGULATION AND SUPERVISION

The Bancorp is
regulated as a savings and loan holding company by the OTS under the Home
Owners' Loan Act, as amended (the "HOLA"). The Bank, as a federally
chartered savings institution, is also subject to federal regulation and
oversight by the OTS extending to all aspects of its operations. In addition,
the Bank is subject to regulation and examination by the FDIC, which insures the
deposits of the Bank to the maximum extent permitted by law. The Bancorp is also
required to file reports with, and otherwise comply with the rules and
regulations of the SEC under the federal securities laws.

The Bank is
subject to extensive regulation, examination and supervision by the OTS, as its
primary federal regulator, and the FDIC, as its deposit insurer. The Bank is a
member of the Federal Home Loan Bank ("FHLB") System and its deposit
accounts are insured up to applicable limits by the Savings Association
Insurance Fund ("SAIF") managed by the FDIC. The Bank must file
reports with the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other savings
institutions. The OTS and/or the FDIC conduct periodic examinations to test the
Bank's safety and soundness and compliance with various regulatory requirements.
This regulation and supervision establishes a comprehensive framework of
activities in which an institution can engage and is intended primarily for the
protection of the insurance fund and depositors. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss allowances for regulatory purposes.

Any change in such
laws and regulations, whether by the OTS, the FDIC, the Federal Reserve Board
(the "FRB"), the SEC or through legislation, could have a material
adverse impact on the Bancorp, the Bank and their operations and stockholders.

On November 12,
1999, President Clinton signed into law landmark financial services legislation,
titled the Gramm-Leach-Bliley Act ("GLB Act"). The GLB Act, among
other things, repeals depression-era laws restricting affiliations among banks,
securities firms, insurance companies and other financial services providers.
The impact of the GLB Act on the Bancorp and the Bank, where relevant, is
discussed throughout the regulation section below.

The following
discussion is intended to be a summary of the material statutes and regulations
applicable to savings banks and their holding companies, and it does not purport
to be a comprehensive description of all such statutes and regulations, and does
not purport to be a complete description of their effects on the Bank and the
Bancorp.

Holding Company Regulation

The Bancorp is a
non-diversified unitary savings and loan holding company within the meaning of
the HOLA. As such, the Bancorp is required to register with and be subject to
OTS examination and supervision as well as certain reporting requirements. In
addition, the OTS has enforcement authority over the Bancorp and any of its
non-savings institution subsidiaries. Among other things, this authority permits
the OTS to restrict or prohibit activities that are determined to be a serious
risk to the financial safety, soundness or stability of a subsidiary savings
bank. Unlike bank holding companies, a savings and loan holding company is not
subject to any regulatory capital requirements or to supervision by the Federal
Reserve System.

"Grandfathered"
Savings and Loan Holding Company Status. Because the Bancorp acquired the
Bank prior to May 4, 1999, the Bancorp is a "grandfathered" unitary
savings and loan holding company under the GLB Act. As such, the Bancorp has no
restrictions on its business activities, provided the Bank continues to be a
qualified thrift lender ("QTL"). See "Federal Savings Institution
Regulation -- QTL Test." If, however, the Bancorp is acquired by a
non-financial company, or if the Bancorp acquires another savings association
subsidiary (and becomes a multiple savings and loan holding company), the
Bancorp will terminate its "grandfathered" unitary savings and loan
holding company status, and become subject to certain limitations on the types
of business activities in which it could engage. All
"non-grandfathered" unitary savings and loan
                                                                           
35

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holding companies are limited to financially related
activities permissible for bank holding companies, as defined under the GLB Act.

Restrictions
Applicable to All Savings and Loan Holding Companies. Federal law prohibits
a savings and loan holding company, including the Bancorp, directly or
indirectly, from acquiring:

- control (as defined under the HOLA) of another savings institution (or a
    holding company parent) without prior OTS approval;
- through merger, consolidation, or purchase of assets, another savings
    institution or a holding company thereof, or acquiring all or substantially
    all of the assets of such institution (or a holding company) without prior
    OTS approval;
- more than 5% of the voting stock of a savings association or savings and
    loan holding company that is not a subsidiary; or
- control of any depository institution not insured by the FDIC (except
    through a merger with and into the holding company's savings institution
    subsidiary that is approved by the OTS).

A savings and loan holding company may not acquire as a separate subsidiary an
insured institution that has a principal office outside of the state where the
principal office of its subsidiary institution is located, except in the case of
certain emergency acquisitions approved by the FDIC; if such holding company
controls a savings institution subsidiary that operated a home or branch office
in such additional state as of March 5, 1987; or, if the laws of the state in
which the savings institution to be acquired is located specifically authorize a
savings institution chartered by that state to be acquired by a savings
institution chartered by the state where the acquiring savings institution or
savings and loan holding company is located, or by a holding company that
controls such a state chartered association.

In addition, if the Bank fails the QTL test, the Bancorp must register with the
FRB as a bank holding company under the Bank Holding Company Act within one year
of the Bank's failure to so qualify.Federal Savings Institution RegulationBusiness Activities. The activities of
federal savings banks are governed by federal law and regulations. These laws
and regulations delineate the nature and extent of the activities in which
federal associations may engage. In particular, many types of lending authority
for federal associations are limited to a specified percentage of the
institution's capital or assets.Lending and Investment Powers. The
Bank derives its lending and investment powers from the HOLA, and the
regulations and policies of the OTS. Under these laws, regulations and policies,
the Bank may invest in mortgage loans secured by residential and commercial real
estate; commercial, community development, small business and consumer loans;
certain types of government-related debt securities; and certain other assets.
The Bank may also establish service corporations that may engage in activities
not otherwise permissible for the Bank, including certain real estate equity
investments and securities and insurance brokerage. The Bank's authority to
invest in certain types of loans and leases or other investments is limited by
federal law. The Bank may also establish operating subsidiaries that may engage
in activities or investments permissible for federal savings banks.

All lending activities are subject
to general safety and soundness limits against over-concentration of investments
in particular types of assets.

Loans and
Leases-to-One-Borrower Limitations. Under HOLA, the Bank is generally
subject to the same limits on loans and leases-to-one borrower as a national
bank. With specified exceptions, the Bank's total loans and leases or extensions
of credit to a single borrower cannot exceed 15% of the Bank's unimpaired
capital and surplus which does not include accumulated other comprehensive
income. The Bank may lend
                                                                               
36

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additional amounts up to 10% of its unimpaired capital and
surplus, if the loans and leases or extensions of credit are fully-secured by
readily-marketable collateral. The Bank currently complies with applicable loans
and leases-to-one-borrower limitations.     QTL Test. Under the HOLA,
the Bank must comply with the qualified thrift lender, or "QTL" test.
Under the QTL test, the Bank is required to maintain at least 65% of its
"portfolio assets" in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed securities) in at least nine months of the most recent 12-month
period. Recent legislation has expanded the extent to which education loans,
credit card loans and small business loans may be considered "qualified
thrift investments." For purposes of the QTL test, "portfolio
assets" means, in general, the Bank's total assets less the sum of:
specified liquid assets up to 20% of total assets; goodwill and other intangible
assets; and the value of property used to conduct the Bank's business.

The Bank may also
satisfy the QTL test by qualifying as a "domestic building and loan
association" as defined in the Internal Revenue Code of 1986. At March 31,
2004, and in each of the prior 12 months, the Bank met the QTL test, and,
therefore, qualifies as a thrift lender. If the Bank fails the QTL test, it must
either operate under certain restrictions on its activities or convert to a bank
charter.

Capital Requirements. OTS
regulations require the Bank to meet three minimum capital standards:

- a tangible capital ratio requirement of 1.5% of total assets, as adjusted
    under the OTS regulations;
- a leverage ratio requirement of 3% of core capital to such adjusted total
    assets, if a savings bank has been assigned the highest composite rating of
    1 under the Uniform Financial Institutions Ratings System; or if a savings
    bank does not have the highest composite rating of 1, a leverage ratio
    requirement of 4% of core capital to the adjusted total assets; and
- a risk-based capital ratio requirement of 8% of core and supplementary
    capital to total risk-weighted assets.

The minimum
leverage capital ratio for any other depository institution that does not have a
composite rating of 1 will be 4%, unless a higher leverage capital ratio is
warranted by the particular circumstances or risk profile of the depository
institution. In determining compliance with the risk based capital requirement,
the Bank must compute its risk-weighted assets by multiplying its assets and
certain off-balance sheet items by risk-weights, which range from 0% for cash
and obligations issued by the United States Government or its agencies to 100%
for consumer and commercial loans, as assigned by the OTS capital regulation
based on the risks that the OTS believes are inherent in the type of asset.
        Tangible capital is defined,
generally, as common stockholders' equity (including retained earnings), certain
non-cumulative perpetual preferred stock and related earnings and minority
interests in equity accounts of fully consolidated subsidiaries, less
intangibles (other than certain mortgage servicing rights) and investments in
and loans to subsidiaries engaged in activities not permissible for a national
bank. Core capital is defined similarly to tangible capital, but core capital
also includes certain qualifying supervisory goodwill and certain purchased
credit card relationships. Supplementary capital currently includes cumulative
and other perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock and the allowance for loan
and lease losses. In addition, up to 45% of unrealized gains on
available-for-sale equity securities with a readily determinable fair value may
be included in supplementary capital. The allowance for loan and lease losses
includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets, and the amount of supplementary capital that may be
included as total capital cannot exceed the amount of core capital.
                                                                              
37

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On May 10, 2002,
the OTS adopted an amendment to its capital regulations which eliminated the
interest rate risk component of the risk-based capital requirement.

The following table presents the Bank's capital position at March 31, 2004.

Actual
      Required
      Excess
      Actual
        Percentage
      Required
        Percentage(Dollars in thousands)Tangible
      $277,373
      54,443
      222,930
      7.64%
      1.50Core (Leverage)
      277,373
      145,182
      132,191
      7.64
      4.00Risk-based
      303,229
      216,321
      86,908
      11.21
      8.00


As the foregoing table indicates, at March 31, 2004, the Bank met each of its
capital requirements.

Community
Reinvestment Act. Under the Community Reinvestment Act ("CRA"), as
implemented by OTS regulations, the Bank has a continuing and affirmative
obligation to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for the Bank nor does it limit its discretion to
develop the types of products and services that it believes are best suited to
its particular community, consistent with the CRA. The CRA requires the OTS, in
connection with its examination of the Bank, to assess the Bank's record of
meeting the credit needs of its community and to take the record into account in
its evaluation of certain applications by the Bank. The CRA also requires all
institutions to make public disclosure of their CRA ratings. The Bank received a
"satisfactory" CRA rating in its most recent examination.

CRA regulations rate an
institution based on its actual performance in meeting community needs. In
particular, the system focuses on three tests:

- a lending test, to evaluate the institution's record of making loans and
    leases in its assessment areas;

- an investment test, to evaluate the institution's record of investing in
    community development projects, affordable housing, and programs benefiting
    low or moderate income individuals and businesses; and

- a service test, to evaluate the institution's delivery of services through
    its branches, ATMs and other offices.

Transactions with
Related Parties. The Bank's authority to engage in transactions with its
"affiliates" is limited by OTS regulations and by Sections 23A and 23B
of the Federal Reserve Act (the "FRA"). In general, these transactions
must be on terms, which are as favorable to the Bank as comparable transactions
with non-affiliates. In addition, certain types of these transactions are
restricted to an aggregate percentage of the Bank's capital. Collateral in
specified amounts must usually be provided by affiliates in order to receive
loans from the Bank. In addition, the OTS regulations prohibit a savings bank
from lending to any of its affiliates that are engaged in activities that are
not permissible for bank holding companies and from purchasing the securities of
any affiliate, other than a subsidiary.
        Effective April 1, 2003, the Federal
Reserve Board ("FRB"), rescinded its interpretations of Sections 23A
and 23B of the FRA and replaced these interpretations with Regulation W. In
addition, Regulation W makes various changes to existing law regarding Sections
23A and 23B, including expanding the definition of what constitutes an affiliate
subject to Sections 23A and 23B. The FRB's final rule does not by its terms
apply to savings associations. However, because the OTS incorporates Regulation
W and applies it to savings associations, sections 23A and 23B of the FRA apply
to every savings association in the same manner and to the same extent as if a
savings association were a member bank. The OTS rule incorporates all applicable
provisions and exceptions prescribed by the FRB in Regulation W; provide
guidance regarding the additional prohibitions on savings associations with
respect to transactions with affiliates under HOLA; and set out the additional
restrictions that the OTS imposes on savings associations under HOLA with regard
to transactions with affiliates.
                                                                               
38

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The Bank's
authority to extend credit to directors, executive officers and 10% shareholders
of the Bank and the Bancorp, as well as to entities controlled by such persons,
is currently governed by the requirements of Sections 22(g) and 22(h) of the FRA
and Regulation O of the Federal Reserve Board. Among other things, these
provisions require that extensions of credit to insiders (a) be made on terms
that are substantially the same as, and follow credit underwriting procedures
that are not less stringent than, those prevailing for comparable transactions
with unaffiliated persons and that do not involve more than the normal risk of
repayment or present other unfavorable features and (b) not exceed certain
limitations on the amount of credit extended to such persons, individually and
in the aggregate, which limits are based, in part, on the amount of the Bank's
capital. Notwithstanding the foregoing, directors and executive officers are
eligible for a preferential rate and terms under the PFF Director and Employee
Mortgage Loan Policy which is a benefit and compensation program widely
available to our employees.In addition, extensions of credit in
excess of certain limits must be approved by the Bank's Board of Directors.
Section 402 of the Sarbanes-Oxley Act of 2002, ("Sarbanes-Oxley Act"),
prohibits the extension of personal loans to directors and executive officers of
issuers (as defined in the Sarbanes-Oxley Act). The prohibition, however, does
not apply to mortgages advanced by an insured depository institution, such as
the Bank, that is subject to the insider lending restrictions of Section 22(h)
of the FRA.     Enforcement. The OTS has
primary enforcement responsibility over savings banks, including the Bank. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease and desist orders and to remove directors and
officers. In general, these enforcement actions may be initiated in response to
violations of laws and regulations and to unsafe or unsound practices. The FDIC
also has the authority to recommend to the OTS that enforcement action be taken
with respect to a particular savings institution. If action is not taken by the
OTS, the FDIC may take action under certain circumstances.

Standards for
Safety and Soundness. Under federal law, the OTS has adopted a set of
guidelines prescribing safety and soundness standards. These guidelines
establish general standards relating to internal controls and information
systems, internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth, asset quality, earnings standards, and
compensation, fees and benefits. In general, the guidelines require appropriate
systems and practices to identify and manage the risks and exposures specified
in the guidelines.

In addition, the
OTS has adopted regulations that authorize, but do not require, the OTS to order
an institution that has been given notice that it is not satisfying these safety
and soundness standards to submit a compliance plan. If, after being notified,
an institution fails to submit an acceptable plan or fails in any material
respect to implement an accepted plan, the OTS must issue an order directing
action to correct the deficiency and may issue an order directing other actions
of the types to which an undercapitalized association is subject under the
"prompt corrective action" provisions of federal law. If an
institution fails to comply with such an order, the OTS may seek to enforce such
order in judicial proceedings and to impose civil money penalties.

Limitation on
Capital Distributions. The OTS imposes various restrictions or requirements
on the Bank's ability to make capital distributions, including cash dividends. A
savings institution that is the subsidiary of a savings and loan holding company
must file an application or a notice with the OTS at least 30 days before making
a capital distribution. The Bank must file an application for prior approval if
the total amount of its capital distributions, including the proposed
distribution, for the applicable calendar year would exceed an amount equal to
the Bank's net income for that year plus the Bank's retained net income for the
previous two years. However, a savings bank subsidiary of a savings and loan
holding company, such as the Bank, will continue to have to file a notice,
unless the specific capital distribution requires an application.

The OTS may
disapprove of a notice or application if: the Bank would be undercapitalized
following the distribution; the proposed capital distribution raises safety and
soundness concerns; or the capital distribution
                                                                               
39

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would violate a prohibition contained in any statute,
regulation or agreement between the Bank and the OTS or the FDIC, or a condition
imposed on the Bank in an OTS-approved application or notice.     Liquidity. The Bank is
required to maintain a sufficient amount of liquid assets to ensure its safe and
sound operation.

Prompt Corrective
Action Regulations. Under the OTS prompt corrective action regulations, the
OTS is required to take certain, and is authorized to take other, supervisory
actions against undercapitalized savings banks. For this purpose, a savings bank
is placed in one of the following four categories based on the association's
capital:

- well capitalized;
- adequately capitalized;
- undercapitalized; and
- critically undercapitalized.

At March 31, 2004, the Bank met
the criteria for being considered "well-capitalized." When
appropriate, the OTS can require corrective action by a savings bank under the
"prompt corrective action" provisions of federal law.

Insurance of
Deposit Accounts. The Bank is a member of the SAIF and the Bank pays its
deposit insurance assessments to the SAIF. The FDIC also maintains another
insurance fund, the Bank Insurance Fund, which primarily insures the deposits of
banks and state chartered savings banks.

Under federal law,
the FDIC established a risk based assessment system for determining the deposit
insurance assessments to be paid by insured depository institutions. Under the
assessment system, the FDIC assigns an institution to one of three capital
categories based on the institution's financial information as of the quarter
ending three months before the beginning of the assessment period. An
institution's assessment rate depends on the capital category and supervisory
category to which it is assigned. Under the regulation, there are nine
assessment risk classifications (i.e., combinations of capital groups and
supervisory subgroups) to which different assessment rates are applied.
Assessment rates currently range from 0.00% of deposits for an institution in
the highest category (i.e., well-capitalized and financially sound, with no more
than a few minor weaknesses) to 0.27% of deposits for an institution in the
lowest category (i.e., undercapitalized and substantial supervisory concern).
The FDIC is authorized to raise the assessment rates as necessary to maintain
the required reserve ratio of 1.25%.

In addition, all
FDIC insured institutions are required to pay assessments to the FDIC at an
annual rate of approximately .0212% of insured deposits to fund interest payment
on bonds issued by the Financing Corporation, an agency of the federal
government established to recapitalize the predecessor to the SAIF. These
assessments will continue until the Financing Corporation bonds mature in 2017.

The Bank's
assessment rate for fiscal 2004 ranged from 1.5 to 1.6 basis points and the
premium paid for this period was $358,000 all of which was paid towards the
Financing Corporation bonds. The FDIC has authority to increase insurance
assessments. A significant increase in SAIF insurance premiums would have an
adverse effect on the operating expenses and results of operations of the Bank.
Management cannot predict what the insurance assessment rate will be in the
future.
   Under
federal law, insurance of deposits may be terminated by the FDIC upon a finding
that the institution has engaged in unsafe or unsound practices, is in an unsafe
or unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the OTS. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.     Federal Home Loan Bank System.
The Bank is a member of the Federal Home Loan Bank (the "FHLB") of San
Francisco, which is one of the regional FHLBs making up the FHLB System. Each
FHLB
                                                                               
40

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provides a central credit facility
primarily for its member institutions. Prior to April 1, 2004, the Bank was
required to acquire and hold shares of capital stock in the FHLB of San
Francisco in an amount equal to the greater of 1% of the aggregate principal
amount of its unpaid residential mortgage loans, home-purchase contracts and
similar obligations, but not less than $500,000 or 5% of outstanding advances.
The Bank was in compliance with this requirement with an investment in the
capital stock of the FHLB of San Francisco at March 31, 2004, of $42.5 million.
Any advances from a FHLB must be secured by specified types of collateral, and
all long term advances may be obtained only for the purpose of providing funds
for residential housing finance.

Effective
April 1, 2004, the FHLB of San Francisco implemented a new capital plan.
Pursuant to the new plan, the FHLB of San Francisco shall have a single class of
capital stock with a par value of $100 per share that may be issued, exchanged,
redeemed and repurchased only at par value. Each member of the FHLB of San
Francisco must maintain a minimum investment in FHLB of San Francisco capital
stock equal to the greater of (i) a membership stock requirement equal to 1.0%
of the member's assets that qualify as collateral security (up to a maximum of
$25 million) or (ii) an activity-based stock requirements equal to 4.7% of the
member's outstanding advances, plus 5.0% of any portion of any mortgage loan
sold by the member under a mortgage asset program. Under the new plan, the FHLB
of San Francisco may also impose an additional capital stock assessment.

FHLBs are required
to provide funds for the resolution of insolvent thrifts and to contribute funds
for affordable housing programs. These requirements could reduce the amount of
earnings that the FHLBs can pay as dividends to their members and could also
result in the FHLBs imposing a higher rate of interest on advances to their
members. If dividends were reduced, or interest on future FHLB advances
increased, the Bank's net interest income would be affected.

Under the GLB Act,
membership in the FHLB System is now voluntary for all federally-chartered
savings banks, such as the Bank. The GLB Act also replaces the existing
redeemable stock structure of the FHLB System with a capital structure that
requires each FHLB to meet a leverage limit and a risk-based permanent capital
requirement. Pursuant to regulations promulgated by the Federal Housing Finance
Board, as required by the GLB Act, the FHLB of San Francisco adopted a capital
plan, which was implemented on April 1, 2004.

FHLB of San
Francisco's new capital plan, will change the foregoing minimum stock
ownership requirements. Under the new capital plan, each member of the FHLB of
San Francisco will have to maintain a minimum investment in FHLB of San
Francisco stock equal to the greater of (i) 1.0% of its assets that qualify as
collateral security (up to a maximum of $25 million) or (ii) 4.7% of the member's
outstanding advances, plus 5.0% of the outstanding loans purchased and held by
the FHLB of San Francisco. In addition, the new capital plan requires each
member to own stock in an amount equal to a capital stock assessment, to be
imposed by the FHLB of San Francisco.

Assessments.
Savings institutions are required to pay assessments to the OTS to fund the
agency's operations. The general assessments, paid on a semi-annual basis, are
computed by totaling three components: the savings association's total assets,
supervisory condition and complexity of business. The assessments paid by the
Bank for the fiscal year ended March 31, 2004 totaled $502,000.Branching.Subject to certain
limitations, HOLA and the OTS regulations permit nationwide branching by
federally chartered savings institutions to the extent allowed by federal
statute. The authority to establish such a branch is available (i) in states
that expressly authorize branches of savings associations located in another
state and (ii) to an association that qualifies as a "domestic building and
loan association" under the Code, which imposes qualification requirements
similar to those for a "qualified thrift lender" under HOLA. See
"QTL Test." This permits federal savings institutions to establish
interstate networks and to geographically diversify their loan portfolios and
lines of business. The authority under HOLA and the OTS regulatory authority
preempts any state law purporting to regulate branching by federal savings
institutions.     Prohibitions Against Tying
Arrangements. Federal savings banks are subject to the prohibitions of 12
U.S.C. Sec. 1972 on certain tying arrangements. A depository institution is
prohibited, subject to some exceptions, from extending credit to or offering any
other service, or fixing or varying the consideration for such
                                                                               
41

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extension of credit or service, on the
condition that the customer obtain some additional service from the institution
or its affiliates or not obtain services of a competitor of the institution.     Privacy Standards. Effective
July 1, 2001, financial institutions, including the Bancorp and the Bank, became
subject to FDIC regulations implementing the privacy protection provisions of
the GLB Act. These regulations require financial institutions to disclose to
customers at the time of establishing the customer relationship and annually
thereafter, the institution's privacy policy including identifying with whom the
institution shares "non-public personal information." In addition, to
the extent its sharing of such information is not exempted, the Bank is required
to provide its customers with the ability to "opt-out" of having the
Bank share their nonpublic personal information with unaffiliated third parties.
The Bank currently has a privacy protection policy in place and believes that
such policy is in compliance with the regulations.     Trust
Activities Regulation. The Bank derives its trust activity powers from
Section 5(n) of the HOLA and the regulations and policies of the OTS. Under
these laws, regulations and policies, the trust activities of federal savings
banks are governed by both federal laws and state laws. Generally, the scope of
trust activities that the Bank can provide will be governed by the laws of the
states in which the Bank is "located" (as such term is defined under
the regulations of the OTS), while other aspects of the trust operations of the
Bank are governed by federal laws and regulations. If the trust activities of a
federal savings bank are located in more than one state, however, then the scope
of fiduciary services the federal savings bank can provide will vary depending
on the laws of each state.

The Bank through
its trust department acts as trustee, executor, administrator, guardian,
custodian, record keeper, agent, registrar, advisor and manager for various
accounts. As of March 31, 2004, the trust department of the Bank maintained
approximately $293.4 million in assets under management.

Federal Reserve System        Under regulations of the FRB, the
Bank is required to maintain non-interest-earning reserves against its
transaction accounts. FRB regulations generally require that reserves of 3% must
be maintained against aggregate transaction accounts of $42.1 million or less,
subject to adjustment by FRB, and an initial reserve of $1.08 million plus 10%,
subject to adjustment by FRB between 8% and 14%, against that portion of total
transaction accounts in excess of $42.1 million. The first $6.0 million of
otherwise reservable balances, subject to adjustments by the FRB, are exempted
from the reserve requirements. The Bank is in compliance with these
requirements. Because required reserves must be maintained in the form of either
vault cash, a non-interest-bearing account at a Federal Reserve bank or a
pass-through account as defined by the FRB, the effect of this reserve
requirement is to reduce the Bank's interest-earning assets, to the extent the
requirement exceeds vault cash.Federal Securities Law        The Bancorp's common stock is
registered with the SEC under Section 12(g) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). The Bancorp is subject to
information, proxy solicitation, insider trading restrictions, and other
requirements under the Exchange Act.

The Investment
Advisers Act of 1940, as amended (the "Investment Advisers Act")
requires the registration of thrifts which engage in trust activities.
Therefore, the Bank is registered as an investment adviser with the Securities
and Exchange Commission under the Investment Advisers Act, and as such it is
subject to the provisions of the Investment Advisers Act and related
regulations. The Investment Advisers Act requires registered investment advisers
to comply with numerous obligations, including record keeping requirements,
operational procedures and disclosure obligations.                                                                                   
42

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The Sarbanes-Oxley Act     On July 30,
2002, President George W. Bush signed into law the Sarbanes-Oxley Act of 2002.
The Sarbanes-Oxley Act implements a broad range of corporate governance and
accounting measures for public companies designed to promote honesty and
transparency in corporate America and better protect investors from the type of
corporate wrongdoing that occurred in Enron, WorldCom and similar companies. The
Sarbanes-Oxley Act generally applies to all companies, both U.S. and non-U.S.,
that file or are required to file periodic reports with the SEC, under the
Securities Exchange Act. Given the extensive SEC role in implementing rules
relating to many of the Sarbanes Oxley Act's new requirements, the final scope
of these requirements remains to be determined.

The Sarbanes-Oxley
Act includes very specific additional disclosure requirements and new corporate
governance rules, requires the SEC and securities exchanges to adopt extensive
additional disclosure, corporate governance and other related rules and mandates
further studies of specified issues by the SEC and the Comptroller General. The
Sarbanes-Oxley Act represents significant federal involvement in matters
traditionally left to state regulatory systems, such as the regulation of the
accounting profession, and to state corporate law, such as the relationship
between a board of directors and management and between a board of directors and
its committees. Additionally, the Sarbanes-Oxley Act includes the following:

- the creation of an independent accounting oversight board;
- auditor independence provisions which restrict non-audit services that
    accountants may provide to their audit clients;
- additional corporate governance and responsibility measures, including the
    requirement that the chief executive officer and chief financial officer
    certify financial statements;
- the forfeiture of bonuses or other incentive-based compensation and
    profits from the sale of an issuer's securities by directors and senior
    officers in the twelve month period following initial publication of any
    financial statements that later require restatement;
- an increase in the oversight of, and enhancement of certain requirements
    relating to audit committees of public companies and how they interact with
    their independent auditors;
- a requirement that audit committee members must be independent and are
    absolutely barred from accepting consulting, advisory or other compensatory
    fees from the issuer;
- a requirement that companies disclose whether at least one member of the
    committee is an "audit committee financial expert" (as such term
    will be defined by the Securities and Exchange Commission) and if not, why
    not;
- expanded disclosure requirements for corporate insiders, including
    accelerated reporting of stock transactions by insiders and a prohibition on
    insider trading during pension blackout periods;
- a prohibition on personal loans to directors and officers, except certain
    loans made by insured financial institutions;
- disclosure of a code of ethics and filing a Form 8-K for a change or
    waiver of such code;
- mandatory disclosure by analysts of potential conflicts of interest; and
- a range of enhanced penalties for fraud and other violations.

The
SEC has been delegated the task of enacting rules to implement various
provisions with respect to, among other matters, disclosure in periodic filings
pursuant to the Securities Exchange Act. To date, the SEC has implemented some
of the provisions of the Sarbanes-Oxley Act. However, the SEC continues to issue
final rules, reports, and press releases. As the SEC provides new requirements,
we review those rules and comply as required.
                                                                                  
43

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Furthermore, the New York Stock Exchange (the "NYSE") has also
implemented corporate governance rules which implement the mandates of the
Sarbanes- Oxley Act. The NYSE rules include, among other things, ensuring that a
majority of the board of directors are independent of management, establishing
and publishing a code of conduct for directors, officers and employees and
requiring stockholder approval of all new stock option plans and all material
modifications. These rules affect the Bancorp because its common stock is listed
on the NYSE under the symbol "PFB."

Although
we anticipate that we will incur additional expense in complying with the
provisions of the Sarbanes-Oxley Act and the resulting regulations, management
does not expect that such compliance will have a material impact on the results
of operations or financial condition.Other Federal Regulation

In response to the
events of September 11, 2001, President George W. Bush signed into law the
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, on October
26, 2001. The USA PATRIOT Act gives the federal government new powers to address
terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing, and broadened anti-money
laundering requirements. By way of amendments to the Bank Secrecy Act, Title III
of the USA PATRIOT Act takes measures intended to encourage information sharing
among bank regulatory agencies and law enforcement bodies. Further, certain
provisions of Title III impose affirmative obligations on a broad range of
financial institutions, including banks, thrifts, brokers, dealers, credit
unions, money transfer agents and parties registered under the Commodity
Exchange Act.

Among other
requirements, Title III of the USA PATRIOT Act imposes the following
requirements with respect to financial institutions:

- Pursuant to Section 352, all financial institutions must establish
    anti-money laundering programs that include, at minimum: (i) internal
    policies, procedures, and controls, (ii) specific designation of an
    anti-money laundering compliance officer, (iii) ongoing employee training
    programs, and (iv) an independent audit function to test the anti-money
    laundering program.
- Pursuant to Section 326, on May 9, 2003, the Secretary of the Department
    of Treasury, in conjunction with other bank regulators issued Joint Final
    Rules that provide for minimum standards with respect to customer
    identification and verification. These rules became effective on October 1,
    2003.
- Section 312 of the Act requires financial institutions that establish,
    maintain, administer, or manage private banking accounts or correspondent
    accounts in the United States for non-United States persons or their
    representatives (including foreign individuals visiting the United States)
    to establish appropriate, specific, and, where necessary, enhanced due
    diligence policies, procedures, and controls designed to detect and report
    money laundering. Interim rules under Section 312 were issued by the
    Treasury Department on July 23, 2002.
- Effective December 25, 2001, financial institutions are prohibited from
    establishing, maintaining, administering or managing correspondent accounts
    for foreign shell banks (foreign banks that do not have a physical presence
    in any country), and will be subject to certain recordkeeping obligations
    with respect to correspondent accounts of foreign banks.
- Bank regulators are directed to consider a holding company's effectiveness
    in combating money laundering when ruling on Federal Reserve Act and Bank
    Merger Act applications.

Delaware General Corporation Law

The Bancorp is incorporated under the laws of the State of Delaware. Thus,
Bancorp is subject to regulation by the State of Delaware and the rights of its
shareholders are governed by the Delaware General Corporation Law.                                                                                  
44

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FEDERAL AND STATE TAXATION

Federal Taxation

General. We
report our income on a fiscal year basis using the accrual method of accounting,
which is subject to federal income taxation in the same manner as other
corporations with some exceptions, including particularly the Bank's reserve for
bad debts discussed below. We file federal income tax returns on a consolidated
basis. The Bank has been audited by the IRS through the 1990 tax year and the
California Franchise Tax Board through the 1985 tax year and for the 1993 tax
year. The statute of limitations has closed for all tax years for both IRS and
California Franchise Tax Board purposes through the 2000 and 1999 tax years,
respectively. The following
discussion of tax matters is intended only as a summary and does not purport to
be a comprehensive description of the tax rules applicable to us.Tax Bad Debt Reserve.
Formerly, savings institutions such as the Bank which met certain definitional
tests primarily relating to their assets and the nature of their business
("qualifying thrifts") were permitted to establish a reserve for bad
debts and to make annual additions, which additions could, within specified
formula limits, be deducted in arriving at taxable income.
        Although the Bank no longer can use
the reserve method of accounting for bad debt, its tax bad debt reserve balance
of approximately $25.3 million (as of March 31, 1998) will, in future years, be
subject to recapture in whole or in part upon the occurrence of certain events,
such as a distribution to shareholders in excess of the Bank's current and
accumulated earnings and profits, a redemption of shares, or upon a partial or
complete liquidation of the Bank. The Bank does not intend to make distributions
to shareholders that would result in recapture of any portion of its bad debt
reserves. These reserves would also be subject to recapture if the Bank fails to
qualify as a "bank" for federal income tax purposes.

Corporate
Alternative Minimum Tax. The Internal Revenue Code of 1986, as amended (the
"Code") imposes a tax on alternative minimum taxable income ("AMTI")
at a rate of 20%. We do not expect to be subject to the alternative minimum tax.Dividends Received Deduction and
Other Matters. We may exclude from our income 100% of dividends received
from the Bank as a member of the same affiliated group of corporations.State and Local Taxation

State of
California. The California franchise tax rate applicable to us equals the
franchise tax rate applicable to corporations generally, plus an "in
lieu" rate approximately equal to personal property taxes and business
license taxes paid by such corporations (but not generally paid by banks or
financial corporations such as us); however, the total tax rate cannot exceed
10.84%. Through March 31, 2002, California regulations allowed a bad debt
deduction computed using a three or six-year weighted average loss experience
method. Beginning April 1, 2002, large financial institutions, previously on the
reserve method, are no longer allowed to use such a method and are required to
be on the specific charge-off method (same as federal). California granted a
one-time forgiveness of the amount of tax equal to one-half of the amount that
would have been due upon reversal of the accumulated state tax bad debt reserve
as of March 31, 2002. The Bancorp and its California subsidiary file California
state franchise tax returns on a combined basis. Assuming that the holding
company form of organization continues to be utilized, the Bancorp, as a savings
and loan holding company commercially domiciled in California, will generally be
treated as a financial corporation and subject to the general corporate tax rate
plus the "in lieu" rate as discussed previously.Delaware Taxation. As a Delaware
holding company not earning income in Delaware, the Bancorp is exempted from
Delaware corporate income tax but is required to file an annual report with and
pay an annual franchise tax to the State of Delaware.
                                                                               
45

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Item 2. Properties.

As of March 31, 2004, we were
conducting our business through 26 full-service banking branches,
two trust offices, a Southern California regional loan center, two loan
origination offices in Northern California, three registered investment advisory
offices for Glencrest and a DBS office. In May 2004, we opened our 27th banking
branch located in Yucaipa, California. In April 2004, we closed our Redding,
California loan origination office in Northern California.

We own the building and land of the following savings branches located
        in California:
      We lease the building and land of the following savings branches located
        in California:
      We own the building and lease the land of the following savings
        branches located in California:Pomona
      Cathedral City
      Rancho Cucamonga
      Corona
      MontclairUpland
      Alta Loma
      Upland-Northwest
      Fontana
      Chino SpectrumIndian Hill
      29 Palms
      Ontario-Mills
      TustinChino
      La VerneSan Dimas
      OntarioYucca Valley
      Terra VistaClaremont
      Diamond BarPalm Desert
      La QuintaGlendora
      Yucaipa (1)Yorba Linda(1) Opened in May 2004


We lease the land
and building of our administrative office and one of our trust offices. Our
second trust office shares office space in the Claremont savings branch. We own
the building and land of our Regional Loan, Data Operations, Record Retention
and Human Resources/Training Centers. DBS and the remaining loan origination
office in Northern California lease office space, while GIA and GIS share a
leased building.

As of March 31,
2004, the net book value of owned real estate including the branches located on
leased land totaled $19.2 million. The net book value of leased offices was $2.5
million. The net book value of furniture, fixtures and electronic data
processing equipment was $5.7 million.

Item 3. Legal Proceedings.

Other than routine
litigation incidental to our business, neither we, nor any of our subsidiaries
are the subject of any material pending legal proceeding and, to the best of our
knowledge, no such proceedings are contemplated by any governmental authorities.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

---

PART IIItem 5. Market for Registrant's Common Equity,Related Stockholder Matters and
Issuer Purchases of Equity Securities.

Our common stock
is traded on the New York Stock Exchange under the symbol "PFB." The
stock began trading on March 29, 1996. The table below sets forth for the
periods indicated the high, low and closing sale prices of our common stock. As
of May 31, 2004, there were approximately 5,040 holders of our common stock,
which includes those holding shares in street name.



|                          | High    | Low   | Closing
|------------------------- | ------- | ----- | -------
|                          |         |       |        
|Year Ended March 31, 2004 |         |       |        
|First Quarter             | $ 28.08 | 22.89 | 27.61  
|Second Quarter            | 32.02   | 27.36 | 31.88  
|Third Quarter             | 38.75   | 31.92 | 36.28  
|Fourth Quarter            | 40.61   | 33.93 | 38.13  
|                          |         |       |        
|Year Ended March 31, 2003 |         |       |        
|First Quarter             | $ 27.50 | 21.93 | 27.43  
|Second Quarter            | 27.44   | 18.57 | 19.80  
|Third Quarter             | 25.54   | 16.79 | 22.32  
|Fourth Quarter            | 24.43   | 21.89 | 22.92  

Cash
dividend activity during the fiscal years ended March 31, 2004 and March 31,
2003 was as follows:

|Record Date        | Payment Date       | Amount
      per share
|------------------ | ------------------ | ----------------------
|June 13, 2003      | June 27, 2003      | $.071                 
|September 12, 2003 | September 26, 2003 | $.16                  
|December 12, 2003  | December 26, 2003  | $.16                  
|March 12, 2004     | March 26, 2004     | $.20                  



|June 14, 2002      | June 28, 2002      | $.057
|------------------ | ------------------ | -----
|September 13, 2002 | September 27, 2002 | $.057
|December 13, 2002  | December 27, 2002  | $.071
|March 14, 2003     | March 28, 2003     | $.071

The Bancorp may
pay additional dividends out of funds legally available at such times as the
Board of Directors determines that dividend payments are appropriate. The Board
of Directors considers the declaration of dividends on a quarterly basis.

During fiscal
2004, we retired 12,856,574 shares of common stock that had been repurchased in
prior periods and held as treasury stock. During fiscal 2004, our Board of
Directors declared a 40 percent stock split effected in the form of a stock
dividend paid on September 5, 2003, to shareholders of record on August 15,
2003.

The payment of
dividends by the Bank is subject to OTS regulations. "Safe-harbor"
amounts of capital distributions can be made after providing notice to the OTS,
but without needing prior approval. For institutions, such as the Bank, that
meet the definition of "well capitalized", and would continue to do so
following the proposed capital distribution, the safe harbor amount is the
institutions calendar year-to-date net income plus retained net income for the
preceding two years less any previous capital distributions declared for those
periods. Institutions can distribute amounts in excess of the safe-harbor
amounts only with the prior approval of the OTS.
                                                                               
47

---

On March 26, 2003,
the Bancorp's Board of Directors adopted a share repurchase program of 840,000
shares of our common stock. The shares are being purchased in open market
transactions based on market conditions. The timing, volume and price of
purchases are contingent upon our discretion and our overall financial
condition. During fiscal 2004, the Bank paid cash dividends to the Bancorp of
$28.6 million in order to fund general corporate needs, cash dividends to
shareholders and share repurchases. During fiscal 2004, the Bancorp repurchased
302,800 shares at a weighted average price of $34.91 per share resulting in
511,580 shares remaining under the current share repurchase program.

Common stock repurchases were as follows:

Common Stock RepurchasedTotal
        Number of Shares
        Purchased (1)
      Average
        Price
        Per Share
      Total Shares Remaining
        Under Repurchase Program (2)Authorized share repurchase program-March 26, 2003
      -
      -
      840,000March 2003
      25,620
      $22.96
      814,380April 2003
      4,900
      23.71
      809,480May 2003
      18,200
      24.40
      791,280February 2004
      110,900
      35.78
      680,380March 2004
      168,800
      35.80
      511,580


(1) During fiscal 2004 and 2003 , we repurchased 302,800 and 25,620 of our
common shares, respectively, totaling 328,420 common shares under the 840,000
repurchase program adopted by our Board of Directors on March 26, 2003.

(2) At March 31, 2004, the maximum amount of our common shares that can be
repurchased is 511,580 shares.
                                                                               
48

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Item 6. Selected Financial Data.

Our selected
consolidated financial and other data is set forth below, which is derived in
part from, and should be read in conjunction with, our audited consolidated
financial statements and notes thereto - See "Item 8. Financial Statements
and Supplementary Data."

|                                                             | At March 31,          
|------------------------------------------------------------ | ----------------------
|                                                             | 2004                  
|                                                             | (Dollars in thousands)
|                                                             |                       
|Selected Balance Sheet Data:                                 |                       
|                                                             |                       
|Total assets                                                 | $3,677,694            
|Investment
      securities held-to-maturity                 | 5,742                 
|Investment securities
      available-for-sale               | 62,957                
|Mortgage-backed securities
      available-for-sale          | 292,888               
|Collateralized mortgage
      obligations available-for-sale | -                     
|Trading securities                                           | -                     
|Investment in real estate                                    | -                     
|Loans held for sale                                          | 2,119                 
|Loans and leases receivable, net(1)                          | 3,149,318             
|Deposits                                                     | 2,455,046             
|FHLB advances and other
      borrowings                     | 851,600               
|Stockholders' equity,
      substantially
      restricted   | 316,371               
|                                                             |                       
|                                                             |                       

49



---



For the Year Ended March 31,2004
      
      2003
      
      2002
      
      2001
      
      2000(Dollars in thousands, except per share amounts)Selected Operating Data:Interest income
      $180,324
      
      185,376
      
      215,731
      
      239,949
      
      214,952Interest expense
      49,329
      
      72,247
      
      104,624
      
      143,471
      
      126,539Net interest income
      130,995
      
      113,129
      
      111,107
      
      96,478
      
      88,413Provision for loan and lease losses
      2,725
      
      4,840
      
      5,000
      
      5,004
      
      4,000Net interest income after provision for
            loan and lease losses
      128,270
      
      108,289
      
      106,107
      
      91,474
      
      84,413Non-interest income
      25,038
      
      19,898
      
      17,043
      
      14,319
      
      17,628Non-interest expense:General and administrative expense
      79,902
      
      67,466
      
      62,127
      
      57,066
      
      55,506Foreclosed asset operations, net
      339
      
      (190)
      
      (102)
      
      (324)
      
      (278)Total non-interest expense
      80,241
      
      67,276
      
      62,025
      
      56,742
      
      55,228Earnings before income taxes
      73,067
      
      60,911
      
      61,125
      
      49,051
      
      46,813Income taxes
      32,118
      
      25,489
      
      25,761
      
      20,791
      
      20,215Net earnings
      $40,949
      
      35,422
      
      35,364
      
      28,260
      
      26,598Basic earnings per share
      $ 2.55
      
      2.10
      
      2.03
      
      1.66
      
      1.52Diluted earnings per share
      $ 2.45
      
      2.02
      
      1.96
      
      1.60
      
      1.46Dividends declared per share
      $ 0.591
      
      0.256
      
      0.20
      
      0.171
      
      0.129Dividends payout ratio (13)
      24.12%
      
      12.67
      
      10.20
      
      10.69
      
      8.84(continued
        on next page






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|                                                                                                      | At or for the Year Ended March 31,              
|----------------------------------------------------------------------------------------------------- | ------------------------------------------------
|                                                                                                      | 2004                                            
|                                                                                                      | (Dollars in thousands, except per share amounts)
|                                                                                                      |                                                 
|Performance Ratios (2):                                                                               |                                                 
|Return on average assets                                                                              | 1.25                                            
|Return on average equity                                                                              | 13.63                                           
|Average equity to average assets                                                                      | 9.16                                            
|Equity to total assets at end of period                                                               | 8.60                                            
|Net interest spread (3)                                                                               | 3.97                                            
|Effective interest spread (4)                                                                         | 4.11                                            
|Average interest-earning assets
      to
      average interest-bearing liabilities                   | 108.74                                          
|Efficiency ratio (5)                                                                                  | 51.21                                           
|General and administrative
      expense to average assets                                            | 2.44                                            
|Capital (2)(6):                                                                                       |                                                 
|Tangible capital ratio (11)                                                                           | 7.64                                            
|Core capital ratio (11)                                                                               | 7.64                                            
|Risk-based capital ratio (11)                                                                         | 11.21                                           
|Book value per share outstanding                                                                      | $ 19.04                                         
|Tangible book value per share
      outstanding (9)                                                   | 18.97                                           
|Shares outstanding at end of period                                                                   | 16,614,997                                      
|Asset Quality (2):                                                                                    |                                                 
|Non-performing loans as a
      percent of gross loans and leases receivable (7) (12)                 | 0.37%                                           
|Non-performing assets as a
      percent
      of total assets (7) (12)                               | 0.39                                            
|Allowance for loan and lease
      losses
      as a percent of gross loans and leases receivable (8) | 0.84                                            
|Allowance for loan and lease losses as a percent of
      non-performing loans (7) (8)                | 226.01                                          
|Net charge-offs                                                                                       | $ 3,027                                         
|Number of full-service customer
      Facilities (10)                                                 | 26                                              
|Loan and lease originations                                                                           | $2,166,638                                      

(1)   The allowances for loan losses at
March 31, 2004, 2003, 2002, 2001, and 2000 were $30.8 million $31.1 million
$31.4 million, $31.0 million and, $27.8 million, respectively.
(2)   Asset Quality Ratios and Capital Ratios are end of period
ratios. Performance Ratios are based on average daily balances during the
indicated periods.
(3)   Net interest spread represents the difference between the
weighted average yield on interest-earning assets and the weighted average cost
of interest-bearing liabilities.
(4)   Effective interest spread represents net interest income as a
percent of average interest-earning assets.
(5)    Efficiency ratio represents general and administrative
expense as a percent of net interest income plus non-interest income.
(6)    For definitions and further information relating to the
Bank's regulatory capital requirements, see "Regulation - Federal Savings
Institution Regulation - Capital Requirements."
(7)    Non-performing assets consist of non-performing loans and
foreclosed assets. Non-performing loans consist of all loans 90 days or more
past due and all other non-accrual loans. It is the Bank's policy to cease
accruing interest on loans 90 days or more past due. See "Description of
Business - Non-Accrual and Past Due Loans" and "Real
Estate".
(8)     See "Item 1 - Description of business - Lending
Activities - Allowance for Loan and Lease Losses" for a discussion of
factors and methodology utilized in determination of allowance for loan and
lease losses.
(9)   Stated book value minus goodwill.
(10)  In May 2004, we opened our 27th full service savings
branch in Yucaipa, California.
(11)  PFF Bank & Trust only.
(12)  There were no non-performing leases at March 31, 2004.
(13)  Dividends declared per common share as a percentage of diluted
earnings per share.51

---

Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation.

Critical Accounting Policies

- Allowance for losses on loans, leases and real estate. For further
    information, see "Item 1 - Lending Activities - Allowance for Loan and
    Lease Losses" and "Note 5 to the Consolidated Financial
    Statements."
- Mortgage Servicing Rights. For further information, see "Item 1 -
    Lending Activities - Loan Servicing" and "Note 10 to the
    Consolidated Financial Statements."
- Pension Accounting. For further information, see "Note 14 to the
    Consolidated Financial Statements."
- Other-Than-Temporary Impairment. For further information, see "Item 1
    - Investment Activities" and "Notes 2,3 and 4 to the Consolidated
    Financial Statements.

Asset/Liability Management

Our earnings
depend primarily on our net interest income. Net interest income is affected by
net interest spread. Changes in net interest spread ("interest rate
risk") are influenced to a significant degree by the repricing
characteristics of assets and liabilities ("timing risk"), the
relationship between various rates ("basis risk"), customer options,
and changes in the shape of the yield curve.

Our
Asset/Liability Committee ("ALCO") is responsible for implementing the
interest rate risk policies designed to manage our interest rate risk exposure.
The Board of Directors approves acceptable interest rate risk levels designed to
provide sufficient net interest income and net present value of shareholders'
equity ("NPV") assuming specified changes in interest rates. NPV is
defined as the present value of expected net cash flows from existing assets
minus the present value of expected net cash flows from existing liabilities.

One measure of our
exposure to interest rate risk is shown in the following table which sets forth
the repricing frequency of our major assets and liabilities as of March 31,
2004. Repricing frequencies of assets are based upon contractual maturities,
repricing opportunities, scheduled principal payments and estimated prepayments.
Repricing of liabilities is based upon the contractual maturities, estimated
decay rates for core deposits, and the earliest repricing opportunity for
variable and floating rate instruments. We also had $15.0 million of putable
FHLB advances on the balance sheet as of March 31, 2004 that are assumed to
reprice at maturity. The interest rate sensitivity of our assets and liabilities
illustrated in the following table would vary substantially if different
assumptions were used, or if actual experience differed from that assumed.

52



---



|                                                                                                           | March 31, 2004        
|---------------------------------------------------------------------------------------------------------- | ----------------------
|                                                                                                           | 3 Months
      or Less
|                                                                                                           | (Dollars in thousands)
|Interest-earning assets:                                                                                   |                       
|Cash, investment securities and
      FHLB stock (1)                                                       | $ 25,446              
|Loans, leases and mortgage-backed
      securities: (1)                                                    |                       
|Mortgage-backed securities (2)                                                                             | 61,810                
|Loans and leases receivable, net (2)                                                                       | 1,369,689             
|Total loans, leases
      and
      mortgage-backed securities                                             | 1,431,499             
|Total interest-earning assets                                                                              | 1,456,945             
|Non-interest earning assets                                                                                | -                     
|Total assets                                                                                               | $1,456,945            
|                                                                                                           |                       
|Interest-bearing liabilities:                                                                              |                       
|Fixed maturity deposits                                                                                    | $ 246,202             
|Core deposits (3)                                                                                          | 336,273               
|Total deposits                                                                                             | 582,475               
|Borrowings (4)                                                                                             | 241,600               
|Total interest-bearing liabilities                                                                         | 824,075               
|Non-interest bearing liabilities                                                                           | -                     
|Equity                                                                                                     | -                     
|Total liabilities and
      stockholders'          
      equity                                           | $ 824,075             
|Interest sensitivity gap                                                                                   | $ 632,870             
|Cumulative interest sensitivity gap                                                                        | 632,870               
|Cumulative interest sensitivity gap as a percentage of total assets                                        | 17.21%                
|Cumulative interest-earning assets as a percentage of cumulative
      interest-
      bearing liabilities | 176.80                



---

Our one year GAP
at March 31, 2004 was (4.53%) (i.e. more interest bearing liabilities subject to
re-pricing within one year than interest earning assets); this compares with an
"adjusted" GAP of (0.48%) at March 31, 2003. The March 31, 2003 GAP
report was adjusted to reflect the reporting of non-interest bearing assets in
the "more than 5 year" GAP bucket consistent with the current year
presentation. Our one year GAP has become more liability sensitive due to the
slowing prepayments lengthening the repricing terms associated with the loan and
securities portfolios, and an increase in the proportion of interest-bearing
core accounts which are reflected as subject to repricing within twelve months.
If rates were to increase by 200 basis points, it is assumed that prepayment
speeds would slow from an average of 40% CPR to 21% CPR and result in a one year
GAP of (15.53%).

A GAP table is
limited to measuring timing risk and does not reflect the impact of customer
options or basis risk (the risk that various indices to which our assets and
liabilities are tied (e.g. Prime and COFI) will not move with equal speed and
magnitude when the general level of interest rates moves either up or down). To
better measure our exposure to these and other components of interest rate risk,
management relies on an internally maintained, externally supported
asset/liability simulation model.

We forecast our
net interest income for the next twelve months, and our NPV, assuming there are
no changes in interest rates or the balance sheet structure from the current
period end. Once this "base case" has been established, we subject our
balance sheet to instantaneous and sustained rate changes to the treasury yield
curve. Prepayment speeds and the responsiveness of the various indices are
estimated for each rate change level. Our model then re-forecasts net interest
income and NPV. The table below indicates the results of our internal modeling
of our balance sheet as of March 31, 2004 and 2003. The internal calculation of
our sensitivity to interest rate changes would vary substantially if different
assumptions were used, or if our customers' responses to changes in interest
rates resulted in changes in the structure of our balance sheet.



March 31, 2004
      
      March 31, 2003Percentage ChangeChange in Interest Rates (basis points) (3)
      Net Interest Income (1)
      
      Net Portfolio
        Value (2)
      
      Net Interest Income (1)
      
      Net Portfolio value (2)+200
      (0.74)%
      
      (13.60)
      
      4.34
      
      (0.56)+100
      0.12
      
      (3.80)
      
      2.42
      
      (0.08)-100
      (0.89)
      
      0.01
      
      (1.82)
      
      (0.09)(1) This percentage change represents the impact to net interest
        income for a one-year period assuming we do not change the structure of
        our balance sheet.(2) This percentage change represents the NPV for us assuming no
        changes to the structure of our balance sheet.(3) A negative 200 basis point rate shock could not be calculated for
        March 31, 2004 and 2003 due to the low level of interest rates.


The results from
the asset/liability model indicate that net interest income has less sensitivity
to changes in interest rates at March 31, 2004

54

---

The high level of
prepayments experienced in prior years also significantly reduced the seasoning
of our hybrid ARM

We have also
changed our modeling for our interest bearing NOW and Money Market deposit
products. While core deposit accounts are anticipated to exhibit less
sensitivity to rate changes than either CD accounts or fixed rate borrowings, it
is anticipated that they will exhibit greater sensitivity to upward movements in
rates at March 31, 2004 than one-year earlier. This increased sensitivity is
anticipated as a result of continued reductions to the rate on those products
over the past year and an increasingly competitive deposit market. For the year
ended March 31, 2004, the average cost of our core deposit portfolio was 0.93%,
a 70 basis point reduction from the prior year. Our repeated rate reductions on
core deposits have left depositors with a greater opportunity to increase
returns by transferring to other investment products including CDs. It is
important to note the general competitive environment. At this time last year,
we were not witnessing significant rate-driven competition for our deposit
customers. As we enter fiscal 2005, we are seeing an increase in short-term
certificate and money market promotions. Some of these products are being
offered at rates more than 50 basis points above the levels we are currently
paying on our comparable core deposits products. While we will continue to make
every effort to retain our customers through reasonable rate negotiation and
promotional offerings there is an increasing possibility that some of our core
deposit customers may be attracted to promotional rates offered by our
competitors.

Our modeling
indicates increased sensitivity to the NPV of equity at March 31, 2004 compared
to March 31, 2003.  The factors discussed above affecting the sensitivity
of earnings have contributed to the increase in the sensitivity of NPV. The high
prepayment levels assumed at March 31, 2003 created a high level of asset
turnover resulting in shorter asset durations. These short durations allowed us
to continually replace assets at current market values. The slower prepayment
levels assumed at March 31, 2004 combined with the reduced seasoning of hybrid
ARM's increased asset durations resulting in a greater percentage of our
balance sheet being comprised of assets whose market values are more sensitive
to declining as rates rise.

The change in
sensitivity of NPV was also impacted by changes in our funding mix. At March 31,
2004, 67 percent of our total asset base was funded with deposits compared to 74
percent at March 31, 2003. Deposit accounts exhibit lower sensitivity to rate
changes than do borrowings. The lower sensitivity provides greater stability for
funding costs during times of rising interest rates. This stability in funding
costs is expressed as a "deposit intangible" in modeling of NPV.
Typically the market value of the deposit intangible moves inversely with the
market value of assets. That is to say when rates rise, the market value of
assets will typically decline and the value of the deposit intangible will
increase. With a greater percentage of assets funded with FHLB advances, there
is less deposit intangible available to counter the impact of changing interest
rates. Also reducing the deposit intangible value is the anticipation of greater
sensitivity for core deposits noted above.

55

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Overview

The increase in our net income
between fiscal years primarily reflected the following:

- Increases in net interest income arising from a combination of increases
    in net interest spread and growth in average interest-earning assets.
- Decreases in provision for loan and lease losses attributable to an
    improvement in the level of asset quality and a reduction in the overall
    risk profile of the loan portfolio.

- Increases in non-interest income arising from:
- Increases in loan and servicing fees from higher volumes of loan
      repayments.
- Increases in deposit and related fees arising from growth in transaction
      accounts.
- Increases in gain on sales of securities.
- An increase in other non-interest income for fiscal 2004 arising from an
      increase in cash surrender value of split-dollar life insurance policies.

These favorable items were
partially offset by increases in general and administrative expense attributable
principally to compensation and benefits expense.

Our return on average assets fell
slightly from 1.19% for fiscal 2002 to 1.16% for fiscal 2003 but increased to
1.25% for fiscal 2004. Our return on average equity exhibited similar behavior
at 12.80% for fiscal 2002, 12.39% for fiscal 2003 and 13.63% for fiscal 2004.

As reflected in the following
table, we continued to focus our loan origination activities on the Four-Cs.

2004
      
      2003
      
      2002Amount
      Percentage of total
      
      Amount
      Percentage of total
      
      Amount
      Percentage of total(Dollars in thousands)Construction and Land
      
      $1,254,181
      58%
      
      $1,046,034
      56%
      
      $740,573
      52
      %Commercial R.E
      
      168,562
      8
      
      159,650
      8
      
      125,544
      9Consumer
      
      164,752
      8
      
      143,753
      8
      
      129,077
      9Commercial Business and Leases
      
      229,221
      10
      
      190,133
      10
      
      192,762
      13Subtotal - Four Cs
      
      1,816,716
      84
      
      1,539,570
      82
      
      1,187,956
      83Residential and Other (1)
      
      349,922
      16
      
      333,176
      18
      
      245,865
      17Total Originations
      
      $2,166,638
      100
      %
      $1,872,746
      100
      %
      $1,433,821
      100
      %(1) includes 1-4 family and multi-family.


Despite the
significant increases in Four-Cs originations shown above, due to the very high
level of loan paydown activity during fiscal 2004 across all loan product
categories, the net disbursed balance of the Four-Cs increased only $132.7
million between March 31, 2003 and 2004 after increasing $203.0 million between
March 31, 2002 and 2003. In order to achieve our overall asset growth objectives
and to offset the impact of the high level of principal repayments, we purchased
$787.8 million of loans during fiscal 2004 compared to $340.2 million during
fiscal 2003 and $415.3 million during fiscal 2002. Because the overwhelming
majority of those purchases were single-family residential mortgages, the growth
in that segment of the loan and lease portfolio outpaced that of the Four-Cs and
the proportion of the portfolio in the Four-Cs decreased slightly from 46% of
loans and leases receivable, net at March 31, 2003 to 44% at March 31, 2004. We
expect that with a reduction in the level of loan repayment activity that is
expected to accompany an increase in mortgage interest rates, we will not
experience further erosion in the proportion of the loan and lease portfolio
comprised by the Four-Cs.
                                                                               
56

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We continued to
focus our deposit gathering activities on core deposits. Core deposits increased
$157.2 million during fiscal 2004 while CDs decreased $28.3 million. This
pattern of activity is consistent with prior fiscal years, in which core
deposits increased $319.3 million while CDs decreased $162.2 million during
fiscal 2003, and core deposits increased $280.5 million and CDs decreased $132.8
million during fiscal 2002. The significant funding cost advantage to core
deposits over CDs continues to play a significant role in our increasing
profitability. We increased FHLB advances and other borrowings by $366.2 million
during fiscal 2004 to bridge the differential between total asset growth of
$523.7 million and total deposit growth of $128.9 million.

Non-accrual loans
were $13.6 million or 0.37% of gross loans and leases at March 31, 2004 compared
to $18.6 million and $4.5 million or 0.59% and 0.16% of gross loan and leases at
March 31, 2003 and 2002, respectively. See "Lending Activities -
Allowance for Loan and Lease Losses."

During fiscal
2004, we repurchased 302,800 shares at a weighted average price of $34.91 per
share. At March 31, 2004, 511,580 shares remain under an 840,000 share
repurchase authorization adopted by our Board of Directors on March 26, 2003.

At March 31, 2004,
our consolidated capital to assets ratio was 8.60%. The Bank's core and risk
based capital ratios were 7.64% and 11.21%, respectively, compared to 5.00% and
10.00% respectively to be considered "Well Capitalized." See
"Regulation and Supervision."

Net Interest Income

Net interest
income is the difference between the interest and dividends earned on loans and
leases, mortgage-backed securities and investment securities
("interest-earning assets") and the interest paid on deposits and
borrowings ("interest-bearing liabilities"). The spread between the
yield on interest-earning assets and the cost of interest-bearing liabilities
and the relative dollar amounts of these assets and liabilities are the
principal items affecting net interest income.

Our net interest
income totaled $131.0 million in fiscal 2004, up 16% from fiscal 2003 and $19.9
million or 18% from fiscal 2002. This trend reflects consistent increases in net
interest spread from 3.51% for fiscal 2002 to 3.59% for fiscal 2003 to 3.97% for
fiscal 2004. These increases in net interest spread reflect our success in
transitioning our balance sheet to a higher margin business model by focusing on
the Four-Cs and core deposits. Contributing to the increase in net interest
income were increases in average interest earning assets of $66.7 million or 2%
for fiscal 2003 and $224.4 million or 8% for fiscal 2004. Our net interest
spread and net interest income are also impacted by the repricing or rate
adjustment characteristics of our interest-earning assets and interest-bearing
liabilities.

The following table presents for the years indicated the total dollar amount
of:

- interest income from average interest-earning assets and the resultant
    yields; and
- interest expense on average interest-bearing liabilities and the resultant
    costs, expressed as rates.

The table also sets forth our net interest income, interest rate spread and
effective interest rate spread. Effective interest rate spread reflects the
relative level of interest-earning assets to interest-bearing liabilities and
equals:

- the difference between interest income on interest-earning assets and
    interest expense on interest-bearing liabilities, divided by
- average interest-earning assets for the year.

The table also
sets forth our net interest-earning balance -- the difference between the
average balance of interest-earning assets and the average balance of total
deposits and borrowings for the years indicated. We included non-accrual
loans in the average interest-earning assets balance. We included interest from
non-accrual loans in interest income only to the extent we received payments and
to the extent we believe we will recover the remaining principal balance of the
loans. We computed average balances for the year using the average of each month's
daily average balance during the years indicated.

57

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Average Balance Sheets

|                                                                              | Year Ended March 31,   |         
|----------------------------------------------------------------------------- | ---------------------- | --------
|                                                                              | 2004                   |         
|                                                                              | Average
      Balance  | Interest
|                                                                              | (Dollars in thousands) |         
|Assets:                                                                       |                        |         
|                                                                              |                        |         
|Interest-earning assets:                                                      |                        |         
|Interest-earning deposits and short-term
      investments                    | $40,893                | $362    
|Investment securities, net                                                    | 73,412                 | 2,591   
|Mortgage-backed securities, net                                               | 241,605                | 9,219   
|Collateralized mortgage obligations, net                                      | 2,532                  | (327)   
|Loans and leases receivable, net                                              | 2,801,246              | 167,309 
|FHLB stock                                                                    | 30,374                 | 1,170   
|Total interest-earning assets                                                 | 3,190,062              | 180,324 
|Non-interest-earning assets                                                   | 91,201                 |         
|Total assets                                                                  | $3,281,263             |         
|                                                                              |                        |         
|Liabilities and Stockholders' Equity:                                         |                        |         
|Interest-bearing liabilities:                                                 |                        |         
|Passbook accounts                                                             | $152,423               | 523     
|Money market savings accounts                                                 | 535,283                | 7,229   
|NOW and other demand deposit accounts                                         | 804,137                | 6,177   
|Certificate accounts                                                          | 875,916                | 22,841  
|Total                                                                         | 2,367,759              | 36,770  
|FHLB advances and other borrowings                                            | 566,022                | 12,559  
|Total interest-bearing liabilities                                            | 2,933,781              | 49,329  
|Non-interest-bearing liabilities                                              | 47,065                 |         
|Total liabilities                                                             | 2,980,846              |         
|Stockholders' equity                                                          | 300,417                |         
|Total liabilities and stockholders'
      equity                              | $3,281,263             |         
|Net interest income                                                           |                        | $130,995
|Net interest spread                                                           |                        |         
|Effective interest spread                                                     |                        |         
|Ratio of interest-earning assets to
      interest-
      bearing liabilities | 108.74%                |         

58

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Changes in our net
interest income are a function of changes in both rates and volumes of
interest-earning assets and interest-bearing liabilities. The following table
sets forth information regarding changes in our interest income and expense for
the years indicated. For each category of interest-earning assets and
interest-bearing liabilities, we have provided information on changes
attributable to:

- changes in volume - changes in volume multiplied by comparative period
    rate;
- changes in rate - changes in rate multiplied by comparative period
    volume; and
- changes in rate/volume - changes in rate multiplied by changes in
    volume.

Rate/Volume Analysis

The following
table presents the extent to which changes in interest rates and changes in the
volume of interest-earning assets and interest-bearing liabilities have affected
our interest income and interest expense during the periods indicated.
Information is provided in each category with respect to: (i) changes
attributable to changes in volume (changes in volume multiplied by prior rate);
(ii) changes attributable to changes in rate (changes in rate multiplied by
prior volume); (iii) changes attributable to changes in rate volume (change in
rate multiplied by change in volume); and (iv) the net change.

|                                                     |                                                                             |  |                                                                             |  |                    |  |          |  |          |  |          |  |                    |  |          | 
|---------------------------------------------------- | --------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- |  | ------------------ |  | -------- |  | -------- |  | -------- |  | ------------------ |  | -------- | 
|                                                     | Year Ended March 31, 2004
      Compared to
      Year Ended March 31, 2003 |  | Year Ended March 31, 2003
      Compared to
      Year Ended March 31, 2002 | 
|                                                     | Increase (Decrease)
      Due to                                            |  | Increase (Decrease)
      Due to                                            | 
|                                                     | Volume                                                                      |  | Rate                                                                        |  | Rate/
      Volume |  | Net      |  | Volume   |  | Rate     |  | Rate/
      Volume |  | Net      | 
|                                                     | (Dollars in thousands)                                                      | 
|Interest-earning assets:                             |                                                                             |  |                                                                             |  |                    |  |          |  |          |  |          |  |                    |  |          | 
|Interest-earning deposits and short-term investments | $ (110)                                                                     |  | (310)                                                                       |  | 46                 |  | (374)    |  | (185)    |  | (539)    |  | 75                 |  | (649)    | 
|Investment securities, net                           | (1,696)                                                                     |  | (763)                                                                       |  | 266                |  | (2,193)  |  | 1,050    |  | (1,257)  |  | (250)              |  | (457)    | 
|Mortgage-backed securities, net                      | 4,934                                                                       |  | (2,451)                                                                     |  | (1,467)            |  | 1,016    |  | (6,061)  |  | (2,183)  |  | 837                |  | (7,407)  | 
|Collateralized mortgage obligations, net             | (85)                                                                        |  | (6,544)                                                                     |  | 6,210              |  | (419)    |  | (997)    |  | (3,078)  |  | 953                |  | (3,122)  | 
|Loans and leases receivable, net                     | 15,028                                                                      |  | (16,143)                                                                    |  | (1,530)            |  | (2,645)  |  | 14,170   |  | (30,082) |  | (2,265)            |  | (18,177) | 
|FHLB stock                                           | 59                                                                          |  | (480)                                                                       |  | (16)               |  | (437)    |  | (403)    |  | (175)    |  | 35                 |  | (543)    | 
|Total interest-earning assets                        | 18,130                                                                      |  | (26,691)                                                                    |  | 3,509              |  | (5,052)  |  | 7,574    |  | (37,314) |  | (615)              |  | (30,355) | 
|                                                     |                                                                             |  |                                                                             |  |                    |  |          |  |          |  |          |  |                    |  |          | 
|Interest-bearing liabilities:                        |                                                                             |  |                                                                             |  |                    |  |          |  |          |  |          |  |                    |  |          | 
|Passbook accounts                                    | 139                                                                         |  | (487)                                                                       |  | (70)               |  | (418)    |  | 105      |  | (763)    |  | (47)               |  | (705)    | 
|Money market savings accounts                        | 1,785                                                                       |  | (3,664)                                                                     |  | (654)              |  | (2,533)  |  | 182      |  | (4,304)  |  | (54)               |  | (4,176)  | 
|NOW and other demand deposit accounts                | 1,689                                                                       |  | (4,763)                                                                     |  | (799)              |  | (3,873)  |  | 3,379    |  | 1,744    |  | 2,027              |  | 7,150    | 
|Certificate accounts                                 | (3,255)                                                                     |  | (6,652)                                                                     |  | 710                |  | (9,197)  |  | (9,721)  |  | (18,931) |  | 3,159              |  | (25,493) | 
|FHLB advances and other borrowings                   | 4,073                                                                       |  | (9,087)                                                                     |  | (1,883)            |  | (6,897)  |  | (6,279)  |  | (3,681)  |  | 807                |  | (9,153)  | 
|Total interest-bearing liabilities                   | 4,431                                                                       |  | (24,653)                                                                    |  | (2,696)            |  | (22,918) |  | (12,334) |  | (25,935) |  | 5,892              |  | (32,377) | 
|Change in net interest income                        | $13,699                                                                     |  | (2,038)                                                                     |  | 6,205              |  | 17,866   |  | 19,908   |  | (11,379) |  | (6,507)            |  | 2,022    | 

59

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Provision for Loan and Lease Losses   We recorded a $2.7 million
provision for loan and lease losses during fiscal 2004 compared to provisions of
$4.8 million and $5.0 million for fiscal 2003 and fiscal 2002, respectively. See
"Lending Activities Allowance for Loan and Lease Losses".Non-Interest Income

Our total
non-interest income was $25.0 million for fiscal 2004, compared to $19.9 million
for fiscal 2003 and $17.0 million for fiscal 2002.Deposit and Related FeesDeposit and related fees
totaled $11.4 million in fiscal 2004, up $820,000 from fiscal 2003 and $2.0
million from fiscal 2002. These increases reflect increases in the number of
checking accounts, which create additional monthly fees as well as transactional
charges.

The following
table presents a breakdown of deposit and related fees during the years
indicated.

|                                                     | 2004                   | 2003   | 2002 
|---------------------------------------------------- | ---------------------- | ------ | -----
|                                                     | (Dollars in thousands)
|Monthly maintenance and deposit related service fees | $ 7,692                | 6,598  | 5,887
|Automated teller machine fees                        | 2,096                  | 1,994  | 1,893
|Other fees                                           | 1,593                  | 1,969  | 1,647
|Total deposit and related fees                       | $11,381                | 10,561 | 9,427

Loan and Servicing Fees

Loan and servicing
fees totaled $6.6 million for fiscal 2004, up $1.3 million from fiscal 2003 and
$1.6 million from fiscal 2002. The primary factor contributing to these
increases was an increase in loan principal paydowns from $1.57 billion in
fiscal 2002 to $1.87 billion in fiscal 2003 and $2.35 billion in fiscal 2004.
Loan and servicing fee income is shown net of amortization of our MSR asset.

The following
table presents a breakdown of loan and servicing fees for the years indicated:

2004
      
      2003
      
      2002(Dollars in thousands)Loan Servicing fees
      $ 6,779
      
      5,487
      
      5,570Amortization of MSR
      (58)
      
      (74)
      
      (175)Impairment of MSR
      (126)
      
      (151)
      
      (423)$ 6,595
      
      $5,262
      
      $4,972


At March 31, 2004, our MSR asset was $333,000.

Trust and Investment Fees

Trust and investment fees increased from $2.1 million for
both fiscal 2002 and fiscal 2003 to $2.5 million for fiscal 2004. Assets under
custody or management were $293.4 million, $231.0 million and $251.6 million at
March 31, 2004, 2003 and 2002, respectively. Assets under custody or management
at March 31, 2004, include $238.3 million managed by Glencrest, which includes
$76.2 million of assets generated by Glencrest with the remainder representing
assets generated by the Bank's Trust Department.
                                                                             
60

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Gain on Sale of Loans

Our community banking business strategy does not include
aggressively pursuing the origination of loans for sale. The Four-Cs have
consistently comprised in excess of 80% of total originations and those four
product types are originated for portfolio as opposed to sale. Additionally, we
retain for portfolio virtually all adjustable rate residential mortgages.
Accordingly, the principal balances of loans sold during fiscal 2004, 2003 and
2002 were $42.2 million, $19.2 million and $10.2 million, respectively. This
activity generated net gains on sales of $809,000, $559,000 and $359,000 for
fiscal 2004, 2003 and 2002, respectively.Gain on Sale of Securities

We generally
follow a "buy and hold" strategy with respect to our securities
portfolio. While the overwhelming majority of our securities portfolio is
classified as "available for sale", sales activity has been and is
expected to continue to be infrequent. Gain on sales of securities was $1.8
million for fiscal 2004 compared to $1.3 million for fiscal 2003 and $25,000 for
fiscal 2002.



We liquidated our
portfolio of trading securities during March 2003 after determining that such
activity was inconsistent with our strategic direction and business model.
Accordingly, there was no gain or loss on trading securities during fiscal 2004.
We incurred net losses on trading activity during fiscal 2003 and 2002 of
$575,000 and $107,000, respectively.

Other Non-Interest Income

Our other
non-interest income of $2.0 million for fiscal 2004 is up substantially from
$606,000 for fiscal 2003 and $281,000 for fiscal 2002. The $1.4 million increase
between fiscal 2003 and 2004 was attributable to a $1.3 million non-recurring
increase in cash surrender value of split-dollar life insurance policies that we
own. The total non-interest income arising from increases in cash surrender
value during fiscal 2004, 2003 and 2002 was $1.7 million, $381,000 and $149,000,
respectively. At March 31, 2004, our balance sheet includes total cash surrender
value of $3.5 million classified as other assets.Non-Interest Expense

Non-interest
expense increased from $62.0 million for fiscal 2002 to $67.3 million for fiscal
2003 and $80.2 million for fiscal 2004. General and administrative expense
increased from $62.1 million or 2.09% of average assets for fiscal 2002 to $67.5
million or 2.22% of average assets for fiscal 2003 and $79.9 million or 2.44% of
average assets for fiscal 2004. While our balance sheet, which is increasingly
comprised by Four-Cs and core deposits, generates higher levels of net interest
income than would a balance sheet comprised by residential mortgage loans and
CDs, our higher margin business is also more cost intensive, particularly with
respect to compensation levels. The relationship between net revenue (net
interest income plus non-interest income) and operating costs expended to
generate that revenue is measured by our efficiency ratio. Our efficiency ratio
was 51.21% for fiscal 2004 compared to 50.72% for fiscal 2003 and 48.48% for
fiscal 2002. While our ratio of general and administrative expense to average
assets increased 22 basis points or 10% between fiscal 2003 and 2004, our
efficiency ratio only deteriorated 49 basis points or 1%. This indicates that
the growth in our operating cost structure was substantially offset by increases
in net revenue generated by our higher margin business model. The ratio of
general and administrative expense to average assets and efficiency ratio for
fiscal 2003 compared to fiscal 2002 exhibits a similar relationship to that
between fiscal 2004 and fiscal 2003 with a 6% increase in the general and
administrative expense ratio and a 5% increase in the
                                                                                
61

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efficiency ratio. The more positive relationship between
fiscal 2004 and 2003 compared to the relationship between fiscal 2003 and 2002
reflects the fact that we must incur the infrastructure costs to support the
higher volumes of business in advance of those volumes coming on the books.Compensation and Benefits

The increases in
compensation and benefits also reflect the Bank's opening of two new
full-service retail branches during fiscal 2003, and the formation and staffing
up of Glencrest Investment Advisors. Included in compensation and benefits
expense for fiscal 2004, 2003 and 2002, respectively are non-cash charges of
$8.5 million, $5.9 million and $5.7 million associated with the Bank's ESOP
and 1996 Incentive Plan. The stock awarded under the 1996 Incentive Plan vested
over a five-year period ending October 2001. Accordingly, the non-cash charge to
expense associated with the 1996 Incentive Plan decreased from $1.4 million for
fiscal 2002 to zero for fiscal 2003 and 2004, respectively. The allocation of
shares under the Bank's ESOP will continue in generally equal installments
through 2005. The amount charged to expense under the ESOP moves upward or
downward with changes in the market price of the Bancorp's common stock. ESOP
expense for fiscal 2004, 2003 and 2002 was $8.5 million $5.9 million and $4.3
million, respectively.Marketing and Professional Services

Our other general
and administrative expense increased from $8.9 million for fiscal 2002 to $10.2
million for fiscal 2003 and $12.0 million for fiscal 2004. The $1.8 million
increase between fiscal 2003 and 2004 was primarily attributable to an increase
in correspondent bank service charges and appraisal fees resulting from higher
volumes of deposit and loan activity, and compliance with Sarbanes-Oxley. The
increase between fiscal 2002 and 2003 was primarily attributable to increased
appraisal fees and correspondent bank service charges resulting from higher
volumes of loan and deposit activity.Income Taxes

Income taxes were
$32.1 million for fiscal 2004 compared to $25.5 million for fiscal 2003 and
$25.8 million for fiscal 2002. The effective income tax rates were 44.0%, 41.8%
and 42.1% for fiscal 2004, 2003 and 2002, respectively. Our tax rate increased
in fiscal 2004, primarily due to a permanent difference associated with our ESOP
Plan, whereby the difference between the fair value of our stock over the tax
cost of our stock is not a deduction for Federal and State income tax purposes.

The objective of
liquidity management is to ensure that we have the continuing ability to
maintain cash flows that are adequate to fund operations and meet other
obligations on a timely and cost-effective basis. Our most liquid assets are
cash and short-term investments. The levels of these assets are dependent on our
operating, financing, lending and investing activities during any given period.
At March 31, 2004, cash and short-term investments totaled $60.2 million.
                                                                           
62

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Effective July 11,
2001 the OTS adopted a rule eliminating the statutory liquidity requirement. In
its place, the OTS adopted a policy, consistent with that of the other Federal
banking regulatory agencies, that liquidity be maintained at a level which
provides for safe and sound banking practices and financial flexibility.

Our internal
policy is to maintain cash and readily marketable debt securities with final
maturities of one year or less equal to approximately three percent of total
deposits, FHLB advances and other borrowings maturing within one year. At and
for the year ended March 31, 2004 our defined liquidity ratios were 4.20 percent
and 3.40 percent, respectively. As an additional component of liquidity
management, we seek to maintain sufficient mortgage and securities collateral at
the FHLB to enable us to immediately borrow an amount equal to at least five
percent of total assets. At March 31, 2004, our immediate borrowing capacity was
$418.2 million or 11 percent of total assets.

Our primary
sources of funds are deposits, principal and interest payments on loans, leases
and securities, FHLB advances and other borrowings, and to a lesser extent,
proceeds from the sale of loans and securities. While maturities and scheduled
amortization of loans, leases and securities are predictable sources of funds,
deposit flows and loan and security prepayments are greatly influenced by the
general level of interest rates, economic conditions and competition.

Our strategy is to
manage liquidity by investing excess cash flows in higher yielding
interest-earning assets, such as loans, leases and securities, or paying down
FHLB advances and other borrowings, depending on market conditions. Conversely,
if the need for funds is not met through deposits and cash flows from loans,
leases and securities, we initiate FHLB advances and other borrowings, or if
necessary and of economic benefit, sell loans and/or securities. Only when no
other alternatives exist will we constrain loan originations as a means of
addressing a liquidity shortfall. We have not found it necessary to constrain
loan originations due to liquidity considerations.

Our cash flows are
comprised of three primary classifications: cash flows from operating
activities, investing activities and financing activities.

Cash flows
provided by operating activities were $39.2 million, $87.0 million and $50.9
million for the years ended March 31, 2004, 2003 and 2002, respectively. The
variability in cash flows provided by operating activities among the fiscal
years ended March 31, 2004, 2003 and 2002 was attributable principally to
increases (decreases) in accrued expenses and other liabilities of ($15.0)
million, $41.0 million and ($3.6) million for fiscal 2004, 2003 and 2002,
respectively. These increases (decreases) were attributable principally to
timing differences relating to securities purchased on March 31, 2003 that were
recorded on our balance sheet using the trade date, with settlement in cash
occurring on the following day of the new fiscal year.

Net cash used in
investing activities consists primarily of disbursements for loan and lease
originations and purchases and purchases of securities, offset by principal
collections on loans, leases and proceeds from maturation and paydowns on
securities. The levels of cash flows from investing activities are influenced by
the general level of interest rates. During periods of declining rates,
borrowers exhibit an increasing propensity to refinance their indebtedness,
which results in an increase in cash flows from loan, lease and securities
paydowns. Accordingly, we reinvest those cash flows into originations and
purchases of loans and purchases of securities in order to effectively manage
our cash resources.
        Net cash used in investing activities
for fiscal 2004, 2003 and 2002 was $509.2 million, $169.9 million and $113.9
million, respectively. The increases in cash used in investing activities was
attributable to our increased emphasis on growth in interest-earning assets
beginning during the later stages of fiscal 2003 and accelerating into fiscal
2004. Reflecting the acceleration in cash flows arising from a declining rate
environment described above, principal payments on loans and leases increased
from $1.57 billion for the year ended March 31, 2002 to $1.87 billion and $2.35
billion for the years ended March 31, 2003 and 2004, respectively. In response
to the increased cash inflows from loans and leases, we increased our
disbursements for loan originations and purchases, excluding loans originated
for sale, from $1.84 billion for the year ended March 31, 2002 to $2.19 billion
and $2.91 billion for the years ended March 31, 2003 and 2004, respectively.
                                                                               
63

---

The pattern of activity
with respect to cash provided by financing activities generally corresponds to
that of net cash used in investing activities. The primary sources of net cash
from financing activities are net activity in deposit accounts and FHLB advances
and other borrowings. Our net increases in deposits were $128.9 million, $157.1
million and $147.7 million for the years ended March 31, 2004, 2003 and 2002,
respectively. During the year ended March 31, 2004, we increased our use of FHLB
advances to fund the higher level of interest-earning asset growth. Accordingly,
FHLB advances and other borrowings increased $366.2 million during the year
ended March 31, 2004 as compared to a decrease of $72.6 million for the year
ended March 31, 2003. We began fiscal 2003 with a higher than normal level of
cash and cash equivalents ($106.0 million at March 31, 2002 compared to $51.5
million at March 31, 2001 and $50.3 million at March 31, 2003) due to a higher
level of loan and securities payoffs received late during fiscal 2002. This
excess cash was used to fund loan growth during the early part of fiscal 2003
reducing our need to increase borrowings during fiscal 2003.

Deposits,
particularly core deposits, provide a more preferable source of funding than do
FHLB advances and other borrowings. However, as and to the extent competitive or
market factors do not allow us to meet our funding needs with deposits; FHLB
advances and other borrowings provide a readily available source of liquidity.
As of March 31, 2004 and 2003, the Bank had maximum unused borrowing capacity
from the FHLB of San Francisco of $1.37 billion and $1.21 billion, respectively.
Based upon pledged collateral in place, the available borrowing capacity was
$418.2 million and $195.8 million at March 31, 2004 and 2003, respectively. We
also have the ability to borrow funds under reverse repurchase agreements
collateralized by securities. We had $4.0 million and $4.4 million of borrowings
under reverse repurchase agreements outstanding at March 31, 2004 and 2003,
respectively.
        Additionally, we have the capability
to borrow funds from the Federal Reserve Bank discount window. As of March 31,
2004, our borrowing capacity at the Federal Reserve Bank was approximately $16.0
million.

At March 31, 2004,
the Bank exceeded all of its regulatory capital requirements with a tangible
capital level of $277.4 million, or 7.64% of adjusted total assets, which is
above the required level of $54.4 million, or 1.50%; core capital of $277.4
million, or 7.64% of adjusted total assets, which is above the required level of
$145.2 million, or 4.00% and total risk-based capital of $303.2 million, or
11.21% of risk-weighted assets, which is above the required level of $216.3
million, or 8.00%. See "Item 1 -- Description of Business -- Regulation and
Supervision -- Federal Savings Institution Regulation."

We currently have
no material contractual obligations or commitments for capital expenditures. See
"Item 1 -- Description of Business -- General." At March 31, 2004, we
had outstanding commitments to originate and purchase loans of $154.2 million
and $8.2 million, respectively, compared to $81.5 million and $53.0 million,
respectively, at March 31, 2003. We anticipate that we will have sufficient
funds available to meet our commitments. At March 31, 2004, we had $150,000 of
outstanding commitments to purchase securities. At March 31, 2003 we had no
outstanding commitments to purchase securities. See "Item 1 -- Description
of Business -- General." Certificate accounts that are scheduled to mature
in less than one year from March 31, 2004 totaled $642.5 million. We expect that
we will retain a substantial portion of the funds from maturing certificate
accounts at maturity either in certificate or liquid accounts. The continued low
interest rate environment during fiscal 2004 has resulted in a reduction in the
differential between certificate accounts and more liquid instruments such as
money market accounts. Accordingly, a portion of our maturing certificate
accounts have been and are expected to continue to be reinvested by customers
into more liquid accounts until such time as the rate differential between
certificate and liquid accounts increases.

Contractual Obligations and Other Commitments

---

We have
obligations under long-term operating leases, principally for building space and
land. Lease terms generally cover a five year period, with options to extend,
and are non-cancelable. Currently, we have no significant vendor contractual
obligations.

Our commitments to
originate fixed and variable rate mortgage loans are agreements to lend to a
customer as long as there is no violation of any condition established in the
commitment. Undisbursed loan funds and unused lines of credit include funds not
disbursed, but committed to construction projects and home equity and commercial
lines of credit. Letters of credit are conditional commitments issued by us to
guarantee the performance of a customer to a third party.

The following
table summarizes our material contractual obligations at March 31, 2004. The
payment amounts represent those amounts contractually due to the recipient and
do not include any unamortized premiums or discounts, or other similar carrying
value adjustments

Further discussion
of the nature of each obligation is included in the referenced note to the
consolidated financial statements.

Note
        Reference
      Within
        1 Year
      1 to 3 years
      4 to 5 years
      Over
        5 years
      TotalCertificates of deposit
      11
      $ 642,505
      147,570
      103,832
      206
      894,113FHLB advances
      12
      590,000
      255,000
      -
      -
      845,000Reverse repurchase agreements
      12
      4,000
      -
      -
      -
      4,000Promissory note
      12
      2,600
      -
      -
      -
      2,600Operating leases
      18
      1,118
      1,628
      1,362
      3,559
      7,667Commitments to originate
        loans    and leases:Fixed rate
      19
      1,573
      -
      -
      -
      1,573Variable rate
      19
      152,639
      -
      -
      -
      152,639Commitments to purchase
        variable rate loans
      19
      8,221
      -
      -
      -
      8,221Total
      
      $ 1,402,656
      404,198
      105,194
      3,765
      1,915,813




Undisbursed Loan commitments:
      BalanceConstruction
      $ 504,868Consumers
      143,624Commercial
      129,233Letter of credit
      10,016


65

---

Impact of Inflation        The Consolidated Financial
Statements and Notes thereto presented herein have been prepared in accordance
with accounting principles generally accepted in the United States of America
("GAAP"), which require the measurement of financial position and
operating results in terms of historical dollar amounts or market value without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of our
operations. Unlike industrial companies, nearly all of our assets and
liabilities are monetary in nature. As a result, interest rates have a greater
impact on our performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.

Segment Reporting

We provide a broad
range of financial services to individuals and companies located primarily in
Southern California. These services include demand, time, and savings deposits;
real estate, business and consumer lending; cash management; trust services;
investment advisory services and diversified financial services to homebuilders.
While our chief decision makers monitor the revenue streams of our various
products and services, operations are managed and financial performance is
evaluated on a company-wide basis. Accordingly, all of our operations are
considered by management to be aggregated in one reportable operating segment.Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

We realize income
principally from the differential or spread between the interest earned on
loans, leases, investments and other interest-earnings assets and the interest
paid on deposits and borrowings. Loan and lease volumes and yields, as well as
the volume and rates on investments, deposits and borrowings, are affected by
market interest rates. Additionally, because of the terms and conditions of many
of our loan and lease agreements and deposit accounts, a change in rates could
also affect the duration of the loan portfolio and/or the deposit base, which
could alter our sensitivity to changes in interest rates.Interest rate risk management focuses on maintaining consistent growth in net
interest income within board-approved policy limits while taking into
consideration, among other factors, our overall credit, operating income,
operating cost and capital profile. Disclosure related to market risk is
included in "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Asset/Liability Management" contained in Item 7
of this Form 10-K.
                                                                               
66

---

Item 8. Financial Statements and Supplementary Data.Index to Financial Statements
      PAGEConsolidated Balance Sheets - March 31, 2004 and 2003
      68Consolidated Statements of Earnings - Years ended March 31, 2004,
        2003 and 2002......................
      69Consolidated Statements of Comprehensive Earnings - Years ended March
        31, 2004, 2003 and 2002
      70Consolidated Statements of Stockholders' Equity - Years ended March
        31, 2004, 2003 and 2002
      71Consolidated Statements of Cash Flows - Years ended March 31, 2004,
        2003 and 2002
      72Notes to Consolidated Financial Statements
      74Report of Independent Registered Public Accounting Firm
      111


67

---



PFF BANCORP, INC. AND SUBSIDIARIESConsolidated Balance Sheets

March 31,2004
      
      2003(Dollars in thousands, except per
        share data)AssetsCash and equivalents
      $ 60,151
      
      50,323Investment securities
        held-to-maturity (estimated fair value
        of $5,979 and $5,957 million at March 31, 2004 and 2003)
      5,742
      
      5,753Investment securities available-for-sale, at fair value
      62,957
      
      94,094Mortgage-backed securities available-for-sale, at fair value
      292,888
      
      215,266Collateralized mortgage obligations available-for-sale, at fair value
      -
      
      15,200Loans held-for-sale
      2,119
      
      3,327Loans and leases receivable, net
      3,149,318
      
      2,688,950Federal Home Loan Bank (FHLB) stock, at cost
      42,500
      
      26,610Accrued interest receivable
      14,752
      
      14,162Assets acquired through foreclosure, net
      683
      
      75Property and equipment, net
      27,430
      
      23,325Prepaid expenses and other assets
      19,154
      
      16,939Total assets
      $ 3,677,694
      
      3,154,024Liabilities and Stockholders' EquityLiabilities:Deposits
      $ 2,455,046
      
      2,326,108FHLB advances and other borrowings
      851,600
      
      485,385Deferred income tax liability
      14,068
      
      7,521Accrued expenses and other liabilities
      40,609
      
      61,878Total liabilities
      3,361,323
      
      2,880,892Commitments and contingencies
      -
      
      -Stockholders' equity :Preferred stock, $.01 par value. Authorized 2,000,000
        shares; none issued
      -
      
      -Common stock, $.01 par value. Authorized 59,000,000
        shares; issued 16,894,697 and 29,310,927; outstanding
        16,614,997 and 16,477,453 at March 31, 2004 and 2003, respectively
      168
      
      208Additional paid-in capital
      144,585
      
      131,770Retained earnings, substantially restricted
      173,188
      
      150,282Unearned stock-based compensation
      (2,121)
      
      (3,996)Treasury stock (279,700 and 12,833,474 at March 31, 2004 and 2003,
        respectively)
      (3)
      
      (92)Accumulated other comprehensive income (losses)
      554
      
      (5,040)Total stockholders' equity
      316,371
      
      273,132Total liabilities and stockholders' equity
      $ 3,677,694
      
      3,154,024See accompanying notes to consolidated financial
        statements.


68

---



PFF BANCORP, INC. AND SUBSIDIARIESConsolidated Statements of Earnings

Year Ended March 31,2004
      
      2003
      
      2002(Dollars in thousands, except per share data)Interest income:Loans and leases receivable
      $ 167,309
      
      169,954
      
      188,131Mortgage-backed securities
      9,219
      
      8,203
      
      15,610Collateralized mortgage obligations
      (327)
      
      92
      
      3,214Investment securities and deposits
      4,123
      
      7,127
      
      8,776Total interest income
      180,324
      
      185,376
      
      215,731Interest on deposits
      36,770
      
      52,791
      
      76,015Interest on borrowings
      12,559
      
      19,456
      
      28,609Total interest expense
      49,329
      
      72,247
      
      104,624Net interest income
      130,995
      
      113,129
      
      111,107Provision for loan and lease losses
      2,725
      
      4,840
      
      5,000Net interest income after provision
        for loan and lease losses
      128,270
      
      108,289
      
      106,107Non-interest income:Deposit and related fees
      11,381
      
      10,561
      
      9,427Loan and servicing fees
      6,595
      
      5,262
      
      4,972Trust and investment fees
      2,452
      
      2,142
      
      2,086Gain on sale of loans, net
      809
      
      559
      
      359Gain on sale of securities, net
      1,795
      
      1,343
      
      25Loss on trading securities, net
      -
      
      (575)
      
      (107)Other non-interest income
      2,006
      
      606
      
      281Total non-interest income
      25,038
      
      19,898
      
      17,043Non-interest expense:General and administrative:Compensation and benefits
      47,179
      
      37,323
      
      34,319Occupancy and equipment
      12,706
      
      12,158
      
      11,905Marketing and professional services
      8,027
      
      7,787
      
      6,969Other general and administrative
      11,990
      
      10,198
      
      8,934Total general and administrative
      79,902
      
      67,466
      
      62,127Foreclosed asset operations, net
      339
      
      (190)
      
      (102)Total non-interest expense
      80,241
      
      67,276
      
      62,025Earnings before income taxes
      73,067
      
      60,911
      
      61,125Income taxes
      32,118
      
      25,489
      
      25,761Net earnings
      $ 40,949
      
      35,422
      
      35,364Basic earnings per share
      $ 2.55
      
      2.10
      
      2.03Weighted average shares
        outstanding for basic earnings per share
      16,060,512
      
      16,868,053
      
      17,437,995Diluted earnings per share
      $ 2.45
      
      2.02
      
      1.96Weighted average shares
        outstanding for diluted earnings per share
      16,709,006
      
      17,533,957
      
      18,087,643See accompanying
        notes to consolidated financial statements.


69

---



PFF BANCORP, INC. AND SUBSIDIARIESConsolidated Statements of Comprehensive Earnings

|                                                                                                                                     | Year Ended
      March 31, | 
|------------------------------------------------------------------------------------------------------------------------------------ | -------------------------- | 
|                                                                                                                                     | 2004                       | 
|                                                                                                                                     | (Dollars in thousands)     | 
|Net earnings                                                                                                                         | $ 40,949                   | 
|                                                                                                                                     |                            | 
|Other comprehensive earnings (losses), net
      of income taxes of $4,035 and $1,398 at March 31,
      2004 and 2003, respectively |                            | 
|Unrealized gains (losses) on securities
      available-for-sale:                                                                    |                            | 
|Investment securities available-for-sale, at fair value                                                                              | 4,536                      | 
|Mortgage-backed securities
      available-for-sale, at fair value                                                                   | 213                        | 
|Collateralized mortgage obligations
      available-for-sale, at fair value                                                          | 39                         | 
|Reclassification of realized gains (losses) included
      in earnings                                                               | 836                        | 
|                                                                                                                                     | 5,624                      | 
|Minimum pension liability adjustment                                                                                                 | (51)                       | 
|Tax benefit on minimum pension liability                                                                                             | 21                         | 
|Other comprehensive gains (losses)                                                                                                   | 5,594                      | 
|Comprehensive earnings                                                                                                               | $ 46,543                   | 
|See accompanying
      notes to consolidated financial statements.                                                                  

70

---



PFF BANCORP, INC. AND SUBSIDIARIESConsolidated Statements of Stockholders' Equity



|                                                                              | Number of
      Shares                  |  | Common
      Stock |  | Additional
      Paid-in
      Capital |  | Retained Earnings Substantially Restricted |  | Unearned
      Stock-based
      Compensation |  | Treasury
      Stock |  | Accumulated Other Comprehensive Income (Losses) |  | Total    | 
|----------------------------------------------------------------------------- | --------------------------------------- |  | ------------------ |  | -------------------------------------- |  | ------------------------------------------ |  | --------------------------------------------- |  | -------------------- |  | ----------------------------------------------- |  | -------- | 
|                                                                              | Dollars in thousands, except share data
|Balance at March 31, 2001                                                     | 18,533,827                              |  | $ 200              |  | $ 131,919                              |  | $ 137,703                                  |  | $ (8,953)                                     |  | $ (68)               |  | $ (2,803)                                       |  | $257,998 | 
|Net earnings                                                                  | -                                       |  | -                  |  | -                                      |  | 35,364                                     |  | -                                             |  | -                    |  | -                                               |  | 35,364   | 
|Purchase of treasury stock                                                    | (714,140)                               |  | -                  |  | (5,096)                                |  | (8,431)                                    |  | -                                             |  | (5)                  |  | -                                               |  | (13,532) | 
|Change in minimum pension liability                                           | -                                       |  | -                  |  | -                                      |  | -                                          |  | -                                             |  | -                    |  | (5,079)                                         |  | (5,079)  | 
|Amortization under stock-based compensation plans                             | -                                       |  | -                  |  | 2,456                                  |  | -                                          |  | 3,203                                         |  | -                    |  | -                                               |  | 5,659    | 
|Stock options exercised                                                       | 462,360                                 |  | 3                  |  | 3,777                                  |  | -                                          |  | -                                             |  | -                    |  | -                                               |  | 3,780    | 
|Dividends ($0.20 per share for 2002)                                          | -                                       |  | -                  |  | -                                      |  | (3,513)                                    |  | -                                             |  | -                    |  | -                                               |  | (3,513)  | 
|Changes in unrealized gains on securities available-for-sale
      (AFS), net | -                                       |  | -                  |  | -                                      |  | -                                          |  | -                                             |  | -                    |  | 916                                             |  | 916      | 
|Tax benefit from stock options                                                | -                                       |  | -                  |  | 2,484                                  |  | -                                          |  | -                                             |  | -                    |  | -                                               |  | 2,484    | 
|Balance at March 31, 2002                                                     | 18,282,047                              |  | 203                |  | 135,540                                |  | 161,123                                    |  | (5,750)                                       |  | (73)                 |  | (6,966)                                         |  | 284,077  | 
|Net earnings                                                                  | -                                       |  | -                  |  | -                                      |  | 35,422                                     |  | -                                             |  | -                    |  | -                                               |  | 35,422   | 
|Purchase of treasury stock                                                    | (2,538,480)                             |  | -                  |  | (18,113)                               |  | (41,982)                                   |  | -                                             |  | (19)                 |  | -                                               |  | (60,114) | 
|Change in minimum pension liability                                           | -                                       |  | -                  |  | -                                      |  | -                                          |  | -                                             |  | -                    |  | (3,054)                                         |  | (3,054)  | 
|Amortization under stock-based compensation plans                             | -                                       |  | -                  |  | 3,616                                  |  | -                                          |  | 1,754                                         |  | -                    |  | -                                               |  | 5,370    | 
|Stock options exercised                                                       | 733,886                                 |  | 5                  |  | 7,101                                  |  | -                                          |  | -                                             |  | -                    |  | -                                               |  | 7,106    | 
|Dividends ($0.26 per share for 2003)                                          | -                                       |  | -                  |  | -                                      |  | (4,281)                                    |  | -                                             |  | -                    |  | -                                               |  | (4,281)  | 
|Changes in unrealized gains on securities AFS, net                            | -                                       |  | -                  |  | -                                      |  | -                                          |  | -                                             |  | -                    |  | 1,926                                           |  | 1,926    | 
|Tax benefit from stock options/minimum pension
      liability                | -                                       |  | -                  |  | 3,626                                  |  | -                                          |  | -                                             |  | -                    |  | 3,054                                           |  | 6,680    | 
|Balance at March 31, 2003                                                     | 16,477,453                              |  | 208                |  | 131,770                                |  | 150,282                                    |  | (3,996)                                       |  | (92)                 |  | (5,040)                                         |  | 273,132  | 
|Net earnings                                                                  | -                                       |  | -                  |  | -                                      |  | 40,949                                     |  | -                                             |  | -                    |  | -                                               |  | 40,949   | 
|Purchase of treasury stock                                                    | (302,800)                               |  | -                  |  | (2,159)                                |  | (8,409)                                    |  | -                                             |  | (3)                  |  | -                                               |  | (10,571) | 
|Change in minimum pension liability                                           | -                                       |  | -                  |  | -                                      |  | -                                          |  | -                                             |  | -                    |  | (51)                                            |  | (51)     | 
|Amortization under stock-based compensation plans                             | -                                       |  | -                  |  | 6,518                                  |  | -                                          |  | 1,875                                         |  | -                    |  | -                                               |  | 8,393    | 
|Stock options exercised                                                       | 440,344                                 |  | 5                  |  | 4,815                                  |  | -                                          |  | -                                             |  | -                    |  | -                                               |  | 4,820    | 
|Stock split effected in the form of a stock dividend                          | -                                       |  | 47                 |  | -                                      |  | (47)                                       |  | -                                             |  | -                    |  | -                                               |  | -        | 
|Dividends ($0.60 per share for 2004)                                          | -                                       |  | -                  |  | -                                      |  | (9,587)                                    |  | -                                             |  | -                    |  | -                                               |  | (9,587)  | 
|Treasury stock retirement                                                     | -                                       |  | (92)               |  | -                                      |  | -                                          |  | -                                             |  | 92                   |  | -                                               |  | -        | 
|Changes in unrealized gains on securities AFS, net                            | -                                       |  | -                  |  | -                                      |  | -                                          |  | -                                             |  | -                    |  | 5,624                                           |  | 5,624    | 
|Tax benefit from stock options/minimum pension
      liability                | -                                       |  | -                  |  | 3,641                                  |  | -                                          |  | -                                             |  | -                    |  | 21                                              |  | 3,662    | 
|Balance at March 31, 2004                                                     | 16,614,997                              |  | $ 168              |  | $ 144,585                              |  | $ 173,188                                  |  | $ (2,121)                                     |  | $ (3)                |  | $ 554                                           |  | $316,371 | 

See accompanying notes to consolidated financial statements

71

---



PFF BANCORP, INC. AND SUBSIDIARIESConsolidated Statements of Cash Flows

Year Ended March 31,2004
      
      2003
      
      2002(Dollars in thousands)Cash flows from operating activities:Net earnings
      $ 40,949
      
      35,422
      
      35,364Adjustments to reconcile net
        earnings to net cash provided by operating activities:Amortization of premiums net
        of discount accretion on loans, leases and securities
      2,102
      
      2,086
      
      824Amortization of deferred loan origination fees
      520
      
      1,229
      
      2,955Loan and lease fees collected
      752
      
      732
      
      343Dividends on FHLB stock
      (1,158)
      
      (1,713)
      
      (2,358)Provisions for losses on:Loans and leases
      2,725
      
      4,840
      
      5,000Real estate
      206
      
      -
      
      -Gains on sales of
        loans, mortgage-backed securities available-for-sale, real estate and
        property and equipment
      (2,432)
      
      (2,049)
      
      (625)Proceeds from sale of trading securities
      -
      
      1,805
      
      -Losses on trading securities
      -
      
      575
      
      107Depreciation and amortization
        of property and equipment
      3,108
      
      2,792
      
      3,006Loans originated for sale
      (41,000)
      
      (22,395)
      
      (9,685)Proceeds from sale of loans held-for-sale
      42,847
      
      19,656
      
      10,497Amortization of unearned
        stock-based
        compensation
      8,393
      
      5,370
      
      5,659Increase (decrease) in accrued
        expenses and other liabilities
      (15,030)
      
      41,031
      
      (3,565)(Increase) decrease in:Accrued interest receivable
      (590)
      
      1,491
      
      2,813Prepaid expenses and other assets
      (2,215)
      
      (3,828)
      
      527Net cash provided by operating activities
      39,177
      
      87,044
      
      50,862Cash flows from investing activities:Loans and leases originated for investment
      (2,125,638)
      
      (1,850,351)
      
      (1,424,136)Increase in construction loans in process
      98,959
      
      117,677
      
      50,684Purchases of loans held-for-investment
      (787,751)
      
      (340,169)
      
      (415,287)Principal payments on loans and leases
      2,349,947
      
      1,869,196
      
      1,573,443Principal payments on
        mortgage-backed securities available-for-sale
      84,259
      
      99,453
      
      127,387Principal payments on
        collateralized mortgage
        obligations available-for-sale
      15,200
      
      48,323
      
      20,601Purchases of investment securities held-to-maturity
      -
      
      (5,056)
      
      -Purchases of investment securities available-for-sale
      (60,550)
      
      (65,023)
      
      (83,395)


72

---



PFF BANCORP, INC. AND SUBSIDIARIESConsolidated Statements of Cash Flows, Continued

Year Ended March 31,2004
      
      2003
      
      2002(Dollars in thousands)Redemption of FHLB stock
      $ 1,368
      
      10,236
      
      13,346Purchase of FHLB stock
      (16,100)
      
      -
      
      -Purchases of mortgage-backed
        securities available-for-sale
      (165,042)
      
      (129,815)
      
      (25,236)Proceeds from sale of
        mortgage-backed securities
        available-for-sale
      -
      
      11,490
      
      -Proceeds from maturities of
        investment securities
        available-for-sale
      25,127
      
      67
      
      39,881Proceeds from sale of
        investment securities available-for-sale
      77,497
      
      67,198
      
      8,525Proceeds from sale of real estate
      839
      
      1,390
      
      1,977Purchases of property and equipment
      (7,279)
      
      (4,542)
      
      (1,651)Net cash used in investing activities
      (509,164)
      
      (169,926)
      
      (113,861)Cash flows from financing activities:Proceeds from FHLB advances and other borrowings
      1,490,300
      
      406,885
      
      561,400Repayment of FHLB advances and other borrowings
      (1,124,085)
      
      (479,500)
      
      (578,400)Net change in deposits
      128,938
      
      157,144
      
      147,703Proceeds from exercise of stock options
      4,820
      
      7,106
      
      3,780Cash dividends
      (9,587)
      
      (4,281)
      
      (3,513)Purchase of treasury stock
      (10,571)
      
      (60,114)
      
      (13,532)Net cash provided by financing activities
      479,815
      
      27,240
      
      117,438Net increase (decrease) in
        cash and cash equivalents
      9,828
      
      (55,642)
      
      54,439Cash and cash equivalents, beginning of year
      50,323
      
      105,965
      
      51,526Cash and cash equivalents, end of year
      $ 60,151
      
      50,323
      
      105,965Supplemental information:Interest paid, including interest credited
      49,784
      
      74,235
      
      107,111Income taxes paid
      21,750
      
      17,050
      
      25,078Loans to facilitate
      -
      
      -
      
      256Non-cash investing and financing activities:Net transfers from loans and
        leases receivable to assets acquired through foreclosure
      1,589
      
      634
      
      2,331See accompanying
        notes to consolidated financial statements.


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(1) Summary of Significant Accounting Policies

The following accounting policies, together with those
disclosed elsewhere in our consolidated financial statements, represent the
significant accounting policies used in presenting the accompanying consolidated
financial statements.

Basis of Consolidation

The accompanying consolidated financial statements include
the accounts of PFF Bancorp, Inc. (the "Bancorp") and its subsidiaries
PFF Bank & Trust, Glencrest Investment Advisers, Inc. and Diversified
Builder Services, Inc. Our business is conducted primarily through PFF Bank
& Trust and its subsidiary, Pomona Financial Services, Inc. (collectively,
the "Bank"). Pomona Financial Services, Inc. includes the accounts of
Diversified Services, Inc. Glencrest Investment Advisors, Inc. includes the
accounts of Glencrest Insurance Services, Inc. All material intercompany
balances and transactions have been eliminated in consolidation. We have made
certain reclassifications to the prior years' consolidated financial statements
to conform to the current year's presentation.

Our consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America. In preparing our consolidated financial statements, we are required to
make estimates and assumptions that affect the reported amounts of assets,
liabilities and contingent liabilities as of the dates of our consolidated
balance sheets, and revenues and expenses reflected in our consolidated
statements of earnings. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand and in
banks of $40.4 million and $42.8 million and short-term deposits in banks of
$19.8 million and $7.5 million at March 31, 2004 and 2003, respectively. We
consider all highly liquid debt instruments with maturities at the date of
acquisition of three months or less to be cash equivalents.

Investment and Mortgage-Backed Securities and Collateralized
Mortgage Obligations

At the time of purchase of an investment security, a
mortgage-backed security or a collateralized mortgage obligation, we designate
the security as either held-to-maturity, available-for-sale or trading based on
our investment objectives, operational needs and intent. We then monitor our
investment activities to ensure the activities are consistent with the
established guidelines and objectives.

Held-to-Maturity

Investment securities held-to-maturity are carried at cost,
or in the case of mortgage-backed securities and collateralized mortgage
obligations at unpaid principal balance, adjusted for amortization of premiums
and accretion of discounts which are recognized in interest income using the
interest method, adjusted for anticipated prepayments where applicable. It is
our intent and within our ability, to hold these securities until maturity as
part of our portfolio of long-term interest earning assets. If the security is
determined to be other than temporarily impaired, the amount of the impairment
is charged to operations.

Available-for-Sale

Investment securities, mortgage-backed securities and
collateralized mortgage obligations available-for-sale are carried at fair
value. Amortization of premiums and accretion of discounts are recognized in
interest income using the interest method, adjusted for anticipated prepayments
where applicable. Unrealized holding gains and losses are excluded from earnings
and reported as a separate component of stockholders' equity, net of income
taxes. If the security is determined to be other than temporarily impaired, the
amount of the impairment is charged to operations.

Realized gains and losses on the sale of securities
available-for-sale are determined using the specific identification method and
recorded in earnings using the specific identification method.

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Trading

Trading securities are comprised principally of equity
securities which are carried at fair value, based upon the quoted market prices
of those investments. Accordingly, the net gains and losses on trading
securities are included in earnings.

Loans Held for Sale

Loans designated as held for sale in the secondary market are
carried at the lower of cost or market value in the aggregate, as determined by
a fair value analysis we perform using prevailing market assumptions. Loan fees
and costs are deferred and recognized as a component of gain or loss on sale of
loans when the loans are sold. Net unrealized losses are recognized through a
valuation allowance established by charges to operations.

Mortgage Servicing Rights and Gains or Losses on Sales of
Loans

Gains or losses on sales of loans are recognized at the time
of sale and are determined by the difference between the net sales proceeds and
the allocated basis of the loans sold. We capitalize mortgage servicing rights
("MSR") through the sale of mortgage loans which are sold with
servicing rights retained. At the time of sale, the total cost of the mortgage
loans is allocated to the MSR and the mortgage loans based upon their relative
fair values. The MSR are included in other assets and as a component of the gain
on the sale of loans. The MSR are amortized in proportion to and over the
estimated period of the net servicing income. This amortization is reflected as
a component of loan and servicing fees.

The MSR are periodically reviewed for impairment based upon
their fair value. The fair value of the MSR, for the purposes of impairment, is
measured using a discounted cash flow analysis using market prepayment rates,
our net servicing income and market-adjusted discount rates. Impairment losses
are recognized through a valuation allowance, with any associated provision
recorded as a component of loan servicing fees.

Loans and Leases Receivable

Loans and leases receivable are stated at unpaid principal
balances less the undisbursed portion of construction loans and allowances for
loan and lease losses, and net of deferred loan origination fees and
premiums/discounts on loans and leases. Premiums/discounts are
amortized/accreted using the interest method over the contractual maturities of
the loans and leases.

Uncollected interest on loans and leases contractually
delinquent more than ninety days or on loans for which collection of interest
appears doubtful is excluded from interest income and accrued interest
receivable. Payments received on non-accrual loans and leases are recorded as a
reduction of principal or as deferred interest income depending on management's
assessment of the ultimate collectibility of the loan principal. Such loans and
leases are restored to an accrual status only if the loan is brought
contractually current and the borrower has demonstrated the ability to make
future payments of principal and interest.

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Loan Origination, Commitment Fees and Related Costs

For loans and leases receivable held-for-investment,
origination fees and direct origination costs are deferred, with the net fee or
cost being accreted or amortized to interest income over the contractual
maturity of the related loan or lease using the interest method. Accretion or
amortization is discontinued in the event the loan becomes contractually
delinquent by ninety days or more. Accretion or amortization resumes in the
period all delinquent interest and principal is paid. When a loan is paid in
full, any unamortized net loan origination fee or cost is recognized in interest
income. For loans held-for-sale, loan origination fees and direct origination
costs are deferred until the loan is sold. When the loan is sold any net loan
origination fee or cost is recognized in the calculation of the gain (loss) on
sale of loans. Commitment fees and costs related to commitments where the
likelihood of exercise is remote are recognized over the commitment period on a
straight-line basis. If the commitment is subsequently exercised during the
commitment period we recognize the remaining net unamortized commitment fees at
the time of exercise over the life of the loan using the interest method.

Valuation Allowances for Loans, Leases Receivable and
Foreclosed Assets

Valuation allowances for loan and lease losses are provided
on both a specific and non-specific basis. Specific allowances are provided when
an identified significant decline in the value of the underlying collateral
occurs or an identified adverse situation occurs that may affect the borrower's
ability to repay. Non-specific allowances are provided based on a number of
factors, including our past loss experience, current economic conditions and
management's ongoing evaluation of the credit risk inherent in the portfolio.

Valuation allowances for losses on foreclosed assets are
established when a decline in value reduces the fair value less estimated
disposal costs to less than the carrying value.

We believe that our allowances for loan, lease and foreclosed
asset losses are adequate. While we use available information to recognize
losses on loans, leases and foreclosed assets, future additions to the
allowances may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review our allowances for loan, lease and foreclosed asset
losses. Such agencies may require us to recognize additions to the allowances
based on their judgments of the information available to them at the time of
their examinations.

Loans and leases are considered impaired when, based upon
current information and events we determine, it is probable that we will be
unable to collect on a timely basis all principal and interest amounts due
according to the original contractual terms of the agreement. We evaluate
impairment on an asset-by-asset basis. Once a loan or lease is determined to be
impaired, the impairment is measured based on the present value of the expected
future cash flows discounted at the loans or leases effective interest rate or
by using its most recent market price or the fair value of the collateral if the
loan or lease is collateral dependent.

When the measurement of an impaired loan or lease is less
than the recorded amount of the loan or lease, we establish a valuation
allowance by recording a charge to the provision for loan and lease losses.
Subsequent increases or decreases in the valuation allowance for impaired loans
and leases are recorded by adjusting the existing valuation allowance for the
impaired loan or lease with a corresponding charge or credit to the provision
for loan and lease losses.

All non-homogeneous loans and leases we designate as impaired
are either placed on non-accrual status or designated as restructured loans and
leases. Only restructured loans and leases that are not performing in accordance
with their restructured terms are included in non-performing loans and leases.
Loans and leases are generally placed on non-accrual status when the payment of
interest is 90 days or more delinquent, or if the loan or lease is in the
process of foreclosure, or earlier if the timely collection of interest and/or
principal appears doubtful. Our policy allows for loans and leases to be
designated as impaired and placed on non-accrual status even though the loan or
lease may be current as to the principal and interest payments and may continue
to perform in accordance with its contractual terms.

76

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Payments received on impaired loans and leases are recorded
as a reduction of principal or as interest income depending on management's
assessment of the ultimate collectibility of the loan or lease principal. The
amount of interest income recognized is limited to the amount of interest that
would have accrued at the contractual rate applied to the recorded balance, with
any difference recorded as a loss recovery. Generally, interest income on an
impaired loan or lease is recorded on a cash basis when the outstanding
principal is brought current.

Assets Acquired Through Foreclosure

Assets acquired through foreclosure ("foreclosed
assets") are carried at the lower of cost or fair value less estimated cost
to sell. Once an asset is acquired we periodically perform evaluations and
establish an allowance for losses by a charge to operations if the carrying
value of the asset exceeds its fair value. Costs related to development and
improvement of assets are capitalized, whereas costs relating to holding the
assets are expensed. During the development period, the portion of interest
costs related to development of foreclosed assets are capitalized.

Property and Equipment

Land is carried at cost. Buildings and improvements,
furniture, fixtures and equipment, and leasehold improvements are carried at
cost, less accumulated depreciation or amortization. Depreciation and
amortization are recorded using the straight-line method over the estimated
useful lives of the assets or the terms of the related leases, if shorter.

Intangibles

In January 1995, we acquired the trust operations of another
bank for $3.5 million. The excess cost over net assets acquired was capitalized
and, prior to the fiscal year ended March 31, 2003 ("fiscal 2003"),
was being amortized on a straight-line basis over the estimated average life of
the trust relationships acquired of 11 years. In fiscal 2003, we adopted
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"), which resulted in a cessation of
amortization and the implementation of a periodic impairment test of the
intangible.

On a periodic basis, we review our intangible assets for
events or changes in circumstances that may indicate the carrying amounts of the
assets may not be recoverable. Recoverability of an asset to be held and used is
measured by a comparison of the carrying amount of the asset to discounted
future net cash flows expected to be generated by the asset. If we determine the
asset is impaired, the impairment is measured by the amount by which the
carrying amount exceeds the fair value of the asset.

77

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Reverse Repurchase Agreements

We enter into sales of securities under agreements to
repurchase the same securities. Reverse repurchase agreements are accounted for
as financing arrangements, with the obligation to repurchase securities sold
reflected as a liability in our consolidated balance sheets. The dollar amount
of securities underlying the agreements remains in the respective asset account
on our balance sheet.

Interest on Deposits

Accrued interest is either paid to the depositor or added to
the deposit account on a periodic basis. On term accounts, the forfeiture of
interest (because of withdrawal prior to maturity) is offset as of the date of
withdrawal against interest expense in the consolidated statements of
operations.

Income Taxes

We file consolidated Federal income and combined state
franchise tax returns.

Deferred income taxes are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date.

Employee Stock Ownership Plan

We accounted for the original issuance of our Employee Stock
Ownership Plan ("ESOP") as a component of equity recorded in a
contra-equity account. As a result of the issuance, compensation expense is
recognized over the allocation period based upon the fair value of the shares
committed to be released to employees. This may result in fluctuations in
compensation expense as a result of changes in the fair value of our common
stock. However, any such compensation expense fluctuations result in an equal
and offsetting adjustment to additional paid-in capital.  Our tax rate
increased in fiscal 2004, primarily due to a permanent difference associated
with our ESOP Plan, whereby the difference between the fair value of our stock
over the tax cost of our stock is not a deduction for Federal and State income
tax purposes.Stock Option Plan

On October 23, 1996, we granted stock options and adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which permits entities to recognize
as expense over the vesting period the fair value of all stock-based
compensation on the date of grant. Alternatively, SFAS 123 allows entities to
apply the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and
related interpretations, and provide pro forma net earnings and pro forma
earnings per share disclosures for employee stock option grants made in 1996 and
future years as if the fair-value-based method defined in SFAS 123 had been
applied. We used the Black-Scholes model to calculate amounts required for
disclosure in SFAS 123. 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. We have elected to continue to apply the provisions of APB
25 and provide the pro forma disclosure provisions of SFAS 123.

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The following table contains certain information with respect
to stock options granted under the 1996 and 1999 Plans.

|Assumptions Used in Determining
      Options' values
|-----------------------------------------------------
|Grant Date                                           
|(Dollars in thousands except per share
      data)   
|Options Granted During the Year Ended March 31, 2004 
|Options                                              
|June 25, 2003                                        
|November 25, 2003                                    
|January 28, 2004                                     
|March 24, 2004                                       
|Options Granted During the Year Ended March 31, 2003 
|July 24, 2002                                        
|December 19, 2002                                    
|December 19, 2002                                    
|February 26, 2003                                    
|Options Granted During the Year Ended March 31, 2002 
|June 27, 2001                                        
|October 24, 2001                                     
|November 28, 2001                                    
|February 27, 2002                                    



(1) The risk-free rate is the market rate for U.S. Government
securities with the same maturities as the options.

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We apply APB 25 in accounting for our stock options and,
accordingly, under the intrinsic value method no compensation cost has been
recognized for these stock options in our consolidated financial statements. Had
we determined compensation cost based on the fair value at the grant date for
our stock options exercisable under SFAS 123, our results of operations would
have been adjusted to the pro forma amounts indicated below:

|                                                                                                                                                  | 2004                                          |  | 2003    |  | 2002    | 
|------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------- |  | ------- |  | ------- | 
|                                                                                                                                                  | (Dollars in thousands, except per share data) | 
|Net earnings:                                                                                                                                     |                                               |  |         |  |         | 
|As reported                                                                                                                                       | $ 40,949                                      |  | 35,422  |  | 35,364  | 
|Add: Stock-based employee compensation expense included
      in reported net income, net of related tax effects                                  | 7,540                                         |  | 4,909   |  | 3,274   | 
|Deduct: Total stock-based employee compensation expense determined
      under fair value based method for all awards, net of related tax effects | (8,656)                                       |  | (6,808) |  | (5,169) | 
|Pro forma Net Earnings                                                                                                                            | $ 39,833                                      |  | 33,523  |  | 33,469  | 
|Earnings per share                                                                                                                                |                                               |  |         |  |         | 
|Basic - as reported                                                                                                                               | $ 2.55                                        |  | 2.10    |  | 2.03    | 
|Basic - pro forma                                                                                                                                 | 2.48                                          |  | 1.99    |  | 1.92    | 
|                                                                                                                                                  |                                               |  |         |  |         | 
|Diluted - as reported                                                                                                                             | $ 2.45                                        |  | 2.02    |  | 1.96    | 
|Diluted - pro forma                                                                                                                               | 2.38                                          |  | 1.91    |  | 1.85    | 

We have established an arrangement with an independent
brokerage firm to facilitate the immediate sale of all or a portion of the
shares obtained by directors and employees through the exercise of stock
options. This arrangement allows for the cashless exercise of stock options by
directors and employees through an independent arrangement between the holder of
the options and the broker. We do not agree to purchase the underlying shares
from the broker and we do not guarantee, or underwrite, in any way the
arrangement between the option holders and the broker. We consider this
arrangement to meet the criteria to allow for fixed award accounting under APB
25.

Segment Reporting

Through our branch network and investment advisory offices,
we provide a broad range of financial services to individuals and companies
located primarily in Southern California. These services include demand, time,
and savings deposits; real estate, business and consumer lending; cash
management; trust services; investment advisory services and diversified
financial services for homebuilders. While our chief decision makers monitor the
revenue streams of our various products and services, operations are managed and
financial performance is evaluated on a company-wide basis. Accordingly, we
consider all of our operations are aggregated in one reportable operating
segment.

Treasury Stock

We record treasury stock purchases at cost. The excess of
cost over par value is allocated between additional paid-in-capital and retained
earnings. During the fiscal year ended March 31, 2004 ("fiscal 2004")
and 2003 ("fiscal 2003"), we repurchased 302,800 and 2,538,480 shares
of stock, respectively at an average price of $34.91 and $23.68, respectively.
During fiscal 2004, we retired 12,856,574 shares of common stock that had been
repurchased in prior periods and held as treasury stock. In fiscal 2004, our
Board of Directors declared a 40 percent stock split effected in the form of a
stock dividend paid on September 5, 2003, to shareholders of record on August
15, 2003.

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Earnings Per Share

We calculate our basic and diluted earnings per share in
accordance with SFAS No. 128 "Earnings Per Share." Basic earnings per
share is calculated by dividing net earnings available to common shares by the
average common shares outstanding during the period. Diluted earnings per share
includes the potential dilution resulting from the assumed exercise of stock
options, including the effect of shares exercisable under our stock-based
compensation plans.

New Accounting Pronouncements

In December 2002, the FASB issued Statement of Financial
Accounting Standards No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure" ("SFAS 148"), which amends Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), to provide alternative methods of
transition for an entity that voluntarily changes to the fair value method of
accounting for stock-based employee compensation. SFAS 148 also amends the
disclosure provisions of SFAS 123 to require prominent disclosure about the
effects on reported net income of accounting policy decisions with respect to
stock-based employee compensation. Finally, SFAS 148 amends APB Opinion No. 28,
"Interim Financial Reporting", to require disclosure about those
effects in interim financial information. At this time, the FASB has an exposure
draft in reference to the fair value method of accounting for stock-based
employee compensation, once the FASB issues this statement, we intend to adopt
the fair value method. For further information regarding accounting for stock
options, see Note 14.

In April 2003, the FASB issued Statement of Financial
Accounting Standards No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" ("SFAS 149"), which clarifies
and amends financial accounting and reporting for derivative instruments
embedded in other contracts and for hedging activities under Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). In general,
SFAS 149 is effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003. The financial
impact of SFAS 149 is not material to our consolidated financial statements.

In May 2003, the FASB issued Statement of Financial
Accounting Standards No. 150, "Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity" ("SFAS
150"), which establishes standards for how an issue classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. SFAS No. 150 requires an issuer to classify a financial instrument that
is within its scope as a liability. Many of those instruments were previously
classified as equity. SFAS 150 is generally effective for financial instruments
entered into or modified after May 31, 2003, and otherwise effective at the
beginning of the first interim period beginning after June 15, 2003. The
financial impact of SFAS 150 is not material to our consolidated financial
statements.

Financial Accounting Standards Board Interpretation 45,
"Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees and Indebtedness of Others" ("FIN
45"), provides an interpretation of SFAS Nos. 5, 57 and 107, and rescission
of FIN 34, "Disclosure of Indirect Guarantees of Indebtedness of
Others." Fin 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 were effective for financial
statements of interim or annual periods ended after December 15, 2002. The
implementation of FIN 45 has not had a significant impact on our consolidated
financial statements.

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Financial Accounting Standards Board Interpretation 46,
"Consolidation of Variable Interest Entities" ("FIN 46") (as
revised by FIN-46R), provides guidance to improve financial reporting for
variable interest entities, off-balance sheet structures and similar entities.
FIN 46-R requires a variable interest entity to be consolidated by a company if
that company is subject to a majority of the risk of loss from the variable
interest entity's activities or is entitled to receive a majority of the
entity's residual returns or both. Prior to FIN 46-R, a company included another
entity in its consolidated financial statements only if it controlled the entity
through voting interests. FIN 46-R also requires disclosures about variable
interest entities that a company is not required to consolidate but in which it
has a significant variable interest. The consolidation requirements of FIN 46-R
apply to all special purpose entities by the end of the first reporting period
that ends after December 15, 2003. The provisions of FIN 46-R for the variable
interest entities that are not special purpose entities are required to be
applied by the first reporting period that ends after March 15, 2004. The
implementation of FIN 46-R has not had a significant impact on us.

In addition, the Securities and Exchange Commission
("SEC") issued guidance in Staff Accounting Bulletin No. 105 ("SAB
105"). SAB 105 requires that fair-value measurement include only
differences between the guaranteed interest rate in the loan commitment and a
market interest rate, excluding any expected future cash flows related to the
customer relationship or loan servicing. Servicing assets are to be recognized
only once the servicing asset has been contractually separated from the
underlying loan by sale or securitization of the loan with servicing retained.
The guidance in SAB 105 must be applied to interest rate locks initiated after
March 31, 2004 and is to be applied prospectively. The implementation of SAB105
is not expected to have a significant impact on us.

(2) Investment Securities

The amortized cost and estimated fair values of investment
securities are summarized as follows:

March 31, 2004Amortized
        Cost
      Gross
        Unrealized
        Gains
      Gross
        Unrealized
        Losses
      Estimated
        Fair
        Value(Dollars in thousands)Held-to-maturity:Bonds, notes and debentures at amortized cost:U.S. Government and federal agency obligations
      $5,742
      237
      -
      5,979Total
      $5,742
      237
      -
      5,979Available-for-sale:Corporate debt securities
      $49,830
      1,322
      -
      51,152Equity securities:Direct
      1,105
      7,262
      -
      8,367Mutual funds
      1,430
      2,008
      -
      3,438Total Equity securities
      2,535
      9,270
      -
      11,805Total
      $52,365
      10,592
      -
      62,957


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During the years ended March 31, 2004, 2003 and 2002, we
realized net gains on sales of investment securities available-for-sale of $1.8
million, $514,000 and $25,000, respectively. As of March 31, 2004, there were no
gross unrealized losses on investment securities.

|                                               | March 31, 2003        
|---------------------------------------------- | ----------------------
|                                               | Amortized
      Cost  
|                                               | (Dollars in thousands)
|Held-to-maturity:                              |                       
|Bonds, notes and debentures at amortized cost: |                       
|U.S. Government and federal agency obligations | $ 5,753               
|Total                                          | $ 5,753               
|Available-for-sale:                            |                       
|Corporate debt securities                      | $ 53,340              
|Equity securities:                             |                       
|Direct                                         | 1,950                 
|Mutual funds                                   | 38,507                
|Total Equity securities                        | 40,457                
|Total                                          | $ 93,797              

The amortized cost and estimated fair value of investment
securities held-to-maturity and available-for-sale at March 31, 2004, by
contractual maturity are presented below:

|                        | Held-to-maturity       | Available-
      for-sale       
|----------------------- | ---------------------- | --------------------------------
|Maturity                | Amortized
      Cost   | Estimated
      Fair
      Value
|                        | (Dollars in thousands)
|                        |                        |                                 
|Within one year         | -                      | -                               
|After one to five years | $ 5,742                | 5,979                           
|After five to ten years | -                      | -                               
|After ten years         | -                      | -                               
|Total                   | $ 5,742                | 5,979                           

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(3) Mortgage-Backed Securities

The amortized cost and estimated fair values of
mortgage-backed securities are summarized as follows:

March 31, 2004Amortized
        Cost
      Gross
        Unrealized
        Gains
      Gross
        Unrealized
        Losses
      Estimated
        Fair
        Value(Dollars in thousands)Available-for-sale:GNMA
      $ 9,456
      95
      (41)
      9,510FHLMC
      120,192
      707
      (165)
      120,734FNMA
      161,997
      852
      (205)
      162,644Total
      $ 291,645
      1,654
      (411)
      292,888


During the years ended March 31, 2004 and 2002, we did not
realize any net gains or losses on sales of mortgage-backed securities held as
available-for-sale. During the year ended March 31, 2003, we realized net gains
on sales of mortgage-backed securities held as available-for-sale of $829,000.

March 31, 2003Amortized
        Cost
      Gross
        Unrealized
        Gains
      Gross
        Unrealized
        Losses
      Estimated
        Fair
        Value(Dollars in thousands)Available-for-sale:GNMA
      $ 15,101
      268
      -
      15,369FHLMC
      38,860
      350
      (83)
      39,127FNMA
      160,129
      911
      (270)
      160,770Total
      $ 214,090
      1,529
      (353)
      215,266


The mortgage-backed securities have remaining maturities of
up to 30 years, with the exception of one adjustable rate security with an
unpaid principal balance of $2.9 million whose remaining maturity is 33 years.

The fair value of temporarily impaired securities, the amount
of unrealized losses and the length of time these unrealized losses existed as
of March 31, 2004 are as follows:



Less than 12 months
      12 months or more
      TotalEstimated
        Fair Value
      Gross
        Unrealized
        Losses
      Estimated
        Fair Value
      Gross
        Unrealized
        Losses
      Estimated
        Fair Value
      Gross
        Unrealized
        Losses(Dollars in thousands)Available-for-sale:GNMA
      $ 6,365
      (41)
      -
      -
      6,365
      (41)FHLMC
      22,447
      (111)
      3,347
      (54)
      25,794
      (165)FNMA
      46,782
      (124)
      18,677
      (81)
      65,482
      (205)Total
      $ 75,594
      (276)
      22,024
      (135)
      97,641
      (411)


84

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(4) Collateralized Mortgage Obligations

The amortized cost and estimated fair values of
collateralized mortgage obligations are summarized as follows:

|                    | March 31, 2003        
|------------------- | ----------------------
|                    | Amortized
      Cost  
|                    | (Dollars in thousands)
|Available-for-sale: |                       
|FHLMC               | $ 12,665              
|FNMA                | 2,902                 
|Total               | $ 15,567              

As of March 31, 2004, there were no gross unrealized losses
for collateralized mortgage obligations

(5) Loans and Leases Receivable

Loans and leases receivable are summarized as follows:

|                                             | March 31,              | 
|-------------------------------------------- | ---------------------- | 
|                                             | 2004                   | 
|                                             | (Dollars in thousands) | 
|Mortgage loans:                              |                        | 
|Residential:                                 |                        | 
|One-to-four family                           | $ 1,709,866            | 
|Multi-family                                 | 92,706                 | 
|Commercial real estate                       | 473,374                | 
|Construction and land                        | 1,077,630              | 
|Total mortgage loans                         | 3,353,576              | 
|                                             |                        | 
|Commercial loans and leases                  | 158,391                | 
|Consumer                                     | 177,880                | 
|Total loans and leases                       | 3,689,847              | 
|Less:                                        |                        | 
|Undisbursed portion of construction loans    | (504,868)              | 
|Net discount on loans and leases             | (182)                  | 
|Net deferred loan origination fees (costs)   | (4,660)                | 
|Allowance for loan and lease losses (Note 7) | (30,819)               | 
|Total loans and leases receivable, net       | $ 3,149,318            | 
|Weighted average yield                       | 5.97%                  | 

85

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Loans receivable from our officers and directors were as
follows:

|                  | March 31,              | 
|----------------- | ---------------------- | 
|                  | 2004                   | 
|                  | (Dollars in thousands) | 
|Beginning balance | $ 2,250                | 
|Additions         | 619                    | 
|Repayments        | (211)                  | 
|Ending balance    | $ 2,658                | 

The following table presents impaired loans and leases with
specific allowances and the amount of such allowances and impaired loans and
leases without specific allowances.

|                   | March 31, 2004                                       
|------------------ | -----------------------------------------------------
|                   | Loans and leases with
      Specific
      Allowances
|                   | (Dollars in thousands)                               
|Carrying value     | $ 13,345                                             
|Specific allowance | 4,299                                                
|Net balance        | $ 9,046                                              
|                   |                                                      



|                   | March 31, 2003                                 
|------------------ | -----------------------------------------------
|                   | Loans and Leases with Specific
      Allowances
|                   | (Dollars in thousands)                         
|Carrying value     | $ 20,789                                       
|Specific allowance | 5,181                                          
|Net balance        | $ 15,608                                       

The average recorded investment in impaired loans and leases
totaled $28.4 million in fiscal 2004 and $34.6 million in fiscal 2003. During
fiscal 2004, total interest recognized on the impaired loan portfolio was
$920,000 compared to $1.3 million in fiscal 2003 and $1.9 million in fiscal
2002. There was no income recorded utilizing the cash basis method of accounting
for fiscal 2004, 2003 and 2002.

The aggregate amount of non-accrual loans and leases
receivable that are contractually past due 90 days or more as to principal or
interest were $13.6 million and $18.6 million at March 31, 2004 and 2003,
respectively. The aggregate amount of loans and leases that were contractually
past due 90 days or more as to principal or interest but still accruing were
zero at March 31, 2004 and 2003, respectively.

Interest due on non-accrual loans, that was excluded from
interest income, was approximately $939,000 for fiscal 2004, $1.0 million for
fiscal 2003 and $330,000 for fiscal 2002.

86

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(6) Assets Acquired through Foreclosure

Assets acquired through foreclosure is summarized as follows:

|                                       | March 31,             
|-------------------------------------- | ----------------------
|                                       | 2004                  
|                                       | (Dollars in thousands)
|                                       |                       
|Assets acquired in settlement of loans | $ 889                 
|Allowance for losses (Note 7)          | (206)                 
|Total                                  | $ 683                 

(Gain) loss from foreclosed asset operations, net is
summarized as follows:



Year Ended March 31,2004
      
      2003
      
      2002(Dollars in thousands)(Gain) loss on sale of foreclosed assets, net
      $ (66)
      
      (256)
      
      (280)Foreclosed asset (income) expense
      199
      
      66
      
      178Provision for losses on foreclosed assets
      206
      
      -
      
      -Total
      $ 339
      
      (190)
      
      (102)


(7) Allowances for Losses on Loans and Leases Receivable and
Foreclosed Assets

Activity in the allowances for losses on loans, leases and
foreclosed assets is summarized as follows:

Year Ended March 31,2004
      
      2003
      
      2002(Dollars in thousands)Loans and leases receivable:Beginning balance
      $ 31,121
      
      31,359
      
      31,022Provision
      2,725
      
      4,840
      
      5,000Charge-offs
      (4,267)
      
      (5,739)
      
      (4,771)Recoveries
      1,240
      
      661
      
      108Ending balance
      30,819
      
      31,121
      
      31,359Foreclosed assets:Beginning balance
      -
      
      -
      
      49Provision
      206
      
      -
      
      -Charge-offs
      -
      
      -
      
      (49)Ending balance
      206
      
      -
      
      -Total loans and leases receivable and foreclosed
        assets:Beginning balance
      31,121
      
      31,359
      
      31,071Provision
      2,931
      
      4,840
      
      5,000Charge-offs
      (4,267)
      
      (5,739)
      
      (4,820)Recoveries
      1,240
      
      661
      
      108Ending balance
      $ 31,025
      
      31,121
      
      31,359


87

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(8) Accrued Interest Receivable

Accrued interest receivable is summarized as follows:

|                                    | March 31,             
|----------------------------------- | ----------------------
|                                    | 2004                  
|                                    | (Dollars in thousands)
|Investment securities               | $ 600                 
|Mortgage-backed securities          | 1,417                 
|Collateralized mortgage obligations | -                     
|Loans and leases receivable         | 12,735                
|Total                               | $ 14,752              

(9) Property and Equipment, net

Property and equipment, net is summarized as follows:

|                                          | March 31,              |  |         
|----------------------------------------- | ---------------------- |  | --------
|                                          | 2004                   |  | 2003    
|                                          | (Dollars in thousands)
|Land                                      | $ 7,608                |  | 5,945   
|Buildings and improvements                | 24,436                 |  | 23,038  
|Leasehold improvements                    | 5,059                  |  | 2,343   
|Furniture, fixtures and equipment         | 31,723                 |  | 29,896  
|Automobiles                               | 155                    |  | 156     
|Construction in progress                  | 1,178                  |  | 1,855   
|                                          | 70,159                 |  | 63,233  
|Accumulated depreciation and amortization | (42,729)               |  | (39,908)
|Total                                     | $ 27,430               |  | 23,325  

(a) Amortized over the shorter of the life of the
  improvement or the length of the lease.

88

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(10) Mortgage Servicing Rights

Following is a table that summarizes the activity in mortgage servicing
rights.

|                                                    | 2004                   |  | 2003    |  | 2002    | 
|--------------------------------------------------- | ---------------------- |  | ------- |  | ------- | 
|                                                    | (Dollars in thousands) | 
|Mortgage servicing rights, net, beginning of period | $ 357                  |  | 518     |  | 1,091   | 
|Additions                                           | 160                    |  | 64      |  | 25      | 
|Amortization                                        | (58)                   |  | (74)    |  | (175)   | 
|Impairment write-down                               | (126)                  |  | (151)   |  | (423)   | 
|Mortgage servicing rights, net, end of period       | $ 333                  |  | 357     |  | 518     | 
|                                                    |                        |  |         |  |         | 
|Estimated fair value                                | $ 333                  |  | 357     |  | 518     | 
|                                                    |                        |  |         |  |         | 
|At period end                                       |                        |  |         |  |         | 
|Mortgage loans serviced for others                  | $119,609               |  | 141,883 |  | 189,656 | 
|Weighted average interest rate on loans serviced    | 4.98%                  |  | 5.46    |  | 5.58    | 
|                                                    |                        |  |         |  |         | 

Mortgage servicing rights are included in prepaid expenses and other assets
in the accompanying consolidated balance sheets.

Mortgage servicing rights are periodically reviewed for
impairment based on their fair value. The Company determines fair value based on
the present value of future expected cash flows using management's best
estimates of key assumptions including prepayment speeds and discount rates
commensurate with the risks involved. Information supporting the assumptions is
obtained from reputable market sources. Per SFAS 140 paragraph 63(g) the Company
stratifies servicing assets based on date of origination and financial asset
type. The financial asset types currently being serviced are either government
guaranteed or conventional.

(11) Deposits

Deposits and their respective weighted average interest rates
are summarized as follows:

|                                             | March 31,                        
|-------------------------------------------- | ---------------------------------
|                                             | 2004                             
|                                             | Weighted
      Average
      Rate
|                                             | (Dollars in thousands)           
|                                             |                                  
|Regular passbook                             | 0.30%                            
|NOW and other demand deposit accounts        | 0.56                             
|Fixed and variable-rate certificate accounts | 2.43                             
|Money market checking and savings            | 1.27                             
|Total                                        | 1.40%                            

89

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Certificate accounts maturing subsequent to March 31, 2004,
are summarized as follows:

|Year Ending March 31, | Amount                
|--------------------- | ----------------------
|                      | (Dollars in thousands)
|                      |                       
|2005                  | $642,505              
|2006                  | 95,398                
|2007                  | 52,172                
|2008                  | 81,571                
|2009                  | 22,261                
|Thereafter            | 206                   
|Total                 | $894,113              

Interest expense on deposits is summarized as follows:

|                                      | Year Ended March 31,  
|------------------------------------- | ----------------------
|                                      | 2004                  
|                                      | (Dollars in thousands)
|Regular passbook                      | $ 523                 
|NOW and other demand deposit accounts | 6,177                 
|Money market checking and savings     | 7,229                 
|Certificates of deposit               | 22,841                
|Total                                 | $ 36,770              

At March 31, 2004 and 2003, we had accrued interest payable
on deposits of $835,000 and $983,000, respectively, which is included in other
liabilities in our accompanying consolidated balance sheets.

At March 31, 2004 and 2003, $39.3 million and $32.2 million
of public funds on deposit were secured by loans receivable, mortgage-backed
securities, investment securities and collateralized mortgage obligations with
aggregate carrying values of $60.2 million and $81.3 million, respectively.

The aggregate amount of certificates of deposit with balances
of $100,000 or more were $401.3 million and $385.5 million at March 31, 2004 and
2003, respectively. For deposit accounts with balances in excess of $100,000,
that portion in excess of $100,000 may not be federally insured.

90

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(12) FHLB Advances and Other Borrowings

We utilize FHLB advances and reverse repurchase agreements as
sources of funds. The advances and repurchase agreements are collateralizedby
mortgage-backed securities, investment securities, collateralized mortgage
obligations and/or loans. We only transact business with the FHLB or brokerage
firms that are recognized as primary dealers in U.S. government securities. FHLB
advances and reverse repurchase agreements were $845.0 million and $4.0 million
and $481.0 million and $4.4 million at March 31, 2004 and March 31, 2003,
respectively. (See Note 13)

|                                                                        | March 31,             
|----------------------------------------------------------------------- | ----------------------
|                                                                        | 2004                  
|                                                                        | (Dollars in thousands)
|FHLB advances:                                                          |                       
|Average amount outstanding during the year                              | $ 562,885             
|Maximum amount outstanding at any month end                             | 845,000               
|Amount outstanding at year end (1)                                      | 845,000               
|Average interest rate:                                                  |                       
|For the year                                                            | 2.22                  
|At year end                                                             | 1.72                  
|                                                                        |                       
|Reverse repurchase agreements:                                          |                       
|Average amount outstanding during the year                              | $ 1,303               
|Maximum amount outstanding at any month end                             | 4,385                 
|Amount outstanding at year end                                          | 4,000                 
|Average interest rate:                                                  |                       
|For the year                                                            | 1.94                  
|At year end                                                             | 1.67                  
|                                                                        |                       
|Promissory Note (2):                                                    |                       
|Average amount outstanding during the year                              | $ 149                 
|Maximum amount outstanding at
      any
      month-end during the year | 2,600                 
|Amount outstanding at year end                                          | 2,600                 
|Average interest rate:                                                  |                       
|For the year                                                            | 7.00                  
|At year end                                                             | 7.00                  





Included in the balance of FHLB advances outstanding at March 31, 2004 and
  2003, is a putable borrowing of $15.0 million with a final maturity date of
  February 12, 2008. The advance is subject to quarterly puts from May 12, 2003
  through the final maturity date.

The promissory note was entered into by our subsidiary, Diversified Builder
  Services, Inc. to finance its builder service operations. The note was repaid
  from operating funds on May 13, 2004.

91

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FHLB advances have the following final maturities at March
31, 2004.

|           | Amount                
|---------- | ----------------------
|           | (Dollars in thousands)
|2005       | $ 575,000             
|2006       | 245,000               
|2007       | 10,000                
|thereafter | 15,000                
|Total      | $ 845,000             

Interest expense on borrowings is summarized as follows:

Year ended March 31,2004
      2003
      2002(Dollars in thousands)FHLB advances
      $ 12,460
      19,395
      29,907Reverse repurchase agreements
      36
      8
      -Other interest expense (1)
      63
      53
      (1,298)Total
      $ 12,559
      19,456
      28,609(1) Fiscal 2002, includes $1.3 million recovery of interest expense
        resulting from favorable determination of a disputed state income tax
        matter.


(13) Lines of Credit

At March 31, 2004 and 2003, we had maximum borrowing capacity
from the FHLB of San Francisco in the amount of $1.37 billion and $1.21 billion,
respectively. Based upon pledged collateral in place, we had available borrowing
capacity of $418.2 million and $195.8 million as of March 31, 2004 and 2003,
respectively. Pledged collateral consists of certain loans receivable,
mortgage-backed securities, investment securities and collateralized mortgage
obligations aggregating $1.26 billion and $751.2 million as of March 31, 2004
and 2003, respectively and our required investment in one hundred dollar par
value capital stock of the FHLB of San Francisco. At March 31, 2004 and 2003,
the cost basis of this FHLB capital stock was $42.5 million and $26.6 million,
respectively.

(14) Employee Benefit PlansPension Plan

We maintain a defined benefit Pension Plan ("Pension
Plan") that prior to being frozen as of December 31, 1995, covered our
employees. The benefits are based on each employee's years of service and final
average earnings determined over the five-year period prior to the benefit
determination date. Employees become fully vested upon completion of five years
of qualifying service. We also maintain a Retirement Plan for all directors and
a Supplemental Plan for all senior officers. Effective December 31, 1995, we
elected to freeze the Pension Plan, Directors' Retirement and Supplemental Plan.
Accordingly, no new accruals for future years of service have occurred since
December 31, 1995.
                                                                           
92

---

The following table sets forth the plans' change in benefit
obligation and change in plan assets at the plans' most recent measurement
dates.

Year ended March 31,2004
      
      2003PensionPlan
      
      Directors'
        Retirement andSupplemental
        Plans
      
      Pension
        Plan
      
      Directors'
        Retirement andSupplemental
        Plans(Dollars in thousands)Change in benefit obligationProjected benefit obligation,
           beginning of year
      $ 22,302
      
      2,705
      
      21,196
      
      2,675Interest cost
      1,296
      
      155
      
      1,335
      
      168Benefits paid
      (1,403)
      
      (233)
      
      (1,332)
      
      (207)Actuarial loss
      1,670
      
      38
      
      1,103
      
      69Projected benefit obligation,
           end of year
      $ 23,865
      
      2,665
      
      22,302
      
      2,705Change in plan assetsPlan assets, beginning of year
      $ 18,356
      
      -
      
      19,527
      
      -Actual return on plan assets
      2,229
      
      -
      
      (939)
      
      -Employer contribution
      1,900
      
      233
      
      1,100
      
      207Benefits paid
      (1,403)
      
      (233)
      
      (1,332)
      
      (207)Plan assets, end of year
      $21,082
      
      -
      
      18,356
      
      -Funded status
      $ (2,783)
      
      (2,665)
      
      (3,946)
      
      (2,705)Unrecognized transition obligation
      -
      
      -
      
      -
      
      -Unrecognized prior service cost
      -
      
      -
      
      -
      
      -Unrecognized loss
      8,135
      
      544
      
      8,091
      
      553Prepaid (accrued) benefit cost
      $ 5,352
      
      (2,121)
      
      4,145
      
      (2,152)


Net periodic pension costs for fiscal 2004, 2003 and 2002
included the following components:

Year ended March 31,2004
      2003
      2002Pension
        Plan
      
      Directors'
        Retirement
        and Supple-
        mental Plans
      Pension
        Plan
      
      Directors'
        Retirement
        and Supple-
        mental Plans
      Pension
        Plan
      
      Directors'
        Retirement
        and Supple-
        mental Plans(Dollars in thousandsComponents of net periodic benefit
        costInterest cost
      $ 1,296
      
      155
      1,335
      
      168
      1,350
      
      183Expected return on plan assets
      (1,192)
      
      -
      (1,274)
      
      -
      (1,678)
      
      -Amortization of unrecognized
           transition obligation
      -
      
      -
      -
      
      -
      -
      
      33Amortization of unrecognized
           prior service cost
      -
      
      -
      -
      
      -
      11
      
      -Amortization of unrecognized loss
      589
      
      47
      285
      
      42
      -
      
      38Net periodic pension (income) expense
      $693
      
      202
      346
      
      210
      (317)
      
      254


93

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The assumptions used in determining the actuarial present
value of the accumulated benefit obligation and the expected return on plan
assets are as follows:

Year ended March 31,2004
      2003Pension
        Plan
      
      Directors'
        Retirement
        and Supple-
        mental Plans
      Pension
        Plan
      
      Directors'
        Retirement
        and Supple-
        mental PlansWeighted-average assumptionsDiscount rate
      5.75%
      
      5.75
      6.00%
      
      6.00Expected long-term rate of
        return on plan assets
      6.50
      
      -
      6.75
      
      -


Capital Accumulation PlanIn 1985, we established a capital accumulation plan (the "401(k)
Plan"), which is available to all employees. Under the 401(k) Plan, we
contribute funds in an amount equal to 100% of the first three percent and 50%
of the fourth and fifth percent (for a total maximum possible contribution of
four percent) of employee contributions. In fiscal 2004, 2003 and 2002, the
total 401(k) Plan expense was $782,000, $571,000 and $575,000, respectively.

Deferred Compensation Plans

We provide a non-qualified Directors' Deferred Compensation
Plan and a non-qualified Employees' Deferred Compensation Plan that offer
directors and senior officers the opportunity to defer compensation through a
reduction in salary and then receipt of a benefit upon retirement. The benefit
from the Directors' Deferred Compensation Plan becomes payable no later than the
first day of the month following the date the participant attains age 70.5. The
benefit from the Employees' Deferred Compensation Plan is payable at normal
retirement (age 65) or actual retirement but no later than age 70.5, or
alternatively upon termination if termination occurs earlier due to disability.
The primary form of benefit is 120 monthly installment payments of the account
balance. Such balance shall equal the amount of the deferrals and interest
thereon. Other actuarially equivalent payout schedules, including a lump sum
payout, are available with certain restrictions. Deferrals are currently
credited with an interest rate equal to the highest interest rate paid on a
designated date to our depositors or, at the Participants' election, investment
earnings or losses equivalent to that of the our common stock. At March 31,
2004, the $221,000 liability for these plans is included in accrued expenses and
other liabilities.Post retirement medical benefits

We currently provide post retirement medical coverage to
eligible employees. At March 31, 2004 and 2003, the expected cost associated
with this coverage was $5,000 and $21,000, respectively.

Employee Stock Ownership Plan

As part of the reorganization to the stock form of ownership,
the ESOP purchased 2,221,800 shares of our common stock at approximately $7.14
per share (adjusted for the 40 percent stock split effected in the form of a
stock dividend paid on September 5, 2003), or $15.9 million, which was funded by
a loan from the Bancorp.
                                                                               
94

---

The loan is being repaid from the Bank's discretionary
contributions over a period not to exceed 10 years. Dividends on unallocated
shares held by the ESOP have been used to accelerate employer contributions. The
loan is secured by the common stock owned by the ESOP. Shares purchased with the
loan proceeds are held in a suspense account for allocation among participants
as the loan is repaid. Shares held by the ESOP are treated as outstanding shares
for purposes of determining both basic and diluted EPS. ESOP shares are
allocated to the eligible participants based on compensation as described in the
ESOP plan. For the years ended March 31, 2004, 2003 and 2002, ESOP shares of
258,259, 248,987 and 247,674, respectively were allocated to the participants.
At March 31, 2004 and 2003, the unearned balance of the ESOP shares is included
in unearned stock-based compensation as a reduction of total stockholders'
equity in the accompanying consolidated financial statements. The value of ESOP
shares committed to be released is included in compensation expense based upon
the fair value of the shares on the dates they were committed. At March 31,
2004, the fair value of the unearned ESOP shares is $11.7 million. Compensation
expense associated with the ESOP was $8.5 million, $5.9 million and $4.3 million
for the years ended March 31, 2004, 2003 and 2002, respectively. At March 31,
2004 the allocated and unallocated shares in the ESOP totaled 1,915,096 and
306,704, respectively. At March 31, 2003 the allocated and unallocated shares in
the ESOP totaled 1,656,837 and 564,963, respectively.1996 and 1999 Incentive Plans

During October, 1996, our stockholders approved the PFF
Bancorp, Inc. 1996 Incentive Plan (the "1996 Plan"). During September,
1999, our stockholders approved the PFF Bancorp, Inc. 1999 Incentive Plan (the
"1999 Plan"). The 1996 Plan authorized the granting of options to
purchase our common stock, option related awards, and grants of common stock
(collectively "Awards"). The 1999 Plan authorized the granting of
options to purchase our common stock. Concurrent with the approval of the 1996
Plan, we adopted SFAS 123, "Accounting for Stock-Based Compensation,"
which permits a company to account for stock options granted under either the
fair-value-based or the intrinsic-value-based (as described in APB 25) method of
accounting. If a company elects to account for options granted under the
intrinsic-value-based method, it must make certain disclosures with respect
thereto. We have elected to account for stock options granted under the
intrinsic-value-based method of accounting. See "Note 1 - Stock Option
Plan."

The maximum number of shares reserved for Awards under the
1996 Plan is 3,888,150 shares, with 2,777,250 shares reserved for purchase
pursuant to options and 1,110,900 shares reserved for grants of our common
stock. The maximum number of shares reserved under the 1999 Plan is 875,000 all
of which are reserved for purchase pursuant to options. The exercise price of
all options under both Plans must be 100% of the fair value of our common stock
at the time of grant and the term of the options may not exceed 10 years. Of the
1,110,900 shares reserved for stock grants, 1,078,759 shares with a fair value
of $9.9 million were granted to directors and executive officers during the year
ended March 31, 1997. Of the 1,078,759 shares, 745,500 shares represented grants
to employees with the remaining shares granted to directors. An additional
21,000 shares with a fair value of $214,000 at the time of grant, were granted
to a newly promoted executive officer during the year ended March 31, 1998.
During the year ended March 31, 2003 the remaining 11,141 shares, with a fair
value of $258,000, were granted to executive officers. Stock grants vested in
five equal annual installments with the exception of the 11,141 shares, which
vested in one installment on March 27, 2002. With respect to shares of our
common stock granted to executive officers, the 1996 Plan provided that the
vesting of 75% of the third, fourth and fifth annual installments was subject to
the attainment of certain performance goals. Those goals were met. There was no
compensation expense associated with stock grants recognized for the years ended
March 31, 2004 and 2003. Compensation expense associated with stock grants of
$1.4 million was recognized for the year ended March 31, 2002.
                                                                               
95

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The table below reflects, for the periods indicated, the activity in our
  stock options issued under the 1996 and 1999 Plans.





|                                         | For the Year Ended March 31, | 
|---------------------------------------- | ---------------------------- | 
|                                         | 2004                         | 
|                                         |                              | 
|Balance at beginning of period           | $ 1,844,453                  | 
|Granted                                  | 18,717                       | 
|Canceled or expired                      | (4,272)                      | 
|Exercised                                | (452,437)                    | 
|Balance at end of period                 | 1,406,461                    | 
|Options exercisable                      | 1,341,992                    | 
|Options available for grant              | 41,427                       | 
|                                         |                              | 
|Weighted average option price per share: |                              | 
|Outstanding                              | $ 14.24                      | 
|Exercisable                              | 13.77                        | 
|Exercised                                | 11.56                        | 
|Granted                                  | 34.69                        | 
|Expired                                  | 17.35                        | 

The following table summarizes information with respect to
  our stock options outstanding as of March 31, 2004.



Options Outstanding
      Options ExercisableRange of
        Exercise
        Prices
      Number
        Outstanding
        At
        March 31, 2004
      Weighted-average
        Remaining
        Contractual Life
        (Years)
      Weighted-
        average
        Exercise Price
      Number
        Outstanding
        at March 31, 2004
      Weighted-
        Average
        Exercise Price$9 to 10
      661,081
      2.6
      $9.11
      661,081
      $9.1110 to 12
      74,668
      3.9
      10.94
      68,553
      10.9512 to 14
      6,676
      4.4
      13.14
      6,304
      13.1514 to 16
      5,172
      4.9
      15.30
      4,440
      15.2416 to 18
      25,382
      7.6
      17.49
      12,705
      17.4918 to 20
      559,661
      7.4
      19.04
      559,661
      19.0420 to 22
      3,098
      7.9
      20.72
      3,098
      20.7222 to 24
      53,406
      8.6
      23.26
      25,400
      23.2724 to 40
      17,317
      9.2
      35.31
      750
      37.431,406,461
      
      
      1,341,992


96

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(15) Income Taxes

Income taxes (benefit) is summarized as follows:

|                          | Current                | Deferred |  | Total 
|------------------------- | ---------------------- | -------- |  | ------
|                          | (Dollars in thousands)
|Year Ended March 31, 2004 |                        |          |  |       
|Federal                   | $ 23,110               | 1,770    |  | 24,880
|State                     | 6,474                  | 764      |  | 7,238 
|Total                     | $ 29,584               | 2,534    |  | 32,118
|                          |                        |          |  |       
|Year Ended March 31, 2003 |                        |          |  |       
|Federal                   | $ 17,992               | 2,320    |  | 20,312
|State                     | 5,169                  | 8        |  | 5,177 
|Total                     | $ 23,161               | 2,328    |  | 25,489
|                          |                        |          |  |       
|Year Ended March 31, 2002 |                        |          |  |       
|Federal                   | $ 20,888               | (1,215)  |  | 19,673
|State                     | 6,548                  | (460)    |  | 6,088 
|Total                     | $ 27,436               | (1,675)  |  | 25,761

For the years ended March 31, 2004, 2003 and 2002, our
current Federal tax liabilities were reduced by $3.7 million, $4.2 million and
$1.7 million, respectively due to the exercise of non-qualified stock options by
employees. Under the intrinsic value method, these exercises do not result in a
charge to compensation expense but do provide us with a tax deduction. The
associated tax benefits are recorded in our consolidated financial statements as
increases to additional paid in capital.

A reconciliation of total income taxes and the amount
computed by applying the applicable Federal income tax rate to earnings before
income taxes follows:

|                                                           | Year Ended March 31    | 
|---------------------------------------------------------- | ---------------------- | 
|                                                           | 2004                   | 
|                                                           | Amount                 | 
|                                                           | (Dollars in thousands) | 
|Computed "expected" taxes                                  | $25,574                | 
|Increase in taxes Resulting from:                          |                        | 
|California franchise tax, net
      of Federal tax benefit | 4,704                  | 
|Fair value of ESOP shares
      over deduction             | 2,199                  | 
|Other Items                                                | (359)                  | 
|Total                                                      | $32,118                | 

97

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The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities and
the related income taxes (benefits) are presented below:

|                                                              | March 31,
      2004   |  | Taxes
      (Benefit) |  | March 31, 2003 |  | Taxes
      (Benefit) |  | March 31, 2002 | 
|------------------------------------------------------------- | ---------------------- |  | --------------------- |  | -------------- |  | --------------------- |  | -------------- | 
|                                                              | (Dollars in thousands) | 
|Deferred tax assets:                                          |                        |  |                       |  |                |  |                       |  |                | 
|Allowance for loan and lease losses                           | $ (12,164)             |  | (460)                 |  | (11,704)       |  | 620                   |  | (12,324)       | 
|California franchise tax                                      | (3,474)                |  | (689)                 |  | (2,785)        |  | 371                   |  | (3,156)        | 
|Accrued expenses                                              | (1,721)                |  | (692)                 |  | (1,029)        |  | (459)                 |  | (570)          | 
|Accumulated depreciation                                      | (1,107)                |  | (243)                 |  | (864)          |  | (164)                 |  | (700)          | 
|Core deposit intangibles amortization                         | 3                      |  | 118                   |  | (115)          |  | 128                   |  | (243)          | 
|Non-accrual interest                                          | (545)                  |  | (126)                 |  | (419)          |  | (71)                  |  | (348)          | 
|Unrealized gains (loss) on securities available-for-sale, net | 4,522                  |  | 4,035                 |  | 487            |  | 1,398                 |  | (911)          | 
|Minimum pension liability                                     | (3,076)                |  | (22)                  |  | (3,054)        |  | (3,054)               |  | -              | 
|Difference in bases of investments                            | (1,132)                |  | (210)                 |  | (922)          |  | (173)                 |  | (749)          | 
|Other                                                         | (324)                  |  | 21                    |  | (345)          |  | 140                   |  | (485)          | 
|                                                              | (19,018)               |  | 1,732                 |  | (20,750)       |  | (1,264)               |  | (19,486)       | 
|Deferred tax liabilities:                                     |                        |  |                       |  |                |  |                       |  |                | 
|Deferred loan origination fees                                | 26,917                 |  | 4,818                 |  | 22,099         |  | 3,181                 |  | 18,918         | 
|Unredeemed FHLB stock dividends                               | 5,469                  |  | 260                   |  | 5,209          |  | (1,207)               |  | 6,416          | 
|Pension plan liability                                        | 574                    |  | (256)                 |  | 830            |  | 2                     |  | 828            | 
|Customer early withdrawal
      penalty depreciation          | -                      |  | -                     |  | -              |  | (23)                  |  | 23             | 
|Accrued interest on pre-1985 loans                            | 70                     |  | (2)                   |  | 72             |  | (5)                   |  | 77             | 
|Excess servicing rights amortization                          | 56                     |  | (5)                   |  | 61             |  | (12)                  |  | 73             | 
|                                                              | 33,086                 |  | 4,815                 |  | 28,271         |  | 1,936                 |  | 26,335         | 
|Net deferred tax liability                                    | $ 14,068               |  | 6,547                 |  | 7,521          |  | 672                   |  | 6,849          | 

In determining the possible future realization of deferred
tax assets, the future taxable income from the following sources is taken into
account: (a) the reversal of taxable temporary differences, (b) future
operations exclusive of reversing temporary differences and (c) tax planning
strategies that, if necessary, would be implemented to accelerate taxable income
into years in which net operating losses might otherwise expire.

Based on our current and historical pretax earnings, adjusted
for significant items, we believe it is more likely than not that we will
realize the benefit of the deferred tax asset at March 31, 2004. We believe the
existing net deductible temporary differences will reverse during periods in
which we generate net taxable income. However, there can be no assurance that we
will generate any earnings or any specific level of continuing earnings in
future years.

On August 20, 1996, the President signed the Small Business
Job Protection Act (the "Act") into law. The Act repealed the reserve
method of accounting for bad debts for savings institutions effective for
taxable years beginning after 1995. Accordingly, we are required to use the
specific charge-off method on our 1996 and subsequent Federal income tax
returns. Prior to 1996, savings institutions that met certain definitional tests
and other conditions prescribed by the Internal Revenue Code were allowed to
deduct, within limitations, a bad debt deduction. The deduction percentage was
8% for the year ended March 31, 1996. Alternately, a qualified savings
institution could compute its bad debt deduction based upon actual loan loss
experience (the experience method). Our retained earnings at March 31, 2004
includes approximately $25.3 million for which
                                                                               
98

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no deferred income tax liability has been recognized as
a result of these cumulative statutory bad debt deductions.

(16) Stockholders' Equity

We are subject to the provisions of the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), which was
signed into law on December 19, 1991. Regulations implementing the prompt
corrective action provisions of FDICIA became effective on December 19, 1992. In
addition to the prompt corrective action requirements, FDICIA includes
significant changes to the legal and regulatory environment for all insured
depository institutions, including reductions in insurance coverage for certain
kinds of deposits, increased supervision by the federal regulatory agencies,
increased reporting requirements for insured institutions, and new regulations
concerning internal controls, accounting and operations.Regulatory Capital

To be considered "well capitalized," a savings
institution must generally have a core capital ratio of at least 5%, a Tier 1
risk-based capital ratio of at least 6% and a total risk-based capital ratio of
at least 10%. An institution is deemed to be "critically
undercapitalized" if it has a tangible equity ratio of 2% or less. We
believe that at March 31, 2004, the Bank met the definition of "well
capitalized."

The following is a reconciliation of the Bank's GAAP capital
to regulatory capital as of March 31, 2004:

PFF Bank & Trust's
        Regulatory Capital RequirementTangible
        Capital
      
      Core
        Capital
      
      Risk-based
        Capital(Dollars in thousands)Capital of the Bank presented on a GAAP basis
      $ 279,739
      
      279,739
      
      279,739Adjustments to GAAP capital to
        arrive at regulatory capital:Unrealized losses on
        securities
        available-for-sale, net
      (1,066)
      
      (1,066)
      
      (1,066)Goodwill and other intangible assets
      (1,267)
      
      (1,267)
      
      (1,267)General loan valuation allowance (1)
      -
      
      -
      
      25,856Disallowed Assets
      (33)
      
      (33)
      
      (33)Regulatory capital
      277,373
      
      277,373
      
      303,229Regulatory capital requirement
      54,443
      
      145,182
      
      216,321Amount by which regulatory capital
        exceeds requirement
      $ 222,930
      
      132,191
      
      86,908


(1) Limited to 1.25% of risk-weighted assets.

99

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The following table summarizes the Bank's actual capital and
required capital under prompt corrective action provisions of FDICIA as of March
31, 2004 and 2003.

Actual
      For Capital
        Adequacy Purposes
      To be Well
        Capitalized Under
        Prompt Corrective
        Action ProvisionsMarch 31, 2004
      Amount
      Ratio
      Amount
      Ratio
      Amount
      Ratio(Dollars in thousands)Total capital (to risk-weighted assets)
      $303,229
      11.21%
      $216,321
      >8.00%
      $270,401
      >10.00%Tier 1 (Core) capital (to adjusted total assets)
      277,373
      7.64
      145,182
      >4.00
      181,478
      >5.00Tier 1 (Core) capital (to risk-weighted assets)
      277,373
      10.26
      -
      - (1)
      162,240
      >6.00Tangible capital (to tangible assets)
      277,373
      7.64
      54,443
      >1.50
      -
      - (1)




Actual
      For Capital
        Adequacy Purposes
      To be Well
        Capitalized Under
        Prompt Corrective
        Action ProvisionsMarch 31, 2003
      Amount
      Ratio
      Amount
      Ratio
      Amount
      Ratio(Dollars in thousands)Total capital (to risk-weighted assets)
      $281,680
      11.85%
      $190,206
      >8.00%
      $237,757
      >10.00%Tier 1 (Core) capital (to adjusted total assets)
      256,148
      8.17
      125,376
      >4.00
      156,719
      >5.00Tier 1 (Core) capital (to risk-weighted assets)
      256,148
      10.77
      -
      - (1)
      142,654
      >6.00Tangible capital (to tangible assets)
      256,148
      8.17
      47,016
      >1.50
      -
      - (1)


(1) Ratio is not specified under capital regulations.

At periodic intervals, both the OTS and the FDIC routinely
examine the Bank's financial statements as part of their legally prescribed
oversight of the thrift industry. Based on these examinations, the regulators
can direct that the Bank's financial statements be adjusted in accordance with
their findings.Treasury StockDuring fiscal 2004 we retired 12,856,574 shares of our common stock that
had been repurchased in prior periods and held as treasury stock. During fiscal
2004, our Board of Directors declared a 40 percent stock split effected in the
form of a stock dividend paid on September 5, 2003, to shareholders of record on
August 15, 2003.

The payment of dividends by the Bank to the Bancorp is
subject to OTS regulations. "Safe-harbor" amounts of capital
distributions can be made after providing notice to the OTS, but without needing
prior approval. For institutions, such as the Bank, that meet the definition of
"well capitalized" and would continue to do so following the proposed
capital distribution, the safe harbor amount is the institutions calendar
year-to-date net income plus retained net income for the preceding two years
less any previous capital distributions declared for those periods. Institutions
can distribute amounts in excess of the safe-harbor amounts with the prior
approval
                                                                           
100

---

of the OTS. During fiscal 2004, the Bank paid cash dividends
to the Bancorp of $28.6 million in order to fund general corporate needs, cash
dividends to shareholders and share repurchases.

On March 26, 2003, our Board of Directors adopted a share
repurchase program of 840,000 shares of our common stock. The shares are being
purchased in open market transactions based on market conditions. The timing,
volume and price of purchases are contingent upon our discretion and our overall
financial condition. During fiscal 2004, we repurchased 302,800 shares at a
weighted average price of $34.91 per share resulting in 511,580 shares remaining
under the current share repurchase program.

Common stock repurchases were as follows:

Common Stock RepurchasedTotal Number of shares (1)
      Average
        Price
        Per Share
      Shares Remaining
        Under Repurchase Program (2)Authorized share repurchase program-March 26, 2003
      -
      -
      840,000March 2003
      25,620
      $22.96
      814,380April 2003
      4,900
      23.71
      809,480May 2003
      18,200
      24.40
      791,280February 2004
      110,900
      35.78
      680,380March 2004
      168,800
      35.80
      511,580


(1)  During fiscal 2004 and 2003 , we repurchased 302,800 and 25,620 of
our common shares, respectively, totaling 328,420 common shares under the
840,000 repurchase program adopted by our Board of Directors on March 26, 2003.

---

(17) Other Non-Interest Expense

Other non-interest expense amounts are summarized as follows:

|                                 | Year Ended March 31,  
|-------------------------------- | ----------------------
|                                 | 2004                  
|                                 | (Dollars in thousands)
|                                 |                       
|SAIF insurance premiums          | $ 852                 
|Office supplies and expense      | 3,178                 
|Savings and NOW account expenses | 1,954                 
|Loan expenses                    | 1,155                 
|Other                            | 4,851                 
|Total                            | $ 11,990              

(18) Commitments and Contingencies

We have various outstanding commitments and contingent
liabilities in the ordinary course of business that are not reflected in the
accompanying consolidated financial statements as follows:Litigation

We have been named as defendants in various lawsuits arising
in the normal course of business. The outcome of these lawsuits cannot be
predicted, but we intend to vigorously defend the actions and are of the opinion
that the lawsuits will not have a material effect on our consolidated financial
statements.Leases

We lease various office facilities under noncancelable
operating leases that expire through 2022. Rent expense under operating leases
included in occupancy and equipment expense for the years ended March 31, 2004,
2003 and 2002, was $1.1 million, $732,000, and $759,000, respectively. A summary
of future minimum lease payments under these agreements at March 31, 2004
follows.

|                      | Amount                
|--------------------- | ----------------------
|                      | (Dollars in thousands)
|Year ending March 31, |                       
|2005                  | $ 1,118               
|2006                  | 888                   
|2007                  | 740                   
|2008                  | 740                   
|2009                  | 622                   
|Thereafter            | 3,559                 
|Total                 | $ 7,667               

102

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(19) Off-Balance Sheet Risk
Concentrations of Operations and Assets

Our operations are primarily located within Southern
California. At March 31, 2004 and 2003, approximately 83% and 87%, respectively,
of our mortgage loans were secured by real estate in Southern California. In
addition, substantially all of our assets acquired through foreclosure and our
property and equipment are located in Southern California.

Off-Balance-Sheet Credit Risk/Interest-Rate Risk

In the normal course of meeting the financing needs of our
customers and reducing exposure to fluctuating interest rates, we are a party to
financial instruments with off-balance-sheet risk. These financial instruments
(which consist of commitments to originate loans, leases and commitments to
purchase loans) include elements of credit risk in excess of the amount
recognized in the accompanying consolidated financial statements as shown below.
The contractual amounts of those instruments reflect the extent of our
involvement in those particular classes of financial instruments.

Our exposure to off-balance-sheet credit risk (i.e., losses
resulting from the other party's nonperformance of financial guarantees) and
interest rate risk (for fixed-rate mortgage loans) in excess of the amount
recognized in the accompanying consolidated financial statements is represented
by the following contractual amounts.

March 31,2004
      2003(Dollars in thousands)Commitments to originate loans and leases:Variable-rate
      $ 152,639
      79,044Fixed-rate
      1,573
      2,446Total
      $ 154,212
      81,490Interest rate range for fixed-rate loans
      4.79%-8.45%
      4.92%-7.69%Commitments to purchase variable rate loans
      $ 8,221
      53,000


Commitments to originate fixed- and variable-rate loans and leases represent
commitments to lend to a customer, provided there are no violations of
conditions specified in the agreement. Commitments to purchase variable-rate
loans represent commitments to purchase loans originated by other financial
institutions. These commitments generally have fixed expiration dates or other
termination clauses and may require the payment of a fee. Since some of the
commitments may expire without being drawn upon, the total commitment amounts
above do not necessarily represent future cash requirements. We use the same
credit policies in making commitments to originate loans and leases and purchase
loans as we do for our on-balance sheet instruments. We control credit risk by
evaluating each customer's creditworthiness on a case-by-case basis and by
using systems of credit approval, loan limitation, and various underwriting and
monitoring procedures.

Standby letters of credit are conditional commitments we
issue to guarantee the performance of a customer to a third party. At March 31,
2004 and 2003, we had standby letters of credit of $10.4 million and $7.3
million, respectively.

We do not require collateral or other security to support
off-balance-sheet financial instruments with credit risk. However, when the
commitment is funded, we receive collateral to the extent deemed necessary, with
the most
                                                                               
103

---

significant category of collateral being deeds of trust on
real property underlying mortgage loans.

(20) Trust Operations

Included in prepaid expenses and other assets is the net
unamortized trust acquisition cost of $1.3 million at March 31, 2004 and 2003.
Amortization of trust acquisition cost was $323,000 for the year ended March 31,
2002. During the year ended March 31, 2003 the amortization of the trust
acquisition cost was discontinued in accordance with SFAS 142. On an annual
basis, we test the net unamortized trust acquisition cost for impairment. For
the years ended March 31, 2004 and 2003, there was no impairment in the net
unamortized trust acquisition cost.

As a result of this acquisition, we have certain additional
fiduciary responsibilities, which include acting as trustee, executor,
administrator, guardian, custodian, record keeper, agent, registrar, advisor and
manager. In addition, our Trust department holds assets for the benefit of
others. These are not our assets and are not included in our consolidated
balance sheets at March 31, 2004 and 2003.

(21) Loan Servicing and Sale Activities

Loan servicing and sale activities are summarized as follows:

As of and for the Year Ended March 31,2004
      2003
      2002(Dollars in thousands)Balance sheet information:Loans held for sale
      $ 2,119
      3,327
      106Statement of earnings information:Loan servicing fees
      377
      443
      280Amortization of servicing asset
      10
      27
      95Loan servicing fees, net
      $ 387
      470
      375Gain on sale of loans
      $ 809
      559
      359Statement of cash flows information:Loans originated for sale
      $ 41,000
      22,395
      9,685Proceeds from sale of loans
      $ 42,847
      19,656
      10,497


Mortgage servicing rights are periodically reviewed for impairment based on
their fair value. The Company determines fair value based on the present value
of future expected cash flows using management's best estimates of key
assumptions including prepayment speeds and discount rates commensurate with the
risks involved. Information supporting the assumptions is obtained from
reputable market sources. Per SFAS 140 paragraph 63(g) the Company stratifies
servicing assets based on date of origination and financial asset type. The
financial asset types currently being serviced are either government guaranteed
or conventional.

We originate mortgage loans, which depending upon whether the
loans meet our investment objectives, may be sold in the secondary market or to
other private investors. We may or may not retain servicing of these loans.
Indirect non-deferrable costs associated with origination, servicing and sale
activities cannot be determined as
                                                                               
104

---

these operations are integrated with and not separable
from the origination and servicing of portfolio loans, and as a result, these
costs cannot be accurately estimated.

At March 31, 2004, 2003 and 2002, we were servicing loans and
participations in loans owned by others of $119.6 million, $141.9 million and
$189.7 million, respectively. See Note 10 "Mortgage Servicing Rights."

(22) Fair Value of Financial Instruments

The following disclosure of the estimated fair value of
financial instruments is made in accordance with the requirements of Statement
of Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments" ("SFAS 107"). The estimated fair value
amounts have been determined using available market information and appropriate
valuation methodologies. However, considerable judgment is necessarily required
to interpret market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts
that could be realized in a current market exchange. The use of different market
assumptions or estimation methodologies may have a material impact on the
estimated fair value amounts.

The estimated fair values of our financial instruments are as
follows:

March 31, 2004
      March 31, 2003Carrying
        Value
      Fair
        Value
      Carrying
        Value
      Fair
        Value(Dollars in thousands)Financial assets:Cash and cash equivalents
      $ 60,151
      60,151
      50,323
      50,323Loans held-for-sale
      2,119
      2,119
      3,327
      3,327Investment securities held-to-maturity
      5,742
      5,979
      5,753
      5,957Investment securities available-for-sale
      62,957
      62,957
      94,094
      94,094Mortgage-backed securities
        available-for-sale
      292,888
      292,888
      215,266
      215,266Collateralized mortgage
        obligations available-for-sale
      -
      -
      15,200
      15,200Loans and leases receivable, net
      3,149,318
      3,172,476
      2,688,950
      2,719,152Federal Home Loan Bank stock
      42,500
      42,500
      26,610
      26,610Financial liabilities:Deposits
      2,455,046
      2,466,684
      2,326,108
      2,343,527FHLB advances and other borrowings
      851,600
      856,085
      485,385
      495,453


The following methods and assumptions were used in estimating
our fair value disclosures for financial instruments.

Cash and cash equivalents: The fair values of cash and cash
equivalents approximate the carrying values reported in the consolidated balance
sheet.

Loans held-for-sale: Loans designated as held for sale are
carried at the lower of cost or market value in the aggregate, as determined by
a fair value analysis we perform using prevailing market assumptions.

105

---

Investment securities held-to-maturity: Fair values were
based on quoted market prices. If a quoted market price was not available, fair
value was estimated using market prices for similar securities, as well as
internal analysis.

Investment securities, MBS and CMO available-for-sale: Fair
values were based on quoted market prices. If a quoted market price was not
available, fair value was estimated using market prices for similar securities,
as well as internal analysis.

Loans and leases receivable: The carrying amount of loans and
lease financing receivables is their contractual amounts outstanding, reduced by
deferred new loan origination fees and the allocable portion of the allowance
for loan and lease losses. The fair value of fixed and variable rate loans and
leases was estimated using a discounted cash flow analysis based on an estimated
current rate at which similar loans and leases would be made to borrowers with
similar credit risk characteristics and for the same remaining maturities. In
determining the estimated current rate for discounting purposes, no adjustment
has been made for any change in borrowers - credit risks since the origination
of the loans and leases, as the allocable portion of the allowance for credit
losses provides for such changes in estimating fair value. It is not practicable
to estimate the fair value of non-accrual loans as the credit risk adjustment
that would be applied in the marketplace for such loans can not be readily
determined. As a result, the fair value of loans and leases as of March 31, 2004
and 2003, includes the carrying amount of non-accrual loans.

Federal Home Loan Bank stock: The carrying amount
approximates fair value.

Deposits: The fair values of passbook accounts, demand
deposits and certain money market deposits are assumed to be the carrying values
at the reporting date. The fair value of term accounts is based on projected
contractual cash flows discounted using rates currently offered on alternative
funding sources with similar maturities.

FHLB advances and other borrowings: The fair value of FHLB
advances and other borrowings is based on discounted cash flows using rates
currently offered on alternative funding sources with similar maturities.

Off-balance sheet financial instruments: Commitments to
originate loans and leases had a notional amount of $154.2 million at March 31,
2004. The carrying value of the commitments is zero as all are cancelable and
not readily marketable. Standby letters of credit had a notional amount of $10.4
million at March 31, 2004.

(23) Conversion to Capital Stock Form of Ownership

The Bancorp was incorporated under Delaware law in March 1996
for the purpose of acquiring and holding all of the outstanding capital stock of
the Bank as part of the Bank's conversion from a federally chartered mutual
savings and loan association to a federal stock savings bank. On March 28, 1996,
the Bank became a wholly owned subsidiary of the Bancorp. In connection with the
conversion, the Bancorp issued and sold to the public 27,772,500 shares of its
common stock (par value $.01 per share) at a price of $7.14 per share. The
proceeds, net of $4.5 million in conversion costs, received by the Bancorp from
the conversion (before deduction of $15.9 million to fund the Employee Stock
Ownership Plan) amounted to $193.9 million. The Bancorp used $105.0 million of
the net proceeds to purchase the capital stock of the Bank.

At the time of the conversion, the Bank established a
liquidation account in the amount of $109.3 million, which was equal to its
total retained earnings as of September 30, 1995. The liquidation account will
be maintained for the benefit of eligible account holders who continue to
maintain their accounts at the Bank after the conversion. The liquidation
account will be reduced annually to the extent that eligible account holders
have reduced their qualifying deposits. Subsequent increases will not restore an
eligible account holder's interest in the liquidation account. In the event of
a complete liquidation, each eligible account holder will be entitled to
                                                                       
106

---

receive a distribution from the liquidation account in an
amount proportionate to the current adjusted qualifying balances for accounts
then held. The balance in the liquidation account at March 31, 2004 is $16.6
million.

The Bancorp may not declare or pay cash dividends on or
repurchase any of its shares of common stock, if the effect would cause
stockholders' equity to be reduced below applicable regulatory capital
maintenance requirements or if such declaration and payment would otherwise
violate regulatory requirements.

(24) Parent Company Condensed Financial Information

This information should be read in conjunction with the other
notes to the consolidated financial statements. Following are the condensed
parent company only financial statements for PFF Bancorp, Inc.

Condensed Balance Sheets

March 31,2004
      2003(Dollars in thousands)AssetsCash and cash equivalents
      $ 2,975
      2,667Equity securities available-for-sale, at fair value
      11,805
      9,160Trust preferred securities available-for-sale, at
        fair value
      5,807
      6,048Loans
      115
      232Investment in subsidiaries
      302,766
      257,608Other assets
      1,625
      4,329Total assets
      $ 325,093
      280,044Liabilities and Stockholders' EquityOther liabilities
      $ 8,722
      6,912Stockholders' equity
      316,371
      273,132Total liabilities and stockholders' equity
      $ 325,093
      280,044


Condensed Statements of Earnings

|                                                                                                        | Year ended March 31,   |       
|------------------------------------------------------------------------------------------------------- | ---------------------- | ------
|                                                                                                        | 2004                   | 2003  
|                                                                                                        | (Dollars in thousands) |       
|                                                                                                        |                        |       
|Interest and other income                                                                               | $ 5,646                | 2,416 
|General and administrative expense                                                                      | 1,996                  | 1,356 
|Earnings (loss) before equity in
      undistributed earnings
      of subsidiaries before income taxes | 3,650                  | 1,060 
|Dividend from subsidiaries                                                                              | 29,593                 | 43,993
|Equity in earnings of subsidiaries before income taxes                                                  | 39,824                 | 15,858
|Earnings before income taxes                                                                            | 73,067                 | 60,911
|Income taxes                                                                                            | 32,118                 | 25,489
|Net earnings                                                                                            | $ 40,949               | 35,422

107

---

Condensed Statements of Cash Flows

Year Ended March 31,2004
      
      2003
      
      2002(Dollars in thousands)Cash flows from operating activities:Net earnings
      $ 40,949
      
      35,422
      
      35,364Adjustments to reconcile net earnings to cash used by
        operating activities:Amortization of premiums on
        investments and mortgage-backed securities
      6
      
      7
      
      5Losses on trading securities
      -
      
      -
      
      107(Increase) decrease in trading securities
      -
      
      2,334
      
      (66)Amortization of unearned stock-based compensation
      8,393
      
      5,370
      
      5,659Gain on sale of securities
      (4,419)
      
      -
      
      -Undistributed (earnings) loss of subsidiaries
      (38,140)
      
      6,764
      
      (25,317)(Increase) decrease in other assets
      2,704
      
      (657)
      
      (2,206)Increase in other liabilities
      28
      
      3,798
      
      2,606Net cash provided by operating activities
      9,521
      
      53,038
      
      16,152Cash flow from investing activities:Decrease in residential loans
      117
      
      5
      
      4Decrease in construction loans
      -
      
      -
      
      478(Increase) decrease in equity securities available-for-sale
      5,396
      
      627
      
      (1,085)Decrease in trust preferred securities
      612
      
      -
      
      -Net cash provided by (used in) investing activities
      6,125
      
      632
      
      (603)Cash flows from financing activities:Proceeds from exercise of stock options
      4,820
      
      7,106
      
      3,780Purchase of treasury stock
      (10,571)
      
      (60,114)
      
      (13,532)Cash dividends
      (9,587)
      
      (4,281)
      
      (3,513)Net cash used in financing activities
      (15,338)
      
      (57,289)
      
      (13,265)Net increase (decrease) in cash during the year
      308
      
      (3,619)
      
      2,284Cash and cash equivalents, beginning of year
      2,667
      
      6,286
      
      4,002Cash and cash equivalents, end of year
      $ 2,975
      
      2,667
      
      6,286


108

---

(25) Earnings Per Share

A reconciliation of the components used to derive basic and
diluted earnings per share for the years ended March 31, 2004, 2003 and 2002
follows:

Net
        Earnings
      Weighted Average
        Shares Outstanding
      Per Share
        Amount(Dollars in thousands, except per share data)2004 (1)Basic earnings per share
      $ 40,949
      16,060,512
      $2.55Effect of dilutive stock options and awards
      -
      648,494
      0.10Diluted earnings per share
      $ 40,949
      16,709,006
      $2.452003 (2)Basic earnings per share
      $ 35,422
      16,868,053
      $ 2.10Effect of dilutive stock options and awards
      -
      665,904
      0.08Diluted earnings per share
      $ 35,422
      17,533,957
      $ 2.022002 (3)Basic earnings per share
      $ 35,364
      17,437,995
      $ 2.03Effect of dilutive stock options and awards
      -
      649,648
      0.07Diluted earnings per share
      $ 35,364
      18,087,643
      $ 1.96


1. Options to purchase 12,279 shares of common stock at a weighted average
    price of $37.75 per share were outstanding during the fiscal year ended
    March 31, 2004, but were not included in the computation of diluted EPS
    because the options' exercise prices were greater than the average market
    price of the common shares. The options, which expire between November 25,
    2013 and January 28, 2014, were still outstanding at March 31, 2004.
2. Options to purchase 39,140 shares of common stock at a weighted average
    price of $23.39 per share were outstanding during the fiscal year ended
    March 31, 2003, but were not included in the computation of diluted EPS
    because the options' exercise prices were greater than the average market
    price of the common shares. The options, which expire on December 19, 2007,
    were still outstanding at March 31, 2003.
3. Options to purchase 739,059 shares of common stock at a weighted average
    price of $19.04 per share were outstanding during the fiscal year ended
    March 31, 2002, but were not included in the computation of diluted EPS
    because the options' exercise prices were greater than the average market
    price of the common shares. The options, which expire between November 28,
    2006, and February 27, 2007, were still outstanding at March 31, 2002.
                                                                       
    109

(26) Quarterly Results of Operations (Unaudited)

Three Months EndedJune 30,
        2003
      September 30,
        2003
      December 31,
        2003
      March 31,
        2004
      Total
        2004(Dollars in thousands, except per share data)Net interest income
      $ 30,048
      31,427
      33,539
      35,981
      130,995Provision for loan losses
      660
      1,645
      120
      300
      2,725Other income
      5,607
      5,586
      7,135
      6,710
      25,038Other expenses
      18,834
      18,731
      21,362
      21,314
      80,241Earnings before income taxes
      16,161
      16,637
      19,192
      21,077
      73,067Income taxes
      6,829
      7,036
      8,106
      10,147
      32,118Net earnings
      $9,332
      9,601
      11,086
      10,930
      40,949Basic earnings per share
      $ 0.59
      0.60
      0.69
      0.67
      2.55Diluted earnings per share
      $ 0.56
      0.58
      0.66
      0.64
      2.45


Three Months EndedJune 30,
        2002
      September 30,
        2002
      December 31,
        2002
      March 31,
        2003
      Total
        2003(Dollars in thousands, except per share data)Net interest income
      $ 28,243
      27,338
      28,135
      29,413
      113,129Provision for loan losses
      1,000
      1,500
      500
      1,840
      4,840Other income
      4,312
      4,485
      4,917
      6,184
      19,898Other expenses
      16,370
      15,979
      17,478
      17,449
      67,276Earnings before income taxes
      15,185
      14,344
      15,074
      16,308
      60,911Income taxes
      6,332
      5,877
      6,387
      6,893
      25,489Net earnings
      $ 8,853
      8,467
      8,687
      9,415
      35,422Basic earnings per share
      $ 0.50
      0.49
      0.52
      0.59
      2.10Diluted earnings per share
      $ 0.47
      0.46
      0.50
      0.56
      2.02


110

---

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
PFF Bancorp, Inc.:

We have audited the accompanying consolidated balance sheets
of PFF Bancorp, Inc. and subsidiaries as of March 31, 2004 and 2003 and the
related consolidated statements of earnings, comprehensive earnings,
stockholders' equity, and cash flows for each of the years in the three-year
period ended March 31, 2004. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with 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 PFF Bancorp, Inc. and subsidiaries as of March 31, 2004 and 2003 and
the results of their operations and their cash flows for each of the years in
the three-year period ended March 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.

/s/ KPMG LLP

Los Angeles, California

June 9, 2004
                                                                               
111

---

Item 9. Change in and Disagreements with Accountants on Accounting and Financial
Disclosure.

None.Item 9A. Controls and Procedures.

Our management, including our Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of our disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d - 15(e))
as of the end of the period covered by this report. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective, in all material aspects, to
ensure that information relating to us, which is required to be disclosed in the
reports we file with the Securities and Exchange Commission under the Exchange
Act, is recorded, processed, summarized and reported as and when required.

There have been no changes in our internal control over
financial reporting identified in connection with the evaluation that occurred
during our last fiscal quarter that has materially affected, or that is
reasonably likely to materially affect, our internal control over financial
reporting.

PART III

Item 10. Directors and Executive Officers of the Registrant.

The information
appearing in the definitive Proxy Statement to be filed with the Securities and
Exchange Commission on or about July 29, 2004, pursuant to Regulation 14A in
connection with PFF Bancorp, Inc.'s Annual Meeting of Stockholders to be held on
September 14, 2004 (the "Proxy Statement") under the captions Proposal
1-"Election of Directors" "Section16(a) Beneficial Ownership
Reporting Compliance" is incorporated herein by reference.

We have adopted a
Code of Conduct and Ethics, which applies to all of our employees, officers,
directors, subsidiaries and affiliates (as defined in the Code of Conduct and
Ethics), including our principal executive officer, principal financial officer,
principal accounting officer or controller or person performing similar
functions for us. The Code of Conduct and Ethics for Senior Financial Officers
meets the requirements of a "code of ethics" as defined by Item 406 of
Exchange Act Regulation S-K and is available at our website: www.pffbank.com. We
will also furnish a copy by mail to shareholders upon written requests sent to
PFF Bancorp, Inc., 350 South Garey Avenue, Pomona, California, 91766, Attn:
Corporate Secretary.

Item 11. Executive Compensation.

The information appearing in the definitive Proxy Statement,
which will be filed with the Securities and Exchange Commission on or about July
29, 2004 for the 2004 Annual Meeting of Stockholders under the captions
"Executive Compensation", "Employment Agreements" and
"Benefit Plans" is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.The information relating to security ownership of certain beneficial
owners and management is incorporated herein by reference to the information
under the headings "Security Ownership of Certain Beneficial Owners and
Management" and "Security Ownership of Management" in our
definitive Proxy Statement to be filed with the Securities and Exchange
Commission on or about July 29, 2004 for the 2004 Annual Meeting of
Stockholders.
                                                                       
112

---

The following table presents the equity compensation plan
information as of March 31, 2004.

|Equity Compensation Plan Information                                        
|----------------------------------------------------------------------------
|Plan category                                                               
|                                                                            
|Equity
      compensation
      plans approved by
      security holders    
|Equity
      compensation
      plans not approved
      by security holders
|Total                                                                       

Item 13. Certain Relationships and Related Transactions.

The information relating to certain relationships and related
transactions is incorporated herein by reference to the information under the
heading "Transactions with Certain Related Persons", in our definitive
Proxy Statement to be filed with the Securities and Exchange Commission on or
about July 29, 2004 for the 2004 Annual Meeting of Stockholders.

PART IV

Item 14. Principal Accountant Fees and Services.

Information regarding principal accountant fees and services
is presented under the heading "Audit Committee Report" in our
definitive Proxy Statement for the 2004 Annual Meeting of Stockholders to be
held on September 14, 2004, which will be filed with the SEC on or about July
29, 2004 and is incorporated herein by reference.

113

---

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

|(a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | List of Documents Filed as Part of this Annual Report
      on Form 10-K                                                                                                   
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | (1)                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | -                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | -                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | -                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | -                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | -                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | -                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | -                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | (2)                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | (3)                                                                                                                                                                        
|(a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | The following exhibits are filed as part of this report
      or are incorporated herein by reference:                                                                     
|3.1                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Certificate of Incorporation of PFF Bancorp, Inc. (1)                                                                                                                      
|3.2                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Bylaws of PFF Bancorp, Inc. (1)                                                                                                                                            
|4.0                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Stock Certificate of PFF Bancorp, Inc. (1)                                                                                                                                 
|10.1                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Form of Employment Agreement between PFF Bank &
      Trust and PFF Bancorp, Inc.
      and certain executive officers (1)                                                 
|10.2                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Form of Change in Control Agreement between PFF Bank
      & Trust and PFF Bancorp, Inc.
      and certain executive officers (1)                                          
|10.3                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Form of PFF Bank & Trust Employee Severance
      Compensation Plan (1)                                                                                                    
|10.4                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Capital Accumulation Plan for Employees of Pomona First
      Federal Savings and Loan
      Association (1)                                                               
|10.5                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | PFF Bancorp, Inc. 1996 Incentive Plan (2)                                                                                                                                  
|10.6                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Form of Non-Statutory Stock Option Agreement for officers and employees
      of
      PFF Bancorp, Inc. (3)                                                               
|10.7                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Form of Incentive Stock Option Agreement for officers and employees of
      PFF Bancorp, Inc. (3)                                                                         
|10.8                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Form of Stock Award Agreement for officers and
      employees of PFF Bancorp, Inc. (3)                                                                                    
|10.9                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Form of Stock Award and Stock Option Agreement for Outside Directors of
      PFF Bancorp, Inc. (3)                                                                        
|10.10                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | The Pomona First Federal Bank & Trust Restated Supplemental
      Executive
      Retirement Plan (3)                                                                      
|10.11                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | The Pomona First Federal Bank & Trust Directors'
      Deferred Compensation Plan (3)                                                                                      
|10.12                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | PFF Bancorp, Inc. 1999 Incentive Plan (4)                                                                                                                                  
|21                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Subsidiary information is incorporated herein by reference to
      "Part I- Subsidiary
      Activities."                                                                 
|23                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Consent of KPMG LLP                                                                                                                                                        
|31.1                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Certification of Chief Executive Officer pursuant to Section 906 of
      Sarbanes-Oxley Act of 2002.                                                                      
|31.2                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Certification of Chief Financial Officer pursuant to Section 906 of
      Sarbanes-Oxley Act of 2002.                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                            
|32.1                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Certification of Chief Executive Officer pursuant to Section 302 of
      Sarbanes-Oxley Act of 2002.                                                                      
|32.2                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Certification of Chief Financial Officer pursuant to Section 302 of
      Sarbanes-Oxley Act of 2002.                                                                      
|99.3                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Annual Report on Form 11-K for Capital Accumulation Plan for employees
      of
      PFF Bank & Trust (5)                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                            
|(b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Reports on Form 8-K                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                            
|(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Incorporated herein by reference from the Exhibits to
      the Registration Statement on Form S-1, as amended, filed on December 8,
      1995, Registration No. 33-80259.
|(2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Incorporated herein by reference from the Proxy
      Statement for the 1996 Annual Meeting of Stockholders dated September 16,
      1996.                                
|(3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Incorporated herein by reference from the Form 10-K
      filed on June 20, 1997.                                                                                          
|(4)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Incorporated herein by reference from the Proxy
      Statement for the 1999 Annual Meeting of Stockholders dated September 22,
      1999.                                
|(5)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | To be filed on or before June 30, 2004.                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                            
|AVAILABILITY OF REPORTS
      Annual reports on form 10-K, quarterly reports on form 10-Q, current
      reports on Form 8-K and all amendments to those reports are available free
      of charge from our internet site, www.pffbank.com, by clicking on
      "Investor Relations" located on the home page, proceeding to
      "Financial" and then to "SEC filings."
      We will furnish any or all of the non-confidential exhibits upon payment
      of a reasonable fee. Please send request for exhibits and/or fee
      information to:
|PFF Bancorp, Inc.
      350 South Garey Ave
      Pomona, California 91769
      Attention: Corporate Secretary                                                                                                                                                                                                                                                                                                                                                                                                                                        

114

---

SIGNATURES

Pursuant to the requirements of Section 13 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.

|                     | PFF BANCORP, INC.
|-------------------- | -----------------
|                     |                  
|                     | BY:              
|                     |                  
|DATED: June 10, 2004 |                  
|                     |                  

Pursuant to the requirements of the Securities and Exchange
Act of 1934, this report has been signed by the following persons in the
capacities and on the dates indicated.

|Name                    | Title                                                                                                                    | Date         
|----------------------- | ------------------------------------------------------------------------------------------------------------------------ | -------------
|                        |                                                                                                                          |              
|                        |                                                                                                                          |              
|/s/ LARRY M. RINEHART   |                                                                                                                          | June 10, 2004
|Larry M. Rinehart       | President, Chief Executive
      Officer and Director
      (Principal Executive Officer)                                |              
|                        |                                                                                                                          |              
|/s/ GREGORY C. TALBOTT  |                                                                                                                          | June 10, 2004
|Gregory C. Talbott      | Executive Vice President, Chief Financial Officer and Treasurer
      (Principal Financial and
      Accounting Officer) |              
|/s/ DONALD R. DESCOMBES |                                                                                                                          | June 10, 2004
|Donald R. DesCombes     | Director                                                                                                                 |              
|                        |                                                                                                                          |              
|/s/ ROBERT W. BURWELL   |                                                                                                                          | June 10, 2004
|Robert W. Burwell       | Director                                                                                                                 |              
|                        |                                                                                                                          |              
|/s/ STEPHEN C. MORGAN   |                                                                                                                          | June 10, 2004
|Stephen C. Morgan       | Director                                                                                                                 |              
|                        |                                                                                                                          |              
|/s/ CURTIS W. MORRIS    |                                                                                                                          | June 10, 2004
|Curtis W. Morris        | Director                                                                                                                 |              
|                        |                                                                                                                          |              
|/s/ JIL H. STARK        |                                                                                                                          | June 10, 2004
|Jil H. Stark            | Director                                                                                                                 |              
|                        |                                                                                                                          |              
|/s/ ROYCE A. STUTZMAN   |                                                                                                                          | June 10, 2004
|Royce A. Stutzman       | Director                                                                                                                 |